As of August 31, we’re up 54.64% since inception (March 22, a little over 5 months.)   A competing “buy and hold” portfolio would have earned about 1%.

• Inception to date:                  +54.64%
• S&P 500:                                +0.99%
• Differential:                            +53.65%

August was going so well until the 7th.  That marked the first of 20 sessions in a row that traded within 5 points of the fan line from the top in 2007.  Directional trading became very difficult, as every breakout or breakdown fizzled before it could get rolling  — a situation that will likely continue until the central banks’ intentions become clearer.

So, I’ve resorted to short-term trading — playing the daily swings (aka scalping) for a few points here and there and going to cash much more often.  Since Aug 21, results have been much more positive: we managed to salvage a 5.39% month versus 1.23% for the S&P 500.

The downside of such a strategy is that we might miss part of extended breakouts or breakdowns.  It’s also much more labor intensive — resulting in many more trades than normal (sometimes several in one day.)  I think it’s a risk worth taking — at least until after Sept 13th when the FOMC concludes its next meeting and QE questions are (hopefully!) answered.  Then, I plan to go back to directional trading before all my hair is as white as my knuckles.

Two months into Q3, we’re at 15.68% so far versus 3.19% for the S&P 500.  Q2 came in at 37.74% — which would have ranked us #1 among managers if we were an equity mutual fund or (according to these guys) a hedge fund.  Monthly results are as follows:

as of August 31, 2012

More details and important disclosures here.

I’m not really a scalper.  Our swing/directional calls have been pretty successful and are a lot less stressful and time consuming.  But, we’ve had day after frustrating day of watching breakouts and breakdowns fizzle before they could even get started, leaving us with subpar performance for August (+5.4% versus our average of +12.2%.) 

Today marked the 21st day in a row where we traded within 5 points of the fan lines from 2007.  Complaining hasn’t seemed to help, so I decided to scalp this schizophrenic market and try to pick up a few points per day — at least until the Central Planning Sweepstakes winners are announced and things return to normal (hopefully by the 13th.)  

It’s good for an old dog like me to get the blood flowing by getting reacquainted with some old tricks.  But, buy and hold types might prefer to brush up on their golf game.  We’ve averaged 12 trades/month since the new site opened in March.  In the past two days alone we’ve traded 9 times.  Thankfully, it’s been volatile enough to pick up 2.3% in the process.

ORIGINAL POST:  9:30 AM

Emini’s are taking on a descending triangle look, and approaching the .618 time point where there should be either a breakout or breakdown.

It’s worth playing along on the downside at the opening to see if there’s another trip to the lower bound at 1395.  A stop at the upper bound (1406) should provide protection.  I’ll take a short position on SPX when it opens.

UPDATE:  9:50 AM

Strange opening, with SPX up while ES was down.  Opened a small short position at 1406, stops at 1408.50.  Lower bound on triangle for SPX is 1396ish.

If the 15-min RSI rebounds at a TL coming up, I’ll switch sides and play the upside.

UPDATE:  10:00 AM

Switching sides here at 1402, with very tight stop at 1401.

I still like the idea of a Butterfly Pattern getting going here.  I’ll post a chart in a moment.

UPDATE:  10:10 AM

If/as we approach the upper bound, we’ll have to be wary of a reversal that could start a Gartley in the other direction.  The BC leg was roughly .618 of the AB leg.

So far, we’ve retraced .786 of the BC leg.  The upper bound is roughly at 1408.50 — which also happens to be the upper Fan Line from 2007.

More in a few.

UPDATE:  10:20 AM

The 5-min RSI has provided a nice road map this morning.  Just broke out of its little corrective channel — but that rising purple line is one of our major channel lines.  Make or break time for this little rally.

If we hit the upper bound, I’ll likely take profits and wait for a breakout to get back in.  Otherwise, cash sounds fine.

UPDATE:  10:30 AM

Taking profits here at 1408.55, will stay in cash unless break 1409.55 or little channel up breaks down.

UPDATE:  10:45 AM

Channel broke down, but RSI picture isn’t so clear.  Will stay in cash for now.

More in a few.

UPDATE:  10:50 AM

5 min RSI broke back through support.  Will we get a tag on the lower RSI channel line again?  It’s the same line for the 15 min, too.  The lower Fan Line is just below at 1404.80.

If that doesn’t hold, there’s also a TL at 1403 (white) that might correlate with the RSI channel lower bound.  If that doesn’t hold, there’s always a yellow channel line at 1399 and the descending triangle lower bound at 1396.50.

It just now occurs to me that the frequency with which SPX traverses between the upper and lower fan lines (currently at 1408.42 and 1404.80) has provided some tasty trade opportunities.  In the past 20 days, it’s ventured into the gap 30 times, 22 of which traveled to the other side and 8 of which failed.

Given the 4 point gap and using reasonable stops, that would have translated into a nice little trading system:  22 x 4 = 88, 8 x -2 = -16, net = 72 pts. Probably not useful going forward, as we should break out of this tight range once the Central Bank Sweepstakes winners are announced.  But, for now, the an lines are definitely exerting a lot of influence.

UPDATE:  11:15 AM

Speak of the devil.  Just had a little reversal at the lower fan line.  I’ll play the odds and go long if we break above 1404.80 — stop at 1402.80.

UPDATE:  11:20

Changed my mind — don’t like the RSI pattern.  Will wait for a better setup.  Looks like more downside to me.

More in a few.

UPDATE:  11:40 AM

So much for ignoring the trend!  RSI broke up through its FL and SPX appears headed for the 1408.40 side of the gap (also the triangle upper bound.)  As before, if it breaks convincingly through 1409.55, I’ll consider it a breakout of the triangle and tag along on the upside.  If not, happy here in cash after making lunch money for the day — or might take another run at a reversal.

UPDATE:  1:30 PM

SPX approaching that white TL (1405-ish) again.  If it breaks through, should be a good short.   Chart in a minute.

UPDATE:  1:55 PM

Yikes!  That was a break through.  If 1401.25 broken, immediate target is 1400.  I’ve added some channels (yellow, dashed) that seem to be working pretty well in the short run.  We just bounced off 1401.38, will likely back test the presumed channel line in red — also a yellow channel line.  This is really bouncing around, I’ll set a loose stop at 1405 — as we might go back and back test the broken TL (white.)

UPDATE:  2:35 PM

I’ll give it another point or so to see if it’s stopped by the TL back test.

UPDATE:  3:44 PM

Going ahead and closing out the short here at 1403 for a whopping 2 point gain.  We’ll probably get a bounce off the RSI TL, and I like the idea of being in cash again overnight.

ORIGINAL POST:  9:45 AM

There are three crucial dates coming up that will determine much of the market’s direction in the coming months — culminating with the FOMC press conference on the 13th.  I expect we’ll continue to bounce around in the general vicinity of current prices for the next 9 days.

If the current downward sloping channel (in red) is to hold, we’re heading down this morning — probably to the same neckline established Friday.  It looks to be around 1399.40.  I’ll play along on the short side and look for a reversal there.

UPDATE 10:25 AM

Having reached 1399, I’ll stay short and see if the sloppy H&S pattern might play out, putting in a stop around 1402.50.  This makes two right shoulders, BTW, the same as occurred in the last larger pattern from Apr 23 – May 4.

Why the change of heart?  We could be working on a Crab pattern with Friday’s low as our Point B.  It would target the 1.618 at 1387 — also a channel line objective (purple.)

If 1397 holds, however, it leaves open the possibility that we’re working higher (the red pattern) and just established a Point C.  Given the implications, I’m 50:50 as to whether TPTB will allow lower prices to set in just now.

My gut is that a nice meaningful drop would give better cover for whatever central banking goodies they have in store, while higher prices would make things more politically difficult.  We’ll find out shortly.  Watch your stops.

If we successfully back test 1400 and 1397 falls, we could get a nice big downdraft.  Targets include the H&S target of 1370.  But, that’s unlikely to happen very quickly.  We have the above-mentioned purple channel line as well as one of our yellow channel lines of support at 1389 — just above the 1.618 at 1387.07.

A reminder, this kind of day trading is decidedly not what pebblewriter.com is all about.  But, as long as market is bouncing around — being held hostage to the three events depicted on the above chart — we might as well try to pick up a few points here and there.  Twenty points per week on the SPX would equate to 5% per month — a very respectable outcome.

More shortly.

UPDATE:  1:30 PM

The 15-min chart is showing a possible turning point — end of the back test or break out?

The markets have settled down a bit, giving me a chance to update some other charts.  The dollar is again testing the midline of its little contra-wave channel.

As we discussed Friday, its RSI has completed the back test of a falling wedge that indicates higher prices (thus, probably lower equity prices.)  An important fan line (7-11) drawn from the recent RSI high has been broken, although a lesser one (7-12) is immediately ahead of us.  Breaking this line will likely correlate with breaking through the center line of the price channel — ushering in a test of the channel high or at least a back test of a key Fib price level.

This is normally a pretty reliable indicator.  As can be seen from the last system of fan lines, each broken fan line led to a nice bump in DX.  But, back tests can be substantial.  When the first fan line was broken at Point 1, the RSI back tested that line all the way to Point 2.  In so doing, however, it established the larger channel (in white).

Another fan line break at 3 led to a nice bounce; and, the next back test (at 4) put in a higher low which led to a substantial rally.   Note that Point 7 represented negative divergence.  DX reached a higher high (84.245 v 83.67) but RSI didn’t.  Point 7 also represented a tag of the upper channel bound.

It might have signaled an upward breakout, but for that negative divergence.  All things being equal, this is a bearish indicator.  And, in fact, it was accurate.  DX’s RSI began a trip to the other side of the channel, completing it at 10 on a back test of the Point 9 fan line break.  Since then, we’ve been consistently breaking up through and successfully back testing those fan lines.

Again, if we can break the fan line running from 7 to 12/13, the dollar should rally nicely.  But, check out the white channel in the context of the bigger picture and you can see the fly in the ointment.  Yep, that’s negative divergence between Point A and Point B versus DX’s price increase during the same period.

It goes to show how confused the signals are at the moment — and why a sizable drop in the dollar (probable rise in the euro and stocks) is still very much on the table.  If it plays out that way, look for DX to test the red channel line again — currently around 80.75 — or even the next lower red channel line below 80.

We have two days until the ECB announces its monetary policy decisions (7:45 EDT on the 6th, with the press conference following at 8:30.)  If the past is any guide, we can expect a pop in the euro around the announcement.

I wouldn’t be surprised to see this rally in DX continue till the RSI channel midline, probably around 81.46-81.64 on DX, at which point an ECB announcement sends it back down to test the lows — resulting in a tag of the 1.272 and/or .5000 at 80.83-80.88.   Any immediate disappointment out of Frankfurt would, of course, clear the way for a trip to the RSI channel upper bound — probably at DX 81.86.

Many ECB announcements have provided very short-term pops in the euro.  So, I would hesitate to jump on the band wagon as long as the German Constitutional Court decision on ESM is still hanging out there (expected Sep 12.)  And, with so many divergent voices arguing for different outcomes, don’t be surprised to see some very negative comments regarding accommodation in the interim.

More later.

UPDATE:  2:10 PM

Channels and a RW for EURUSD.

Note the break and back test of the RSI channel (in white.)

UPDATE:  2:15 PM

SPX RSI broke up and out of the little 15-min channel we discussed at 1:30.  It should go up and test my stop at the 1402.50 pivot point — with a max upside (if it remains in the red channel) at 1405.  I’ll play along with some longs here at 1400, with stops at 1400.

UPDATE:  2:30 PM

Raising stops to 1404.6.  SPX has broken through our presumed red channel and appears heading for the .786 at 1406.59 or the .886 at 1407.87.  Will keep stops close behind.

UPDATE;  2:40 PM

That’s good enough as far as I’m concerned.  Closing out the long position with a tag of the upper Fan Line from 2007 at 1408.50 and .786 of 1413-1396 Fib.  Getting short again here, with stops at 1410.

UPDATE:  2:55 PM

When we first discussed the red downward sloping red channel, I noted how narrow it was — and how it was likely to expand, much like the channel down from April to June did (it features the exact same slope.)

Sure enough, today’s action presents some alternative channels that, while not negating the original red one, provide some guidance as to the interim moves that might serve to widen it.  In addition to the red channel (CH1), we have a white one (CH2) and a dashed yellow one (CH3).  The latter are less steeply sloped, and thus give SPX room to expand the red channel if that’s in the cards.

If SPX reverses before the close, it’ll likely be back to the Fib 1404.62/lower fan line.  At that point, it could leave a big spinning top for the day — the perfect way to show the market’s indecision.

UPDATE:  3:30 PM

It’s worth noting that SPX has retraced a Fib .786 of the decline from 1413 since Friday.  Any time I see a stop at the .786, I’m thinking Butterfly Pattern. While the 1.272 extension of this pattern (in purple) would land at 1417.59, the 1.628 extension would take SPX to 1423.31 — right next to the .886 of the next larger pattern at 1423.25 (seen in red.)

While that could easily mark the end of things, leaving 1426.68 as the high, another possibility is 1423 (on ECB announcement day?) would mark a Point B in a larger Crab Pattern — the 1.618 extension of which is 1445.

We’d end up with a scenario something like this:

This is pure conjecture, of course, but it sort of fits with my notion of how the Central Bank sweepstakes might run — a modest ramp into Thursday’s ECB announcement, followed by realization that: (a) “it’s” a stupid idea that will never work; or, (b)  “it” won’t work without a favorable German court ruling.

If we get a favorable ruling, it would be bullish going into the FOMC press conference.  If not, markets soften (but not too much, as the Fed will surely save the day.)

I still believe the Fed would like to not have to bring QE just yet, if they can avoid it.  It doesn’t matter so much who injects liquidity into the markets, as long as someone does.  Benny and the Jets would surely prefer it be the Europeans.

UPDATE:  3:45 PM

It’s been a good day playing the swings, so I’ll go to cash at the close — setting a stop here at 1405.  We tagged the lower fan line as discussed in the 2:55 post above.

UPDATE:  3:55 PM

Covered at 1405.  Cash for the night.

ORIGINAL POST:  10:15 AM

Got stopped out on the opening this morning (1408.90) and immediately shorted. How low can we go?  I see support at 1398-1399, and will consider covering or setting stops there.

Depending on your point of view, Lockhart was testing the market’s reaction/letting us down easy/managing our expectations.  And, the market reacted predictably.

According to Lockhart — the economy has been growing at 2% (versus hoping for 2 1/2%)  which is very modest growth, won’t bring great progress in bringing down unemployment.  While inflation remains subdued at a little over 2%.  He said it was a close call in terms of warranting further easing.

It would be an easier decision if we were to see persistence of less than 100k monthly employment growth or signals of deflation.  But, the question remains as to shorter and longer term costs.

Forecasting low rates into 2014 has kept rates low, could take rates even lower.  Lower mortgage rates would help qualify more real estate buyers.  But, lower rates isn’t really the issue — even though they would have some positive effect

Re Draghi no-showing at JH — a signal that all hands are on deck in Europe, paying attention to their issues, which have contributed to the uncertainty that we’re dealing with.  The fact that they’d stay home in august is a good thing.

Re the costs and benefits of additional QE:  costs are speculative, don’t really know what costs are over longer term.  We could see some benefit, but limited benefit for limited risk and I think manageable costs over the longer term.  Not overly concerned with costs of more action, but see limited benefits, too.

I continue to believe the Fed really doesn’t want to implement more QE unless they have no other choice. I believe this morning’s announcement was, as George Carlin would call it, a test fart.  How crazy would the markets go if we don’t announce it now.  What if we don’t announce on Sept 13?  What if we never announce it again?

UPDATE:  10:30 AM

I’m covering here at 1399, but will stay on the sidelines for the moment.  If we break 1398.04, I’ll go short again with an objective of 1386-1389, trailing stops starting at 1398.

Note that 1398 is not only the previous low, it’s the level of one of our channel lines (parallel to the former neckline.)  Breaking it would make an upside harmonic pattern that much less likely.

more in a few…

UPDATE:  11:00 AM

We’re catching a bid here at 1398, with the hourly RSI showing positive divergence on an oversold condition.  I think the market might bounce back to 1402 or slightly higher, and will try a small long position here — strictly a day trade — with stops at 1398.

If we break lower again, I’ll go back to the short position with 1386-1389 objective and trailing stops starting at 1398.

UPDATE:  11:30 AM

The 5 minute RSI broke through double resistance.  I’ll stay long and raise my stop to 1399.

UPDATE:  1:15 PM

Still sitting with a small long position.  SPX tested our white channel line again and it held.  Our upside probably isn’t terribly great right now.  Resistance is overhead at the purple channel (1402) and the intersection of the white channel with the lower of the two fan lines from 2007 — right at the Fib .886 of 1404.64.

If we can get to and somehow break through that level (somewhat unlikely) the upside would appear to be capped at the intersection of the top white channel line (the previous neckline) and the larger downward sloping channel right at 1409.

The larger trend does appear to be down — probably a Crab pattern with a target on the 1.618 at 1386.84 — also the white channel bottom and a purple channel line.  The key will be the white channel line currently providing support.

UPDATE:  2:45 PM

The dollar has broken up through the channel midline and is currently testing the recently broken purple channel line.

The purple channel line is a major feature on the long-term chart.  DX broke down through it about a week ago, but it’s done this in the past and managed to bounce back in short order.

If it can retake this line, the larger upward trend can resume.  The chart below shows how influential these channels have been in the past.

But, there are other speed bumps to deal with.  The dollar is at a critical intersection of these purple channels with the white channels and the big yellow channel shown below.   The big yellow channel (used to be purple) has been in charge for almost 14 years.

And, of course, this intersection is occurring in the vicinity of an election that has major implications for the economy, Fed composition (and thus policy) and our relationship with the rest of the world.

I wouldn’t be surprised to see DX stay relatively close to this nexus for the next 10 weeks — until we get past the election.  Breaking out of this tangle of intersecting channels would signal an economic sea change — one that’s decidedly not beneficial to equities.

The wild card remains the euro.  It’s such a major component of the dollar’s value that a failure of the EZ to produce a fix the market can believe in will boost the dollar — regardless of what Bernanke announces tomorrow or on Sept 13.

The red channel I show extending to the right up above is the likely path forward.  Reaching the upper bound is the next major move, but there’s a lot of ground to cover first.

Our medium-term objective for DX remains 87.  It’s the Fib .886 retracement of move down from June 2010 to May 2011 (purple pattern) and the 1.618 extension of the Jan to May 2011 decline (yellow pattern.)  The intersection of a Bat and a Crab pattern is almost always significant, so we should expect a serious reaction at 87.  The charts say it’ll happen at about the same time as the election.

This timing intrigues me. What would it mean?  Would the administration and the Fed allow the dollar to rise (and equities to fall) as we approach the election?  I think it more likely they’d pull the trigger on QE enough in advance of November 6 to make a difference.

More in a few…

UPDATE:  3:20 PM

Just hit 1402, so I’m raising my stop to 1400.50.  I still plan on being largely in cash by the end of the day (though I’ll probably put on a small, highly leveraged short just for fun.)

UPDATE:  3:40 PM

Almost to 1404, and just tagged purple channel line.  Raising stop to 1403.30.

UPDATE:  3:50

Finally stopped out there at the channel line.  Could be a few bucks left, but that’s okay.  I’m buying a few O.O.M. puts with a downside target of 1386 tomorrow (if there are any QE bulls who haven’t already pulled the plug???) but am otherwise in cash.

Thanks to OnTheFly, who correctly pointed out the H&S pattern that began on Aug 6 and completed today (dashed yellow neckline.)  It’s very lopsided, but if it plays out it indicates a downside of 1370.

Reposted from last night:

Yesterday, I ran into a friend (and member here) who was trying to develop a strategy for the rest of the week; we got to talking about various approaches.

I know I wrote this numerous times last week, but it bears repeating: if you’re not a gambler, stay out of this market.  In the short-term, it’s just too dependent on what Bernanke says (or doesn’t) on Friday.

I blog every day about what I see and what I think.  As always, I have an opinion as to what will happen.   But, right now, my confidence in my opinion being right is a lot closer to 50% than the 70% I shoot for.  Why?

Most of what happens in the next couple of days will be driven by what Bernanke says on Friday.  And, while I have opinions, I have no special insight into what he’s going to do.  So, unless something really weird happens in the next two days, I will have at most a very modest bet in place when Bernanke starts talking.

Ever since 1426, trading SPX has been very high risk.  First, 1426 didn’t really match up with any patterns; 1422 or 1433, sure — but not 1426.  I saw a few Elliott Wave guys get it right, but that’s about it.  So, it wasn’t clear it was the top (still isn’t.)

Second, every one of the past 16 sessions has traded within 10 points of the fan line from 1576 in October 2007.   Thirteen have actually touched it, and 5 have straddled it.  Fan lines are extremely important, and the fact that the market can’t make up its mind is very telling.

Third, the cost of being wrong could be substantial.  I’m working on a forecast that covers a range of outcomes, but SPX could move +50 or -50 in a matter of a day or two — depending the what the news is and how well it’s delivered.

Looking back over the years, the worst trades I ever made came from being invested at a time when I wasn’t very sure about the direction, but had enough of a hunch to stay invested.  Sometimes these even work out, which is dangerous (it only encourages more hunch playing.)

I’ve learned the hard way that it’s perfectly all right to be on the sidelines.  Sometimes, it’s the only sensible approach.  Although illogical from a mathematical standpoint, in my  opinion losing actual money sucks more than does an opportunity loss.

So, unless there’s a great straddle (currently 5.10 ATM on SPY) or volatility trade that makes sense, this is one of those times.  I’m still long from 1409, with an objective of 1420-1422 and a stop at the fan line around 1405.  I’ll continue to take stabs at the intra-day stuff for those who like to day trade.  But, if nothing substantive happens in the next few days, I’ll be market neutral (and sleeping soundly) Thursday night.

I’ll post more after the open.

UPDATE:  9:50 AM

We’re getting that rebound we were expecting off the lower channel bound on the 30-min chart.  So far, the TL (red, dashed) from 1426 is holding, but I expect it to give way in the next hour or two.  If it does, potential targets are the .786 at 1420 and the .886 at 1422.  But, I wouldn’t be surprised if the channel midline (the yellow dashed line) keeps a lid on any break outs.

If the channel should break down for some reason, the immediate downside should be limited to the fan line down around 1405.  The channel bottom and the red TL intersect around 1410 at 1230 EDT, so look for a breakout or breakdown before then.

continued… (more…)

I’ve been charting various indices all day — XLF in particular.  I’ll post those charts this afternoon.  In the meantime, SPX is trading in a little channel which hit the upper bound this morning at 1416 and has potential to about 1408-9 on the downside.

We’re still long from 1409 on Friday with a stop at 1407.  But, I think we’ll bounce around in this channel for the next several days.

The short-term harmonic picture shows a potential Gartley to 1420.55.

DX bounced back to the channel midline as we discussed last week, back testing an important channel line, too.

And, EURUSD back tested the lower bound of its channel, only to reverse off it and come to rest on a trend line of support.  The RSI did pretty much the same.  Charts coming in the next hour.

Update on the AUDUSD — also reaching an important level of support on daily RSI.

More later.

With all the whipsaw action these past two weeks, it might be helpful to review the big picture.  We’ll start with the chart pattern that’s easiest to see: a big rising wedge.

The wedge shows the potential for higher prices — a tag of the upper bound, for instance.  The apex is currently around 1472 in January of 2013 (but, wedges rarely play out all the way to the apex.)

continued… (more…)

We got the reaction on the dollar and euro we discussed yesterday afternoon.  So far, it’s pointing to a continuing sell-off of equities.

continued… (more…)