Now Reading
A Trader’s Guide to Contractions
175

A Trader’s Guide to Contractions

by MoleDecember 3, 2009

I may be a little early on this, but this is not a timing call. This is food for thought, better digested while the sky still remains high.

Michael Davey (CD) here…

Two important truths about the market which tend to be ignored, especially by the investing public, are 1): Stock prices reflect a market’s premium-to-growth for a given company; and 2): When a glass is truly full, there remains only fractional potential for the volume of matter to rise; while the potential for volume to decrease is more significant. This does not speak to timing, which is important in trading, but more to the points that when everyone is on the ship, at some point there is no one left to come aboard.

The first point is crucial, but the general public does not think of stocks in this way. When they perceive a company as bad, they can’t see the logic in the stock of that company rising. At the same time, if they recognize a superior, excellent company with an innovative and diverse product line, they expect the stock should be good as well; especially if they know the stock to have traded at rich price-levels and have become accustomed to that level of price for that stock.

But this is very dangerous, since stock prices do not represent the quality of a company, but instead a market’s premium to that company’s growth.

If I show you a company (XYZ) which has been growing steadily at 10% per year and XYZ has a PE of 20 (price-to-earnings ratio), the premium-to-growth is rather rich. Why? Because the company is selling for twice their rate of growth. Ironically though, the stock’s low PE suggests a more modest valuation. A better measure then for quickly measuring valuation is the stock’s PEG. PEG = PE/Growth; 2.00 in the above example.

Conversely, if I show you a younger company (ABC) which is growing rapidly at 100% a year, but sports a PE of 50, the premium-to-growth here is significantly lower (a PEG of 0.5 in this case). Even though we have a significantly higher PE, the valuation is less richly valued.

Stock prices are a measure of supply vs. demand, so in the above example the market is (currently) pricing XYZ with a higher premium-to-growth than ABC. Even though XYZ is slow-growing compared to ABC, ABC is priced less than XYZ (regardless of what price-per-share each company is trading at, since that could be almost any number; dependent only upon an arbitrary number of shares outstanding. Thus, ABC might trade at $100/shr and still be cheaper than XYZ which might trade at $10.

This might be dummed-down for most of you, but might be important/informative to others. Keep reading Einstein – I might finally get around to saying something!

The peanut gallery might point to ABC’s PE of 50 (like Barron’s) and write a weekend (zzzz)report on how over-valued that stock is, blah blah, etc. etc. Meanwhile, the same rag might feature the mature ABC stock on the cover as being cheap (especially if the stock is in free-fall!); since it is an established brand and has a reasonable PE of only 20.

Here is where it gets interesting. I could show you the greatest retail company of the next 10 years (possibly the name pictured above) and if the PEG is very richly priced, the company could grow every bit as currently anticipated and more, and yet the stock will quite possibly decline at the same time.

I’m exaggerating, obviously, since that can’t be true.

Well, actually no.

Let’s examine a couple of great retail stocks of the past – Starbucks and Walmart (there are more, but you and I are short on time). We can all agree these are two titans in the history of retail. Walmart grew to such enormous heights that today it accounts for something like 10% of total retail sales in the US, while Starbucks, at it’s peak, was practically within spitting distance of every step you ever took (certainly in this country).

Fine. But did you know that while Walmart was growing into the monster it is today, there were periods of solid, continued growth where the company traded lower for years at a time (the 1990’s being the best example). This is known as a PE-contraction (essentially, even though a company continues to grow, perhaps even better than expected, the premium-to-growth can decline at a more rapid rate).

That premium can decline for any number of reasons (interest rates, market conditions, trends, money flows, animal spirits, still-further anticipated growth, etc.). The point is that a good company on its own does not guarantee a good stock (if you weren’t bored by the first half of this piece then re-read that sentence).

Starbucks this year is expected to earn roughly twice the amount the company profited 5 years ago, but the stock is cheaper by almost 50%. Even though the company generates twice as much profit, investors have lost half their investment; thanks to a PE-contraction.

Now for the second point – that a glass full has more to empty than to fill further. This is not to say that something overvalued cannot go higher, or that an undervalued company cannot see its stock trade lower (no no no). Rather, that when the market participants (institutional and private investors) have all taken their position in a stock, (or have all sold their position, on the other extreme), then there remains little space for that stock to rise (or fall) further. If there are 1,500 institutions capable of taking a position in a given company and 1,400 of them already hold a stake, the supply of institutions is already saturated and the ability of the remaining 6 or 7% to take the price higher is obviously limited. We can argue for some length what these levels are, for both institutions and retail investors, but no matter – at some point there are no more outsiders to come in and drive up the price.

Even if it’s a company as amazing as…Apple Computer.

There goes the majority of my reading public right there forever (and there goes my widow and orphan friends to boot). Am I stupid enough to attack the stock of the greatest company in the world and suggest you fools SELL?

Nah.

I wont do that to you – to us! I know you have a time horizon of X; and you have a pain threshold of Y; and your tax-gain consequence is Z; and the percentage of AAPL relative to the rest of your portfolio is XX; and that portfolio relative to your worth is YY; and so on forever.

I know none of that, obviously. Please understand then that I am suggesting absolutely zero as far as what you should do with your investment of Apple Computer.

I just want to make the point, since it takes too long (and too many drinks) to do so at parties – that you may own the greatest company since bread was first sliced and that company may grow ever to the sky, and you still may lose money on the stock.

Besides the fact that AAPL is the premier institutional growth stock and the glass of managers in the stock by this point is reaching full (saturated, crowded investment), history shows us that a PE-contraction can overwhelm even the greatest companies, and even while they generate greater and greater profit.

How about AAPL‘s PEG? There is clear precedent for concern. APPL’s PEG based on current earnings is quite high at 1.79; while the PEG for estimated 2010 earnings is still high, at 1.29. Apple’s current PE of 31 is quite a bit higher than for other box and handset manufactures and deservedly so – this speaks to their innovation and their ability to round up consumers, selling to them on a variety of connected products and spaces. And while I’m not suggesting that Apple will disappoint in the future, my argument is that it doesn’t need to disappoint in order to see a multi-year decline (even if the broard market rises during the same period!).

The simple point here is that Apple’s premium-to-growth (the premium which has been elevated by a multitude of players getting into the now very-full glass) will be what drives the price; regardless of whether or not Apple transcends into the dominant retail force it is suggesting.

If Apple fails to grow that dominance, well even my widow and orphan friends know then it’ll be a disaster for share holders. What I don’t think they’re conscious of though, is that they’re in for pressure, perhaps likely, even if all those Apple dreams all worm true.

Previously in this series:
A Trader’s Guide to Sipping Kool Aid
Losing Like a Winner: A Trader’s Guide
A Trader’s Guide to Secondary Offerings (Part 2)
A Trader’s Guide to Secondary Offerings (Part 1)
A Trader’s Guide (Introduction)
A Trader’s Guide to Chasing Ambulances
A Trader’s Guide to Exhaustion


About The Author
Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • gregn

    What a great post, Michael. You learn something everyday, certainly. Those pesky animal spirits have been the downfall of many a great stock…

  • gregn

    I know I posted this a couple days ago, but /DX had a BB buy signal several days back, look for a higher dollar over next week for at least a short term bounce: http://screencast.com/t/MGJlMGJh

  • Gerbil_gold

    wow, read it all. may have to read it several more times. naaaaaah.

  • bist

    That's more like it! EOD sell off!

    It's been so long since I've seen one I think I have a tear in my eye 😉

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    Leaving for LA now – will try to chk in mobile later in the day

  • gregn

    Are you going to check in with the Mole-ster?

  • goldpackers

    Well !!!!!!!!!!!!!!!!!!!!!!! Did we finish the rising wedge? Sure appears we did. Next turn 12-10/11 and thought we would sell off until then to at least 1073/1080. We will see on the numbers tomorrow.

  • gregn

    Made a little indicator out of BB buy signal, buy signal on /DX has 100% validity for potential upside: http://screencast.com/t/ZTYzZWY0

  • PRSGuitars

    EUR USD update– wacky sound effects edition!

    http://screencast.com/t/NzZkZTQ2Nm

    Listen to this sound effect (press the play button after the link) when looking at the chart: http://www.soundboard.com/sb/xcrib.aspx

    133 of 133 remains on hourly close. Looking like this might be contained. Usually a major 133 involvement signals a break through the original channel's bottom — aka 1.475. Whoa.

    I wouldnt say this is it just yet but the fact that DX refuses to go lower at this point is a nice breather — might need to relaunch into January for that 1.53 (dont know about an EW count to support that) after a cold December as mean reversion, ah, reappears (i wanted to say rears its ugly head but I realize I don't know even what mean reversion looks like anymore, hasn't been around for some time….)

    Daily BB has been the key lately: http://screencast.com/t/OWEyNDU1ZTMt

  • gregn

    Love your 133% charts, thank you kindly.

  • PRSGuitars

    no prob! it's such a weird thing I figure I have to keep up with it when it appears so plainly… especially on a longer timeframe like this…

  • Tronacate

    I think the DXY has bottomed…….

    http://content.screencast.com/users/trona/folde

  • Nightwind

    Excellent post, but in your opinion, how hard is it to discover the next Microsoft, Intel, etc thru these methods?

  • Nightwind

    You might be right….triangles are usually continuation patterns of the prior trend. A break upward out of a descending trend could be a strong reversal pattern. We'll see..

  • CorporalCarrot

    Nice post Michael.

    Just heard that BAC's issue price for the $20bn is at $15.00. Thats a 5% discount to todays close.

    I'm off to listen to some Opeth. Tomorrow should be interesting.

  • Tronacate

    Especially with the flatter bottom consisting of slightly higher lows…….normal breakout is like you say…..plus normally break is to the flatter side.

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    Good qUestion. Not so much a prob since as they emerge they are growing much faster than they are priced;the csco's as theyemerge.
    This is more for after we have a behemoth and after all the institutions are in.

    You make me want to take a fresh look at those tho

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    That is part of the plan

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    Where is it trading now?

  • ultra

    I love Apple but it's gonna correct hard along with everything else. The ship analogy is a good one.

    Kinda like the buck in reverse, where the story – as the much-maligned Mr P keeps pointing out – is not so much how low it is, but that it is still a decent way off last year's lows despite the universal negative sentiment. Clearly nearly everyone who is bailing on the buck already has.

  • gregn

    I saw this picture and immediately it reminded me of your post pictures. I could imagine you using this with title like “Taking the plunge” — http://bit.ly/5FIwV6

  • Biowolf

    This site is gtting better by the day. What a turn around. Great job Mole. Still waiting for your consumer product. I have a hunch.

  • AudioTactics

    Nice one MD! 😉

    Awesome post…

  • http://oahutrading.blogspot.com/ steveo77

    Avast ye bears, keep yer wits about thee, and ponder on this chart of total market.

    http://screencast.com/t/MjA0NWM0MW

  • PRSGuitars

    Ok, you 133 fans. Rejoice.

    This is total mental masturbation, but I only used 133s to get there — and NO, this is NOT useful now, just totally wicked to see EUR behaving like this.

    http://screencast.com/t/Yjk0NTUzOT

    Disregard the legit 133 of 133 on top of the channel (from earlier…

    ——

    http://screencast.com/t/NzZkZTQ2Nm

    Listen to this sound effect (press the play button after the link) when looking at the chart: http://www.soundboard.com/sb/xcrib.aspx

    133 of 133 remains on hourly close. Looking like this might be contained. Usually a major 133 involvement signals a break through the original channel's bottom — aka 1.475. Whoa.

    ———-

    and WOW, we have an underside 133 of 133 that produces, albeit in a roundabout manner, a 133 of 133 in and of itself.

    I will have more commentary on how this might be a predictive measure later on. Just sharing my observations.

  • Scoops

    I can just picture this trade unfolding.

    10:31am
    Buy VIX Put Options as Index May Continue Slide, Macro Risk Advisors Says
    from Bloomberg.com
    Dec. 3 (Bloomberg) — Investors should buy VIX puts to profit from a decline in the benchmark index for U.S. stock options because it may decline below 20 this month for the first time since August 2008, Macro Risk Advisors LLC said.

    2:31pm
    VIX Options Trading Surges to Record in Bet Derivatives Index May Decline
    from Bloomberg.com
    Dec. 3 (Bloomberg) — Trading of options on the benchmark index for U.S. equity derivatives surged to a record in a bet that the so-called VIX may decline in the next two months.

  • Nightwind

    That's funny as hell

  • Scoops

    Great post!!

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    Very nice!

  • PRSGuitars

    And for anyone looking for a little EUR overnight review, here are some screencaps I've put together over the last month or two of a few setups. Nothing is organized, so, sorry. But if you want to see some setups develop, look at how EUR does over the 2-4am EST with regard to moving averages, VWAP, and BBs on a 15min (20sma setting).

    Most of these are 1min charts, some are 5min — watch for the difference in the two with regard to my MAs (the MAs are the same, but the 100 sma on the 1min IS the 20 sma on the 5min, and the 100 sma on the 5min is, naturally, its own new moving average on the 5min chart…).
    Remember – most are 1min charts, some are 5min!
    Yellow: 20 sma
    Purple: 50 sma
    Cyan/Blue: 100 sma (aka the 5min, 20sma – crucial moving average for trend)
    Salmon/Pink: 240 sma (aka the 5min, 50sma – also crucial moving average for overnight)

    I have this setup so that on a 1min I can see the 5min 20/50 sma — they control the short term EUR movements. On the 5min, I really only watch the 20 and 50 (yellow and purple) but the longer term ones (100 and 240) occasionally come into play as in Screenshot #4.

    http://screencast.com/t/OGFkNGY0ZWMt
    http://screencast.com/t/OWU4YTE0MmMt
    ?http://screencast.com/t/YjMwNjUxMWE?
    http://screencast.com/t/MTdiYzM5MG
    http://screencast.com/t/MDdiNDU5Mm

    Please ask questions if you have any. Share ideas. Observations. Whatever!

  • http://www.gamingthemarket.com/ gamingthemarket

    There are a bunch of names setting up this holiday season. Here is what a scan of 113 retailers produced. A list of 37 names near various inflection points.

    http://www.gamingthemarket.com/thirty-retailers

  • Huck

    So let it be written; so let it be done!

  • gregn

    Entered /ES short @ 1097.25 http://screencast.com/t/YjUyMzQ2N

  • gregn

    Target is next major support at 1085.

  • PRSGuitars

    /DX Channel midline… back to possible ruh roh territory if the channel snaps…

    http://screencast.com/t/ODI4NWFl

  • http://nummyfx.blogspot.com nummy
  • gregn

    That is pretty damn cool.

  • PRSGuitars

    nice! when they both shit, they'll do so in tandem to complete the fractal too. (i suspect)

  • Nightwind

    nummy,….all this time I thought you were just an AI guy. Good insight

  • http://nummyfx.blogspot.com nummy

    what's an AI guy? did you think I was a robot?

  • gregn

    After the right wing is complete, the descent will begin: http://screencast.com/t/MTZlZDlmN2Y

  • http://nummyfx.blogspot.com nummy

    even cooler!!!

  • Nightwind

    Artifical intelligence….I thought you modeled AI trading networks….no?

  • Nightwind

    Without the right wing, nothing happens LOL.

  • bubble jeopardy

    very interesting! that is a potential formation I have yet to see

  • gregn

    I have seen that dozens of times, it is very disheartening.

  • http://nummyfx.blogspot.com nummy

    oh .. yeah, but that's not necessarily AI

  • http://dreadwinaard.livejournal.com dreadwin

    Targets for tomorrow: Looking for a gap fill on IWM to 58.05, which should get TZA to 12.53. On IYR, the picture is more difficult to see. I think IYR could retrace 50% of this monster move, putting SRS in the neighborhood of 8.71. If we get bigger moves than that, it is likely that this move down is impulsive and not corrective. Fingers crossed :)

  • Nightwind

    ok..ok..neuro networks if you want to get picky. I'm into artificial ignorance myself, never had reboot the system…always works

  • http://nummyfx.blogspot.com nummy

    haha .. i guess ANNs is the term, artificial neuro networks since you are modeling a biological neuron in a computer and no “intelligence” or decision making is involved, just a bunch of computation.

  • http://ewtrendsandcharts.blogspot.com/ Columbia1

    Outstanding work!!
    I am posting a link to this post on my blog!!
    http://ewtrendsandcharts.blogspot.com/

  • momac

    It closed at 15.76, af traded to 15.47

  • momac

    Excellent post. Are there any companies with decent PE/PEG ratios to be found. That is why it is so hard to go long on anything, it seems like everything is overpriced.
    The sell off EOD was quite nice. Too bad I sold all my TZA, SPXU and the spy puts earlier in anticipation of the daily EOD ramp job. Day was still ok, but damn, it could of been so much better. But after being burned so many times, it's hard to keep my hand in the fire anymore. :-)

  • bergs

    Sure left us hanging in the breeze.

    http://screencast.com/t/YTBjNTlh

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    hamster roadmap

    gold down to 1100 or 1150
    s&p down to 1070

    why? bpspx still under ma13, spx:gold could use a touch on the mid BB, gold has a meeting with one of those 2 values

  • sem1pr0

    shorted aapl at 199.86, hope i'm not about to get martyred.

  • ds2

    I got stopped out of my AAPL at $200. I'm OK w/ that.

  • ds2

    Now that makes sense!

  • http://bullorbearwhocares.blogspot.com/ jamesmarkii

    swangin

  • http://evilspeculator.com molecool

    2004: 38.89/ 0.36 / 300 = .36 PEG Ratio (aggressive rally in stock price)

    2005: 38.89/ 1.31 / 264 = .11 PEG Ratio (continued aggressive rally in stock price)

    2006: 38.89/ 1.52 / 16 = 1.59 PEG Ratio (drop in first part of the year – then rally – so net effect growth was weak)

    Seems like CD isn't completely off the mark 😉

    Now, AAPL

    Now look at the chart:

  • Studio 89

    Here are some good PE/PEG Ratios
    SNDA 16/0.91, CHL 11/0.41, SOHU 12/0.33,TSYS 8/0.51, RKT 8/0.85

  • Gerbil_gold

    agreed.
    if you lookie wtic:gold – the fast stoch is trying to reverse.
    this would imply gold coming down, oil trying to improve (relatively speaking).

  • Studio 89

    VIV 31.08/0.60

  • http://marginalizingmorons.blogspot.com/ CaptiousNut

    Hah!

    MD the kick-butt momentum guy on the *long run*….

    Could have used DELL as a another great example of PE-contraction.

    Though he needn't even gone outside of AAPL.

    AAPL itself has already gone through a couple of cycles on the PE graph. And what, was it only a handful of years ago that it traded at near CASH-on-the-book?

  • CanadianBoy

    We are dealing with tricksters. I also had TZA but instead of selling when my brain told me to do so, I used the George Costanza method. That is – do the opposite of what you would normally do. It worked.

  • Gerbil_gold
  • http://pugridironsma.blogspot.com/ pugridiron

    A very well thought out article. Thanks.

  • raised_by_wolves

    Put options or direct short?

    As for getting martyred, you won't assuming you have a plan B exit strategy (maybe a lash or two but not burned at the stake). What about taking a small loss if AAPL goes above 200 again (or choose some other condition)?

  • TransworldDepravity

    Is the third time the charm? I'm keeping my toes crossed.

    http://www.screencast.com/t/MGRiMjY1ZjU

  • tradejane

    I'm glad I'm not the only one who thinks that stocks like AAPL are overpriced, because I could never be able to explain the why as well as you do.

    The DAX today is poised to open well below its pivot of 5792. First support seen at 5732, second support at 5694. Ideally the pivot should act as a resistance today but if it doesn't, the next target will be 5830.

    We need a drop below 5640 to reconfirm the downtrend.

    I expect at least one bounce before that happens, so I'm planning to close the bank short at the open. (Hopefully somewhere close to 2nd support. :)

  • http://oahutrading.blogspot.com/ steveo77

    2 of the 3 of my favorite BB's

    Bollinger Bands (get the book, Bollinger by Bollinger)

    Black Betty –what a classic Jam by hippies that were burnt out decades ago!

    oh, and the third….check the video. His voice is cracking and he spends 90% of the time not meeting the eyes or camera. BB is pushed to the limits, although he knows his keepers are basically happy. Bankers and Gov officials are going to need body guards.

    http://www.msnbc.msn.com/id/21134540/vp/3425891

    Links to the 2 good ones are here…
    http://oahutrading.blogspot.com/2009/12/bb.html

  • raised_by_wolves

    “spx:gold could use a touch on the mid BB”

    Are you referring to the dotted mid line on the 13, 2.618 BB?

    http://screencast.com/t/ZDUzMGUzZTgt

    With the lower 104, 2.618 BB not slopping down much, you may be thinking it is more likely for the $spx:$gold price action to bounce off before the downtrend continues. The other possibility, the one I'm favoring at the moment, is that the $spx:$gold price action will nosedive for a little while longer. Why? We could easily be seeing a little more time with RSI(14) under 30.

    http://screencast.com/t/MWZmY2RmMjg

    Watch to see if RSI(2) moves up suddenly or continues to approach zero.

    http://screencast.com/t/ZDMxMTg2MTYt

  • CorporalCarrot

    Good morning from dry & cold Ireland folks. The country went apeshit over the unpaid leave for public servants idea so its back in the mix for our budget which comes on wednesday. As a high earner, I'm not looking forward to it. My marginal tax rate will be around 60% from 1 Jan I think.

    On the state of the world markets, I know that US folk tend to focus on local divergences when it comes to “non-confirmation” as we approach toppping patterns. For example, R2K not confirming latest moves by Dow/S&P, or the transports not confirming Dow move or leaders such as GS, AAPL not confirming or whatever.

    A potentially more interesting divergence might be building with Europe however. Up to the end of October, if you overlaid a chart of the FTSE, Dax etc over the S&P, you couldn't tell one from the other. But the recent move from the November lows has shown significant divergence. FTSE/Dax failes to hit their recent highs on this move. The dax in particular has fallen short, not only of pre-dubai levels but of the October highs. In fact the Dax chart is starting to look like the R2k chart.

    If this is indeed the beginning of the latest retracement, we have a significant incidence of non-confirmation and that the “everything goes up together” trade might be starting to fall apart at the seams. I will therefore be looking for lower highs/ lower lows to know this move is for real.

    Another crumb of comfort for the bears. S&P cash hit 1,100 for the first time on 19th October. Based on yesterdays close, that means the market has gone NOWHERE in 6 weeks or more. And yet it feels like its been on a tear. Momentum is clearly waning.

    It feels unstoppable however because of people chasing moves, which is why I went out of my way to warn people yesterday, and its worth repeating again.

    All we can say for certain at this point is;

    1) We had a decent pullback from yesterday's highs…………..but
    2) This was only to be expected after the huge runup from Novembers lows…….and
    3) We are still technically in an uptrend, with no significant trendlines or support levels broken…….so
    4) NOTHING HAS CHANGED

    My advice for people who don't have any shorts already on above this level is not to chase this move here. This, in my opinion, is the number one cause of bearish exhaustion. This might indeed have been a top. In fact, I have been posting my S&P rounded top chart for some time (hopefully rather than optimistically). But we will not know for sure, until a number of other things happen. So chasing it now is likely to lead to disaster. We might follow through, but the odds favour that we are still in an uptrend until confirmed otherwise so you risk getting trapped in the sell low/buy high mentality which has contrived to have bears tearing their hair out for the last two months, even though I've illustrated that the market has gone nowhere in that time.

    Keep your discipline, wait for another test of the highs before shorting again, or a significant breach of a key support level.

    Do not jump in here in no mans land.

    Futures are modestly up at this point, but not yet at those levels that has traditionally seen follow through, and really at the points hit shortly after close yesterday. All eyes on the employment number. Maybe we already had the move yesterday, so the reverse happens when the number comes out. Either way, I'm holding firm at this point, and not doing anthing.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    hey, it's hamster nose indicator HNI, I feel 1100-1150 is in order before any further climbs, but I have given you the BB's that I'm currently using, you can see

    I think gold needs to at least touch the lower band on the 13,2.618

    my two cents and friendly warning

    gold diverged from the upper channel so….

  • jacksoo

    cld you explain SSH – you see 1100-1150 before any further climbs!?

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    you might, nominal is a bitch, but you're already at 0 .16 in real terms from atop at 0.2… my hamster nose says that either it climbs from here (.15 .16) or we'll see 0,12

  • raised_by_wolves

    I'm looking forward to hearing more commentary on how this might be a predictive measure.

    Yesterday's low for $INDU was at my -133 extension. As you can see, I have (almost) mirrored channels above (no 200 extension there though) and below . . .

    http://screencast.com/t/MTc0YzVk

    . . . the former rally trend line:

    http://screencast.com/t/MmJkNzk3ZWEt

    (Excuse TOS prophets for any shifting that occurred when changing time scales).

  • raised_by_wolves

    Listening to Jimi Hendrix, the last two hours slipped by without me noticing. If you think you don't like Hendrix, you should still listen to this. I'll intentionally drop you in the middle of the song. Turn the volume up, way up so you can hear the quieter sounds.

    “Red House” – Part 2 – Live at San Diego

    http://www.youtube.com/watch?v=rzEKnC5w9WQ&fmt=18

  • raised_by_wolves

    1200 is holding for now.

    http://screencast.com/t/YzMyZjZhMzI

  • jesterx

    nothing like a bit of jimmy to get you fired up.

  • jesterx

    http://www.forecastfortomorrow.com/news/i-mafia/

    i mafia hit it on the head yesterday…and got me in nice profits as usual.

    But i wonder what today will bring. I think i am going to fade any move up.

  • raised_by_wolves

    or to liven up my dreaming the next few hours.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    yes, gold should retrace that much

  • fuw

    Nice. We also have failed to make a new higher high in euro/usd (more like a double top), but I would like to see that get under ~1.495 before I get my hopes up to much.

  • jacksoo

    Thx SSH – thght you were talking about SPX hence my confusion.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    speaking of dell, if it goes up it will do close to 15 or 16…. interesting long IF it crosses the 14 mark

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    don't you ever listen to anything but JH?

  • fuw

    Also, remember that this could just be a retest of the latest floor, and we have some way to go before the larger trend is broken.

    DXY 8h:
    http://www.screencast.com/users/fuw/folders/Jin

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    yes, it's interesting how gold has risen and spx has fallen.

    if i'm right the q2-q3 2009 will mark the cross in a prety X between gold and spx:gold… quite symetrical i expect it to be

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    I'd place the stop at 202 or 209 depending on pain treshold

  • ultra

    Morning.

    Interesting juncture in GBPUSD – http://screencast.com/t/NWZjZjIxZmUt

  • ultra

    Looking at USDJPY, can't help thinking that this looks a little like one of those TK short candidate charts – obviously if it breaks out to the upside though… anyone else got any thoughts?

    http://screencast.com/t/MjgwMWZiM2It

  • tradejane

    That's a very good reminder CC, thanks.

    I suspect many people here probably know by now not to chase anything. A bigger problem for me, and perhaps for others as well, is to let the profits run.

    One thing that works for me (when I actually remember to do it) is to put a stop at breakeven and walk away for as long as I can stand it. Then come back, re-assess the situation and either move the stop up or cash in.

    The DAX is one sick puppy. Imo that says a lot about the general condition of the global market, as I consider the German pros to be among the best connected in the world. So if the DAX is unable to follow the Dow/Euro into new highs they must know something I don't.

    /NQ seems to have given up too.

  • tradejane

    That looks like a fairly clean trade as the trend is well defined. According to my primitive TA it would have to go above 89 before one can consider a reversal.

  • CorporalCarrot

    Another (badly drawn :)) visual representation of waning momentum. Notice the boxes representing each “drive” since Julys lows. Each drive to date has moved significantly beyond the top of the previous drive, and has had a retracement that stopped significantly above the lows of the previous drives. The last one stopped that trend, and notice how the current drive is thus far significantly inside the previous one, with a high thats not much higher.

    http://stockcharts.com/h-sc/ui?s=$SPX&p=D&st=20

    Of course, if we are merely establishing a high base here, the potential for a more parabolic rise exists, which would make the current drive evolve into something resembling the July one rather than the last 3.

  • standard_and_poor

    Here's a repost from Wednesday:
    “Living Inside a Broken Clock – Wednesday, Dec. 2, 2009During the last four days the spx index has displayed an impulsive wave count in my humble opinion with the possibility of a one day pullback to 1098 which should resolve itself with an ensuing new high and continued strength for the balance of the month – but only the spx knows its true intentions. Currently 20% long but fully hedged”

    OK now what: (I'm just an idiot dunce, who the hell really knows the future) but yesterday I stated early morning weakness for today, Friday, followed by new highs -lest's wait and see.

    I'm currently 55% invested, 15% in TZA (triple short etf) and will adjust the hedge as needed.

  • goldpackers

    Have not used the i phone but have read ATT is having a massive problem servicing i phone and other customers.

    MUST break down today or headed up into 12-10/11 and probably 1227/37. GS either 158 or171 over next 3/4 days.

    The evidence to me is bearish to 1073/83 at least but will know by 9am!

    Next turn is 12-10/11. Last was 12-1/2.

    Obama Ben Geithner WILL come out with jobs plan by Christmas to help small businesses and consumers so beware.

  • jacksoo

    we do love The Clash

  • standard_and_poor

    Good morning rats.
    Great post again Mike.

    Can I get some cow bell please:
    http://www.youtube.com/watch?v=qFhM1XZsh6o

  • jacksoo

    yeah, but what happens come January and Santas aren't needed anymore !?

  • standard_and_poor

    Did some one say “Spanish bombs in Andalucia”?
    http://www.youtube.com/watch?v=u-qcy0-7ngw

  • goldpackers

    Technicals to me are horrific and should crash to 1000 spx BUTTTTT Obama Ben Geithner have an agenda and MORE MONEY and we bears are having a hard time dealing with that.

    We are trading on what we have always traded on but for now it is breaking our piggy bank.

  • standard_and_poor

    Saw this band in Chicago last Saturday and actually met the singer.
    Band kicked butt. Chicago is proud of its “Company of Thieves”.

    http://www.youtube.com/watch?v=AFsY2VR3NxU

  • jacksoo

    yeah – seminal stuff – –

    http://www.youtube.com/watch?v=FiVvA9YQpiI

  • goldpackers

    Concern with banks is that was deep B wave into late yesterday and ie GS back to 172.50 MS 33

    Faz an abc flat into close and headed back down. SURE hope this is wrong. Obviously today is big. And obviously gun shy!

  • ultra

    Yeah FAZ is a bit of a messy chart right now. But there is still better volume on the ups than the downs and it's held up so far.

    http://stockcharts.com/h-sc/ui?s=FAZ&p=D&b=5&g=

  • fuw

    Good to hear. I was very discouraged when nobody seemed to spot my Joe Strummer avatar a while ago.

    A recent favorite of mine – The Card Cheat:
    http://www.youtube.com/watch?v=5KsULtQ_yIs

  • goldpackers

    Thought FAZ could get to 22 and max 24. I am long but don't see an impulsive pattern potential yet except for possible inverted H7S

  • ultra

    I actually have the neckline of that marked at $1150 on my chart lol

  • tradejane

    And then there's SKF. The pace isn't as exciting but the chart is so much cleaner. I've tried all sorts of inverse ETFs yet I always come back to SKF.

  • tradejane

    I also expect at least another bounce.

    The current action reminds me of the Shanghai index back in late July. One day reversal, drop, then a run to marginally new highs (to take out everyone's stops?) and then the real drop.

  • ultra

    Yep, not in this one, but it's a nice close above the 50 and even better volume

    http://stockcharts.com/h-sc/ui?s=SKF&p=D&b=5&g=

  • http://iberianviews.blogspot.com/ catracho

    yes..my feeling is we take out the recent highs, everybody jumps on the bullish break out, THEN we fall. If only it will be so simple!

  • tradejane

    Well, it was that simple with the DAX back in late October… 😉

    but the premise of the US-markets tends to run along the lines of “why simple when you can make it complicated.” :-/

  • CorporalCarrot

    I will be fading whatever the initial move is today (i.e. if there is a big gap down, I have some shorts added at 10,471 which I will close, if there is a gap up I'm going to be looking to add shorts).

  • tradejane

    It seems to have broken the downward-trendline from the 6 month high as well. :)

    I like DUG too.

    SRS was a long time favorite but I've gotten spooked by its excessive decay lately…

  • ultra

    Ahh the widowmaker…

  • roncofooddehydrator

    I prefer using the 2 hour charts on FAS/FAZ, the moves day to day can be too large for me to make sense of on a daily chart. On the 2 hour chart, moving averages, bollinger bands and a 10% envelope around the 30EMA all seem to be fairly decent indicators.

    My general strategy is to wait for a piercing of the 10% envelope below with a target of the 30EMA, although if it goes beyond I will attempt to hold. If it pierces the top 10%, it's definitely time to sell.

    http://screencast.com/t/NmVlZmRk

  • fuw

    Head&shoulders on the 15min DXY, now at neckline. Break down or not? We also tested a previous floor earlier today (~74.8), but failed to get above it.

  • Nightwind

    Saw it too…could be a show stopper

  • CorporalCarrot

    Before these job numbers, anyone got any thoughts on yesterday's late selloff? I can't quite fathom it myself. MSM is blaming caution in advance of the job numbers but that doesn't jive.

    I mean, market professionals surely anticipate whats going to happen here.

    If as was hinted by Gibbs yesterday, they are worse than expected, then surely that will be bad for the dollar, good for the carry trade so equities should rally. If they are better than expected, then bulls will surely seize this as evidence (however fraudulent) of recovery. In any event, the FED is signalling no change to zirp for the foreseeable future, so it should be meaningless.

    The only thing that I can think of is a reversal of some of the idiotic seasonal adjustment factors we have had previously is going to result in a very big spike in the unemployment rate, without accompanying job losses being that much worse than expected.

    But the initial claims, 4 week moving averages, adp reports do not hint at anything drastic.

    I can't understand it. Theories?

    Bob are you out there?

  • roncofooddehydrator

    Some potential shorts, based on being 30%+ over their 20 day moving average (using finviz.com to screen). They're all China related, any comments towards the fundamentals would be appreciated. They all appear to have spiked up this far above their average a couple times in the last 9 months only to come back down:

    CAAS
    CAGC
    TSTC
    SEED

  • Schwerepunkt

    While I tend to look at news in the same way as you, I think your questions illustrate in vivid color why Mole insists news does not matter. It's all in the eye of the beholder. As traders, the only eye that matters is the market. If the market likes the number, we will know soon enough, although it is the final word that counts, not the initial ups and downs. Wait for a trend to develop following the release and trade around that. I would not front run a news release, however. That is asking for pain.

  • gmak

    http://evilspeculator.com/?p=13332&success

    New Post but it's a quick and dirty for now.
    New Post
    New Post
    New Post
    New Post
    New Post
    New Post

  • bluetrader

    Amen to that…been there, done that, and lost a few bucks doing it. One of my biggest hurdles as a trader was to get past the feeling that if you don't get in ahead of an event you will miss the move. Much easier to just wait and see what happens. There will always be an opportunity.

    -Dave-

  • goldpackers

    thanks  gl

  • raised_by_wolves

    Listening to Jimi Hendrix, the last two hours slipped by without me noticing. If you think you don't like Hendrix, you should still listen to this. I'll intentionally drop you in the middle of the song. Turn the volume up, way up so you can hear the quieter sounds.

    “Red House” – Part 2 – Live at San Diego

    http://www.youtube.com/watch?v=rzEKnC5w9WQ&fmt=18

    Good night! Peace and happiness!

  • raised_by_wolves

    1200 is holding for now.

    http://screencast.com/t/YzMyZjZhMzI

  • jesterx

    nothing like a bit of jimmy to get you fired up.

  • jesterx

    http://www.forecastfortomorrow.com/news/i-mafia/

    i mafia hit it on the head yesterday…and got me in nice profits as usual.

    But i wonder what today will bring. I think i am going to fade any move up.

  • raised_by_wolves

    or to liven up my dreaming the next few hours.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    yes, gold should retrace that much

  • fuw

    Nice. We also have failed to make a new higher high in euro/usd (more like a double top), but I would like to see that get under ~1.495 before I get my hopes up to much.

  • jacksoo

    Thx SSH – thght you were talking about SPX hence my confusion.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    speaking of dell, if it goes up it will do close to 15 or 16…. interesting long IF it crosses the 14 mark

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    don't you ever listen to anything but JH?

  • fuw

    Also, remember that this could just be a retest of the latest floor, and we have some way to go before the larger trend is broken.

    DXY 8h:
    http://www.screencast.com/users/fuw/folders/Jin

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    yes, it's interesting how gold has risen and spx has fallen.

    if i'm right the q2-q3 2009 will mark the cross in a prety X between gold and spx:gold… quite symetrical i expect it to be

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    I'd place the stop at 202 or 209 depending on pain treshold

  • http://chartsandthat.blogspot.com/ ultra

    Morning.

    Interesting juncture in GBPUSD – http://screencast.com/t/NWZjZjIxZmUt

  • http://chartsandthat.blogspot.com/ ultra

    Looking at USDJPY, can't help thinking that this looks a little like one of those TK short candidate charts – obviously if it breaks out to the upside though… anyone else got any thoughts?

    http://screencast.com/t/MjgwMWZiM2It

  • http://twitter.com/tradejane tradejane

    That's a very good reminder CC, thanks.

    I suspect many people here probably know by now not to chase anything. A bigger problem for me, and perhaps for others as well, is to let the profits run.

    One thing that works for me (when I actually remember to do it) is to put a stop at breakeven and walk away for as long as I can stand it. Then come back, re-assess the situation and either move the stop up or cash in.

    The DAX is one sick puppy. Imo that says a lot about the general condition of the global market, as I consider the German pros to be among the best connected in the world. So if the DAX is unable to follow the Dow/Euro into new highs they must know something I don't.

    /NQ seems to have given up too.

  • http://twitter.com/tradejane tradejane

    That looks like a fairly clean trade as the trend is well defined. According to my primitive TA it would have to go above 89 before one can consider a reversal.

  • CorporalCarrot

    Another (badly drawn :)) visual representation of waning momentum. Notice the boxes representing each “drive” since Julys lows. Each drive to date has moved significantly beyond the top of the previous drive, and has had a retracement that stopped significantly above the lows of the previous drives. The last one stopped that trend, and notice how the current drive is thus far significantly inside the previous one, with a high thats not much higher.

    http://stockcharts.com/h-sc/ui?s=$SPX&p=D&st=20

    Of course, if we are merely establishing a high base here, the potential for a more parabolic rise exists, which would make the current drive evolve into something resembling the July one rather than the last 3.

  • standard_and_poor

    Here's a repost from Wednesday:
    “Living Inside a Broken Clock – Wednesday, Dec. 2, 2009During the last four days the spx index has displayed an impulsive wave count in my humble opinion with the possibility of a one day pullback to 1098 which should resolve itself with an ensuing new high and continued strength for the balance of the month – but only the spx knows its true intentions. Currently 20% long but fully hedged”

    OK now what: (I'm just an idiot dunce, who the hell really knows the future) but yesterday I stated early morning weakness for today, Friday, followed by new highs -let's wait and see.

    I'm currently 55% invested, 15% in TZA (triple short etf) and will adjust the hedge as needed.

  • goldpackers

    Have not used the i phone but have read ATT is having a massive problem servicing i phone and other customers.

    MUST break down today or headed up into 12-10/11 and probably 1227/37. GS either 158 or171 over next 3/4 days.

    The evidence to me is bearish to 1073/83 at least but will know by 9am!

    Next turn is 12-10/11. Last was 12-1/2.

    Obama Ben Geithner WILL come out with jobs plan by Christmas to help small businesses and consumers so beware.

  • jacksoo

    we do love The Clash

  • standard_and_poor

    Good morning rats.
    Great post again Mike.

    Can I get some cow bell please:
    http://www.youtube.com/watch?v=qFhM1XZsh6o

  • jacksoo

    yeah, but what happens come January and Santas aren't needed anymore !?

  • standard_and_poor

    Did some one say “Spanish bombs in Andalucia”?
    http://www.youtube.com/watch?v=u-qcy0-7ngw

  • goldpackers

    Technicals to me are horrific and should crash to 1000 spx BUTTTTT Obama Ben Geithner have an agenda and MORE MONEY and we bears are having a hard time dealing with that.

    We are trading on what we have always traded on but for now it is breaking our piggy bank.

  • standard_and_poor

    Saw this band in Chicago last Saturday and actually met the singer.
    Band kicked butt. Chicago is proud of its “Company of Thieves”.

    http://www.youtube.com/watch?v=AFsY2VR3NxU

    http://www.youtube.com/watch?v=XcWpi0I_2ac

  • jacksoo

    yeah – seminal stuff – –

    http://www.youtube.com/watch?v=FiVvA9YQpiI

  • goldpackers

    Concern with banks is that was deep B wave into late yesterday and ie GS back to 172.50 MS 33

    Faz an abc flat into close and headed back down. SURE hope this is wrong. Obviously today is big. And obviously gun shy!

  • http://chartsandthat.blogspot.com/ ultra

    Yeah FAZ is a bit of a messy chart right now. But there is still better volume on the ups than the downs and it's held up so far.

    http://stockcharts.com/h-sc/ui?s=FAZ&p=D&b=5&g=

  • fuw

    Good to hear. I was very discouraged when nobody seemed to spot my Joe Strummer avatar a while ago.

    A recent favorite of mine – The Card Cheat:
    http://www.youtube.com/watch?v=5KsULtQ_yIs

  • goldpackers

    Thought FAZ could get to 22 and max 24. I am long but don't see an impulsive pattern potential yet except for possible inverted H7S

  • http://chartsandthat.blogspot.com/ ultra

    I actually have the neckline of that marked at $1150 on my chart lol

  • http://twitter.com/tradejane tradejane

    And then there's SKF. The pace isn't as exciting but the chart is so much cleaner. I've tried all sorts of inverse ETFs yet I always come back to SKF.

  • http://twitter.com/tradejane tradejane

    I also expect at least another bounce.

    The current action reminds me of the Shanghai index back in late July. One day reversal, drop, then a run to marginally new highs (to take out everyone's stops?) and then the real drop.

    http://tinyurl.com/ycvjwdm

  • http://chartsandthat.blogspot.com/ ultra

    Yep, not in this one, but it's a nice close above the 50 and even better volume

    http://stockcharts.com/h-sc/ui?s=SKF&p=D&b=5&g=

  • http://iberianviews.blogspot.com/ catracho

    yes..my feeling is we take out the recent highs, everybody jumps on the bullish break out, THEN we fall. If only it will be so simple!

  • http://twitter.com/tradejane tradejane

    Well, it was that simple with the DAX back in late October… 😉

    but the premise of the US-markets tends to run along the lines of “why simple when you can make it complicated.” :-/

  • CorporalCarrot

    I will be fading whatever the initial move is today (i.e. if there is a big gap down, I have some shorts added at 10,471 which I will close, if there is a gap up I'm going to be looking to add shorts).

  • http://twitter.com/tradejane tradejane

    It seems to have broken the downward-trendline from the 6 month high as well. :)

    I like DUG too.

    SRS was a long time favorite but I've gotten spooked by its excessive decay lately…

  • http://chartsandthat.blogspot.com/ ultra

    Ahh the widowmaker…

  • roncofooddehydrator

    I prefer using the 2 hour charts on FAS/FAZ, the moves day to day can be too large for me to make sense of on a daily chart. On the 2 hour chart, moving averages, bollinger bands and a 10% envelope around the 30EMA all seem to be fairly decent indicators.

    My general strategy is to wait for a piercing of the 10% envelope below with a target of the 30EMA, although if it goes beyond I will attempt to hold. If it pierces the top 10%, it's definitely time to sell.

    http://screencast.com/t/NmVlZmRk

  • fuw

    Head&shoulders on the 15min DXY, now at neckline. Break down or not? We also tested a previous support/resistance earlier today (~74.8), but failed to get above it.

  • Nightwind

    Saw it too…could be a show stopper

  • CorporalCarrot

    Before these job numbers, anyone got any thoughts on yesterday's late selloff? I can't quite fathom it myself. MSM is blaming caution in advance of the job numbers but that doesn't jive.

    I mean, market professionals surely anticipate whats going to happen here.

    If as was hinted by Gibbs yesterday, they are worse than expected, then surely that will be bad for the dollar, good for the carry trade so equities should rally. If they are better than expected, then bulls will surely seize this as evidence (however fraudulent) of recovery. In any event, the FED is signalling no change to zirp for the foreseeable future, so it should be meaningless.

    The only thing that I can think of is a reversal of some of the idiotic seasonal adjustment factors we have had previously is going to result in a very big spike in the unemployment rate, without accompanying job losses being that much worse than expected.

    But the initial claims, 4 week moving averages, adp reports do not hint at anything drastic.

    I can't understand it. Theories?

    Bob are you out there?

  • roncofooddehydrator

    Some potential shorts, based on being 30%+ over their 20 day moving average (using finviz.com to screen). They're all China related, any comments towards the fundamentals would be appreciated. They all appear to have spiked up this far above their average a couple times in the last 9 months only to come back down:

    CAAS
    CAGC
    TSTC
    SEED

  • Schwerepunkt

    While I tend to look at news in the same way as you, I think your questions illustrate in vivid color why Mole insists news does not matter. It's all in the eye of the beholder. As traders, the only eye that matters is the market. If the market likes the number, we will know soon enough, although it is the final word that counts, not the initial ups and downs. Wait for a trend to develop following the release and trade around that. I would not front run a news release, however. That is asking for pain.

    Edit: BTW, I HATE how the market starts trending BEFORE the news is released, putting a trader in the awkward position of chasing or hoping for a reversal.

  • gmak

    http://evilspeculator.com/?p=13332&success

    New Post but it's a quick and dirty for now.
    New Post
    New Post
    New Post
    New Post
    New Post
    New Post

  • bluetrader

    Amen to that…been there, done that, and lost a few bucks doing it. One of my biggest hurdles as a trader was to get past the feeling that if you don't get in ahead of an event you will miss the move. Much easier to just wait and see what happens. There will always be an opportunity.

    -Dave-

  • goldpackers

    thanks  gl