Tops Are A Process

This weekend I don’t see much in my LT chart collection that bodes repeating. Our P&F charts have been spot on recently and as I have produced some updates this is an opportunity to share some pertinent musings with my subs. However, the overall take away message I would like to convey today is that tops (as well as bottoms) are a process and that they take time. This is a concept many retail traders have a hard time embracing, usually much to their own demise. Observe:

Once again we are looking at volatility plotted against the SPX, more specifically we are plotting a ratio between the vanilla VIX and the VXV, it’s 3-month cousin. There is method to my madness as this ratio, when plotted on a long term basis, often provides us with hints of what may lurk behind the distant horizon. More specifically we are interested in divergences which happen when price moves in one direction and our ratio starts pushing in the opposite.

I have highlighted the most salient occurrences and it’s surprising how we start seeing the ratio plot a divergence almost every single time, weeks ahead of prices forming a top. This again demonstrates that markets can stay irrational a lot longer than you can remain solvent. When attempting to short market that’s in squeeze mode you are almost guaranteed to get burned. Remember, you don’t get points for being first – what matters is catching the bus when the time is right. And on a long term basis we have a lot more time than we think. Very rarely do markets turn on a dime. It has happened but it’s the exception.

Right now we once again are seeing a divergence but in comparison with prior ones it’s minuscule. Which means that on a long term basis we ought to give this rally a lot more leeway before we even start thinking about short positions.

Here’s a similar example – the SPX vs. a ratio between NYSE stocks above their 50-day SMA and the ones above their 200-day SMA. Obviously the latter are considered more supportive of long term growth than the former. Again two key observations: 1 – tops take a LOT more time than you think. 2 – we are just now starting to form a divergence.

So does this mean the SPX is bound to make a b-line to 1600 or 1700? Of course not – these are long term charts and thus we need to be thinking in weeks and months, not in days. Even if we are going to paint new highs this year, the path upward will be littered with short and medium corrections. To us traders they of course matter the most but it’s always good to remind ourselves what the prevailing long term trend is. And as of now it remains to the upside.

Now let’s look at some P&F charts – specifically the SPX is currently making my head spin:
More charts and non-biased commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

I’m posting this one with a bit more context so you all get a better feel for using long term P&F charts. Quite frankly the SPX is probably our most volatile P&F charts when compared to those we plot over in commodities or FX. Long term trends seem to prevail longer on the currency and commodity side – Elliotticians for instance have often made a point about ‘extended fifth waves’ in these markets.

In any case I would suggest you take the current PO of 1705 with a grain of salt. This is more a testament to the strength and velocity of the current advance than anything else. Sure, we may just get there eventually but we’ll meet many hoops and hurdles on the way. For instance, exactly one year ago the bullish PO was 1390 – which we met a few months later. But from where this triggered a 1390 PO was a very reasonable target. This particular advance commenced on December 20th, 2011 when the SPX met a ‘bearish signal reversed’ trigger near 1230. The initial PO was 1315 but was quickly advanced to 1390 as things heated up over Christmas.

After eventually painting a high above the 1400 mark we dropped all the way into 1275, which on the last leg of the sell off triggered a bearish PO of 1225. This one never happened and the lesson here is that price objectives triggered after extended runs can be deceptive and may often be reversed.

Had we satisfied the bearish PO and then only advanced tepidly it would have questioned the continuation of the overall longer term uptrend. But obviously we never got there as the bearish PO was reversed a week or so later. For me what usually counts the most are the bullish price objectives I see near bottoms and the bearish price objectives I see near tops. Those seem to be most attainable once a breach of a support/resistance cluster triggers them.

Price objectives like the current one triggered by a ‘long tail up’ on January 24th in my opinion point the way on a very long term basis, that is where we may wind up a few months or perhaps a year from now. But I would never make a bet for 1700 right now and right here, which would be foolish, in particular given the low level of volatility right now. I hope the above makes sense – I was once again attempting to demonstrate that context matters. If you always take P&F price objectives at bare value and consider them immutable targets you will often be disappointed, especially on the equities side (less so in commodities and FX I’d say). In would instead use the current PO as a testament to the strength of the ongoing trend. And as long as we keep painting bullish POs the bears will be relegated to waiting in the bullpen.

AAPL – I dedicated a post to this the other day and I’m sure you all caught it. Since then prices have dropped even further and we are now approaching our price objective. Another 30 handles and we’re there. If you have been riding this dog lower then you may start scaling out.

Crude – once again I covered this one last week in more detail. And once again our current price objective is almost in grasp now – if you have been long since our entry then I suggest you start scaling out. But bear in mind that price objectives are only estimates based on rules – we may easily overshoot and push into triple digits.

Gold has been stuck in a 50 handle range all month and I don’t sense much momentum right now. 1700 is an important inflection point as it would reverse our bearish PO.

Silver sporting a bullish PO but I think this one is merely theoretical. As you can see this thing has been pushing sideways for months now and a mere 4 handle range separates us from a bullish or bearish PO. And after one of them triggers we may find ourselves reversing again once we reach the upper or lower realms of the current price cluster (i.e. 26 – 35). Ergo there is no clear trend in precious metals right now – it’s been a nothingburger for over a year now.

As a side note – we appear to be amidst a long term sideways correction, which in itself is healthy considering how one sided this trade was in late 2010. You may also recall from my previous post of mine (and per the chart above) that the ongoing correction in precious metals has thus far been mild compared with prior ones.

Finally the EUR which seems to be on its merry way. The bullish PO keeps pointing at the 1.39 mark which, much to my distress, seems rather attainable given prior context. Maybe time to raise my Dollar based subscription fees? 😉



This entry was posted on Sunday, January 27th, 2013 at 1:41 pm. Both comments and pings are currently closed.

  • AmazingLarry

    Awesome stuff as usual, mi amigo. Ready to get to work this week. Still think copper holds the commodity cards, but welcome the oppotunity to be proven a fool for such thinking.

  • tradem4alpha

    What I think is more important in those charts are those long term divergences (1 year in the first; 1.5 in the second). I mean, that VXV:VIX ration peaked at the beginning of 2012. From then on it has only been lower highs (and lower lows also). This shows 3-month volatility is constantly being bid up, at least in relation to front month volatility. This thing coupled with sentiment readings (and I am not only talking about II, AAII, NAAIM etc., but other ones as well: margin debt – it is above 2% of USA GDP, the only times this thing has happened were Feb. 2000 and October 2007, short interest) and I think the Fearless scenario (sub 1000 SPX) is doable in 6 months – 1 year. Of course, we are traders and we trade what it is in front of us.

  • Skynard

    SPX weekly, potential triple neg div if prices were capable of reversing.

  • thepercolator

    According to Hussman the S&P 500 has reached an “overvalued, overbought, overbullish, rising-yields syndrome that we define – syndromes that have appeared at or close to the beginning of what investors can easily recall as the singularly worst set of market instances in history, including the 1973-74, 1987, 2000-2002, and 2007-2009 plunges. With some minor imputation (estimating bullish and bearish sentiment as a function of the extent and volatility of prior market movement), we can verify that these syndromes also emerged just prior to the 1929-1932 collapse.”

    I’m building short positions mostly in individual stocks though some ETF’s and I’m now net short, but I trade a much longer time frame than most here and use very little leverage.

  • Y KW

    Must be a new maths … I make it only the second negative divergence (at best) … always happy to learn … also in my book does not really qualify as true divergence.

  • convictscott

    If you take a look at the same chart without MACD you can see the same thing without clutter. MACD (and other momo indicators) are derivative of price. Anytime you have each higher high going up less and less (higher price with less conviction to each upmove) that is the definition of a divergence. Find the same thing on any chart, you will find a divergence, so once you know what it looks like you can throw MACD away and never use it again :) Krastins taught me that years ago, and it has been invaluable.

    So logically what are we seeing here?

    Firstly I note that the trendline is an aberration based on the log scale of the chart you are using, does not appear on a regular scale chart :) So assuming that it is behaving somewhat like a channel/rising wedge of some description (near enough is good enough here I think)

    Medium term (weekly) we are seeing a clear channel or a rising wedge (inherently bearish) that has existed for a long time. It is at the top of it’s trading range and looks as if it MAY (still unclear) attempt a breakout from that channel. Most channel breakouts fail trapping traders wrongway. Statistically (not my opinion) the longer a channel has gone on the weaker it becomes and the more likely a breakout will be attempted. 

    Therefore this is NOT a time to get short on a touch of whatever trendline you are following (probably a good way to get out of longs though), but we still have lots of info to digest.

    An overshoot to the bull side here will probably set up a good shorting opportunity (aligned perfectly with Mole’s post as usual)

    Short term (daily) I like to look at how the current rally STARTED. Look at those two massive up candles which kicked off the current upmove on $spx. They are consecutively expanding in range, indicating that the move is gaining strength. They closed above several weeks of bearish closes in two days. All those fresh shorts from the last two weeks got forced out at that point. From that point the fix was in, shorting SHOULD have been taken off the table, and swing long for the fences on any pullback. Weak bears just stopped out + upwards momentum on the weekly and daily = high probability that this action will continue.

    In the last 2 trading weeks (10 trading days) we have ZERO evidence that the bears are even close to wresting control back from the bulls. What I mean is that there are NO CANDLES WITH A BEAR BODY (a decent sized real body, and close lower than the open) There are a lot of hammer/doji candles, indicative of two sided trading, but after each failed attempt by the bears to push price down, it goes up.

    What price is telling us is that though momentum is waning, the bears are battered and bruised, unable to mount an assault.

    It is MOST DEFINITELY not a time to get short just yet.

    I’d like to see either

    a) Accumulated selling pressure (which is cumulative) start to come in (a few down body candles, indicative of topping action – that the bears are starting to build selling pressure)
    b) A failed retest of the high (ideally sequentially on cascading timeframes, 15min, 60min, daily)
    c) Capitulation to the upside.

    Bottom line, I’d be getting out of longs soon, but not quite ready to get short

  • Skynard
  • Skynard

    Yes, the trend is still up until proven otherwise and agree with you. Let’s see that long body red candle right about now:)

  • Y KW

    It is imperative from my side when using momentum concepts to ensure than you compare related movements … else you can start ‘seeing’ divergences everywhere to justify a story.

  • molecool

    Oh shit – the odds of a EUR ramp just doubled 😉

  • newbfxtrader

    Can I please get your thoughts on this one. Consolidating for next leg higher? Bears trying to get control? How would you read?

  • molecool

    Good to see you around again, Scotty.

  • molecool

    Jeezzz – stochastics – I can’t tell you how wrong they can be. And even if they are right they can remain embedded for extended periods. Yes, there is a divergence on those stochs but I have also seen them swing back up for a final stretch. As a matter of fact let me show you on that very chart:

    Get my drift? You cannot rely on stochastics alone, especially these days when it’s so easy for big players (with Fed cash) to bang the tape higher and to jump in at crucial support levels. As Scott already pointed out – the bears won’t be driving any sell off. As a matter of fact they rarely do – ever. It’s usually a lack of buyers (i.e. the last sucker) that turns markets. Divergences happen before that and based on recent history at least they need to be rather pronounced to exert sufficient gravity.

    As I said in my AAPL post – this is not the beginning of the end. But perhaps it is the end of the beginning.

  • Skynard

    Old news Mate, go short:)

  • molecool

    Oh, you’re not a sub? I wrote about the EUR in my post….

  • bullregard

    Skynard’s scale seems linear to me…

  • Skynard

    Seen that target and like your use of P & F, just looking for some pullback. Put a short again at this resistance level and playing some retrace.

  • Skynard

    Here is a chart.

  • convictscott

    Good to be around mate :) Realistically I’m 3 months from having system trading back up and running again, but I have some ideas for taking my game to the next level. I’m still undecided at this point whether I will be full mechanical or run concurrent mechanical/discretionary systems.

    Do you remember a kid who used to come on this blog years ago, I think he went by the name dudetrader or something? Anyway, he’s taken the same setups as I use (a few extra ones), with some radical trade management, and ruthlessly follows his rules. He is profitable and trading other people’s money now.

    Love to see people put the WORK in to figure out the game.

  • bullregard

    Instead of fighting over unconditionally predicting the future, what about the simplest thought here… algo driven market or not, people still at the keyboards, and 1500 is a psychologically important level for humans using base 10 numeration… So… IMVHO, if we don’t burst over 2 days worth of ATR now, some could start getting cold feet and wanting more of a sit and watch position… and this could cascade in a bigger movement… A straddle could be the answer now.

  • Skynard

    /NG just did the deep dive:)

  • Darth_Gerb
  • bullregard

    wow… i was planning to get short tomorrow at open… 

  • tradem4alpha

     dudeplunger you mean? is he still active on disqus? do you have his email or skype? thanks.

  • Skynard

    Waiting for a long to trigger now as it just tagged the NLSL and the daily 25.

  • bullregard

    Still did not reach the 3 months volume drop, around 3.30.

  • convictscott

    OK my thoughts. 

    1) It is definitely, unarguably a bull trend. 

    In a bull trend the bearish counter trend setups subjectively LOOK MUCH BETTER. They are like the siren call luring you onto the rocks.

    I don’t know how much of a newb you are, but if there is one thing I’d go back in time and change it was my attraction to top picking when I was new.

    2) The most recent price action is showing 3 pushes (2 spike highs) towards the top. This is a classically perfect looking top (and there is an old pit trader saying “3 pushes to make the top”).

    More than 4 pushes is VERY UNUSUAL. One more spike up I’d start actively looking for a short.

    Therefore it is potentially a top, and potentially a nice looking one at that. But you should never short a bull trend just because you think its a top, or because it makes a pwetty chart. You should WAIT FOR A RETEST OF THAT HIGH, AND THEN WAIT FOR EVIDENCE THAT THAT RETEST IS FAILING.

    The last 2 day’s price action could either be a retest of that high (if it fails) or part of an ABC (stupid wave shit) 2 legged correction in an uptrend.

    What is more likely? It is about 50/50 at this stage. I don’t see betting odds that it will fall just this second. I don’t have a valid setup according to my personal rules so I would not take the short setup, but I acknowledge there is a valid short thesis here. 

    Taking into account that short setups in bull trends ALWAYS LOOK TASTY, they always look like back the truck up setups – I’d be inclined to either pass or trade it with a smaller than usual size position.

    How would I trade this? I’m guessing you are gagging to take a short position, so let’s deal with that first.

    If it breaks the low of the most recent day’s price action get short with a small position reflecting that it is not a particularly good risk/return play, with a stop a tick above the daily high. 

    Personally I’d pass on the short here, even though if it works it will be a big winner. 

    However, If you get another attempt to break the low of 2 days ago that FAILS – thats an extremely high probability LONG. Very high probability long actually, since it would be with trend. I’d be looking to exit just past the existing highs.

    Also, you should note that if it breaks the high of the shooting star candle this is an unusual occurrence indicating stronger than usual buying pressure, and you could get long a tick above the high with a stop a tick below the low. I’d be looking to exit at the upper trendline, somewhere around 92

    Bottom line, we have 3 highest probability outcomes – all about equal.

    1) this is a retest of the high, if it fails the fix is in and the bull trend is over
    2) we have a completed 2-legged pullback in an uptrend, and the market will shoot to new highs (probably the highest prob outcome)
    3) we attempt to go down here, this fails, trapping stupid retail shorts, and GUARANTEEING that we hit fresh highs.

  • convictscott

    That’s the guy. Shoot me an email on sphillips @nologic:disqus dot com I don’t want to post his deets.

    After chatting with him I am seriously considering letting him manage some cash for me. He has turned very good, especially for a young kid.

  • Darth_Gerb

    In a bull trend the bearish counter trend setups subjectively LOOK MUCH BETTER. They are like the siren call luring you onto the rocks.
    alla 2009/2010.

  • Skynard

    Think we see a bounce off the 25 daily, if not would be a good place to short or wait for a re-test.

  • newbfxtrader

    Much appreciated thx! 

  • bullregard

    I still think the move will continue down… now I will wait for the bounce tomorrow to give me a better entry. I agree it might bounce now.

  • Skynard

    Hehe, waiting for the re-test of the low to go long. Was already short.

  • JackSparow

    AttN: – Skynard ..thoughts?

  • Skynard

    Currently short and would be long on a break of the high, posted this below. Think it’s a quad div if their is such a thing, that is if we reverse here. The question I have now is the AUD, could it get bid up with dollar strength.

  • Skynard

    /DX at inflection point.

  • JackSparow

    my view
    6E  maybe long6A short
    DX – undecided

  • newbfxtrader

    /6a looks like wedge forming. You are waiting for a break to short?

  • Skynard

    Found the 100 daily, flipped shorts now long for a bounce. Will have sell order if the low is taken out.

  • JackSparow

    short from above (.0500)
     stop loss @ 0.0407 / 0.0435.. continue to be short if wedge breaks ..I think there is enough momentum.. will wait for close trow hope this helps 

  • Darth_Gerb

    gold speculators, long or short – heads up.
    circles show overhead resistance, now is support.

  • Skynard

    Thanks for the set up on /NG Mole, working like a charm so far:)

  • AmazingLarry

    Regression lines on the SPX, Dow and NDX since the 2009 bottom. Tells an interesting story of where we are now vs where we were within the mean of the trend of this bull leg (at least to me, anyway).

  • Skynard

    Close to the 100 weekly now.

  • convictscott

    6a chart is nice

  • JackSparow

    Thank you sir, let us see what trow bring

  • JackSparow

    sorry 1.0407/1.0435

  • molecool
  • reflex121

    @newbfxtrader:disqus DeMark has been killing the turns on the weekly chart.  Another sell was put in last week.

    However, all of CS’s points are valid, so if you play this short, be small and add on confirmation or wait for a retest  if there is one.  Best to your trading.

  • AMCabrera

    im so bearish my balls growl.

  • AMCabrera

    But seriously guys. EUR/GBP, it really did warn everyone that two weeks ago was not the time to go heavily short. Now I think it is however.

  • molecool


    D   A   I    L   Y      Z   E   R   O     H   A   S      B   E    E   N      U   P   D   A   T   E   D


  • molecool

    Hey, I ‘manage’ your money for ya – there’s that new Ferrari I have been meaning to take out for a spin… 😉

  • molecool

    wait… for … it…… not enough suckers in the game just yet.

  • convictscott


  • Skynard

    Like the headlines here:) Get ready!

  • molecool

    DeMark has been wrong on many occasions. Don’t fall prey to recency bias.

  • bullregard

    NG reached the 3 months volume hole in all Feb/Mar/Apr contracts… What a train wreck… and I missed it.

  • Skynard

    Yep, NLSL triggered. Good call on the volume hole! Looks like a gap on the daily as well.

  • molecool

    ¨°º¤ø„¸F R E S H „ø¤º°¨ 
    ¸„ø¤º°¨ M E A T“°º¤ø„¸

  • DudePlunger

    Hit me up –

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