BarroMetrics Views: S&P 2012-05-10 Again

Today I took out my original shorts (1366) and another smaller set at  1353 (initiated yesterday).

FIGURE 1 shows why.

After the price action on May 7 (DOJI day). I expected to see:

1. On May 8, a smallish range day with a lower low and lower high (when compared to May 7); and
2. On May 9, a strong day down.

Instead what we have seen is:

• On May 8, an average range down day  that left a strong buying extreme; and
• On May 9, a day that negated May 8’s buying extreme and replaced it with a buying extreme of its own.
• On both days, the S&P cash, failed to close in the bottom 2/3s of its range.

That’s the price structure, what about the volume picture?

On both days, we see above average volume and we see increased volume on May 9. But the resultant downward move is not keeping pace with volume generated.

The chart pattern appears to be setting up for a buy. And while the buy pattern is far from complete, given the current picture, I am unwilling to hold my shorts. Hence the exit.

FIGURE  1 S&P, Cash, Normalised Volume

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BarroMetrics Views: S&P 2012-05-07 Revisted

The price action on May 7 provides a great lesson of what I do when the cash and E-mini Futures (including the Globex session) don’t line up.

You will recall that I was looking to take a short position around the 1366 to 1371 zone. In addition, acceptance on a daily chart above 1361, would lead me to close out the position.

FIGURE 1 show the daily ESM2. We see a close above 1361 but not one I would immediately classify as acceptance.  I’d have liked to have a close  higher in the day’s range and more of the body above 1361. Still it was a close call.

In this situation, I turn to the situation I turn to my next lower timeframe - in this case 290-min (FIGURE 2). Here I’d have seen we have clear acceptance above 1361.

But then turning to  FIGURE 3, we see that the Daily, cash S&P had small range, DOJI day, with below average volume. In this chart, given the context, the pattern is bearish.

So, what to do?

In my experience, when there is a divergence between cash and futures, go with cash. Usually the divergence means  there is a transfer from strong hands (liquidation of strong longs or initiation of strong shorts) to weak longs.

Usually for today, I’d expect to see a down close with lower highs and lower lows and below average range. This ought to be followed on Wed or Thurs with a strong directional move down.

I have  held my shorts with buy stops unchanged.

FIGURE 1 Daily ESM2

FIGURE 2 290-min ESM2

FIGURE 3 Cash S&P with Normalised Volume

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BarroMetrics Views: S&P 2012-05-07

The price action this morning (HK time) was interesting enough to warrant my postponing the planned article.

Figure 1 shows that the E-mini, June (ESM2), gapped down from a close of 1362.50, opening at 1354 (8.50 points).

Moroever, the ESM2, if it accepts below 1352.50 raises the possibility of an 18-day Swing, Change in Trend Pattern. If that signal is given, the minimum target would be the 13-week line change price at 1303.03. Note that this price will tend to lift at the end of each week.

So what has to happen for the Change in Trend Pattern to invalidated?

Figure 2 provides the answer: all we need to see is an ESM2 DAILY acceptance above 1361. This would provide a buy signal for a move to at least the Primary Sell Zone, 1411.25 to 1419.75. (Figure 2 is a 290-min chart so as to better show the zones).

However, given the context, I rate the greater probability of be the sell signal. That being the case, if I am not short, where would I be looking to take a trade today?

Figure 3 is the 60-min chart. It shows that the resistance zone, 1367 to 1363 ought to hold if a Change in Trend is to occur. Now this level is above the critical zone of 1361. So if I take a trade at 1367 to 1363, I would need to see a strong close BELOW 1361 to hold the position.

FIGURE 1 18-day ESM2

FIGURE 2 290-min ESM2

FIGURE 3 60-min ESM2

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BarroMetrics Views: Trading Mistakes

I concluded a Habits of Success Class last week. As is my wont, I make post seminar notes on the participants - perceived strengths, weaknesses, likelihood of their future success etc. I also look to identify the perceived ’single most important stumbling block’. This exercise allows me to expand my own skills.

Given my time constraints, I thought a short series on common mistakes would be useful.

There are two reasons why we fail at trading:

1. We don’t know what to do; and/or
2. We don’t do what we know.

The first stumbling block falls within the first category - what I call ‘unrealistic expectations’. In Singapore, we see the ads just about everytime we open the local paper. Ads promising untold riches, with no money down and no effort beyond 15-minutes to 30-minutes a day - in short, become rich without effort to acquire the skills, become rich without the necessary capital, become rich without the effort of knowing and applying the necessary skills.

I find it interesting that of the thousands that attend the seminars and workshops, not one would believe we could become a heart surgeon in a weekend seminar, but many would believe that we can become instant investing/trading experts - never mind that K Anders Ericsson, probably the leading authority on expertise, estimates it takes about 10,000 hours to acquire expertise in any field. To become competent and a master at anything, It’s not a question of inborn talent, it’s more about the time and effort you put it. And, that effort takes a specific form which Ericsson calls ‘Deliberative Practice’. For an outline of the Deliberative Practice method see the blog “The Essential Nature of Markets“.

(I linked an excellent article I saw in the Australian on Ericsson - well worth reading)

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BarroMetrics Views: The Importance of Keeping Records

In my classes, I emphasize the wisdom of keeping records.  In particular I recommend that traders keep a snapshot of all orders and fills. When asked in class, I have to admit that the last time I had to fall back on my records was before the Internet era. You could say, I had never had to rely on my snapshots - at least until today.

Today, I placed a limit order and obtained the usual electronic confirmation. The order also appeared in the open orders tab of the platform. I used Snagit to make a copy of both the confirmation and the open order tab. When I came back from lunch, I found that prices had moved 50 pips above my entry and had subsequently moved down so that I would have been 50 pips in profit- I say ‘would have been’ because the order was no longer open and there was no record of the order having been placed.

Luckily I had my snapshots. I wrote to the broker. They admitted to a technical glitch and filled me without further ado.

The question is - how would the broker responded had I not had the snapshots? I suspect I’d have been given a compassionate hearing and short shrift - after all, the onus of proof was on me to establish that I had placed the order.

The moral: keep records of all you do!

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Avoid Australian Resource Stocks: Pro

Fri. Apr. 20 2012 | 11:41 AM[04:56]

Charles Leyland, Managing Director, Leyland Private Asset Management says he’s still avoiding the Australian resources sector and that there..

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BarroMetrics Views: The Spanish Bond Auction

The S&P had a nine point range. The price action was indicative that the market was awaiting some event. Perhaps it was awaiting to see how the Spanish Bond Auction fares today (April 19).

Yesterday, the Spanish 10-year bonds yields fell from a high on April  16 of 6.07% to 5.89%. On Tuesday,  the 12-month and 18-month bill sales went better than expected.

The problem is we see a similar lead up at the last bond auction that only resulted in the 10-year bond sales not meeting their desired targets.

My gut feel, and it is no more than that, we will see a the target met at yields within expectation. If this proves correct, we should see a rally today in the S&P and US$ crosses. The nature  and structure of  the rally we’ll give us an idea if more upside can be expected.

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BarroMetrics Views: S&P 2012-04-17

First off, thanks to all who have written asking about the long silence; I appreciate your concern. I’ll do my best to keep up the blog; right now, my personal situation makes it a little difficult, but I do promise to do my best.

We seem to be right on the cusp with the S&P. By way of context:

1. The FRED graph shows a decline of over US$1B; I take this as a preliminary indication that the  March 27 high (1419.75, basis June) will be a 13-w swing high. The target for the correction will be the line turn price currently at 1254 (basis June), but this will come up as the E-mini comes down.
2. The way I use Quantifiable Edges‘ PoMo indicator means, it gave a sell signal on Thursday.

Figure 2 is the 13-Week Swing of the S&P cash. A close below 1336 is necessary to complete the signal.

Finally, I’ll be reviewing the bearish scenario if if we see a daily close above Friday’s high that shows bullish conviction.

FIGURE 1 FRED

FIGURE 2 CASH  S&P, 13-Week Swing

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BarroMetrics Views: Spain

James from KL asked why I say Spain and/or Portugal could have a possible destabilising effect on US stocks, especially since the the GPD to debt ratio was ‘only  68.5% in 2011′ and is expected to be around 79.8% in 2012. James says only because the US GDP to debt ratio for 2011 was 100.3% (see http://www.zerohedge.com/news/us-closes-2011-record-1522-trillion-debt-officially-1003-debtgdp).

Turning to his question, let’s first take Spain. In this reply, we’ll put aside the advantages the US has because the US$ is the world’s reserve currency…

The problem with Spain is it is unable to meet its obligations and the lenders (EBC, IMF) have imposed stringent austerity conditions for the bailout funds. But, if Spain’s economy does not grow, and/or it is unable to secure new debt at reasonable rates, it will be unable to finance its obligations.

Think of it this way.

Let’s say I have borrowed in excess of my capacity to repay. The first thing, I’d do is consolidate my the old debts to secure viable long-term financing I can afford to repay. Second, I’d need to secure enough income to pay my obligations. To do that, I’ll need to build my business and do this, I’d probably need to borrow. To secure new debt at attractive rates, I’d have to convince my new investors that my business is efficient and profitable.

With that as a context, let’s turn and see what the Spanish Government has cut to meet its austerity obligations….

It cut research and development by 25%! Hmmm…but aren’t these the very items that a government would need to generate an income? Why didn’t it cut, instead, the budget of its bloated civil service?

Perhaps this is the reason why at yesterday’s auction, the target of E3.5B was not met. The auction raised only E2.6B at a rate of 5.69% (up from 5.35%) see Figure 1. The fact is Spain does not seem to have the will to do what is necessary to bring its finances to an viable state. That being the case, it’ll probably need another bailout. But the ECB has stated it’s closing aid for now. So, what then Europe?

FIGURE 1 Spanish 10-Year Rates

Chart through the courtesy of Bloomberg

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BarroMetrics Views: China Revisited

Eyes are again turning to Europe as the deteriorating employment situation in Spain grabs our attention.  I’d suggest however, there is a potentially more dangerous situation looming China.

Let’s see what the charts are pointing to:

•  Figure 1 is a weekly Shanghai Index marking the all time high at 6125 and the reaction low at 1678. It also shows the correction from July 2010 to November 2010.  Taking a closer look at the July-November rally. we turn to Figure 2.
• Figure 2 shows a zoomed in view of that correction.
• In June 2012 we saw a break below the 2318 (July2010 support)  that was followed by an attempted rally. That rally failed to accept above 2423 and is now returning to test the Maximum Extension at 2155.
• If we see acceptance below 2155, we’ll see a retest of the larger Primary Buy Zone at 1892 and 1664.

If the momentum of the current down move continues when testing 2155, we’ll probably see acceptance below it. This raises the question of what it means for US and rest of the world.

I’d suggest that acceptance below 2155 will put the world on notice that Chinese growth in China will be below 7%. If this plays out, the effect on the S&P will be far greater than any European crisis.

FIGURE 1 Weekly Shanghai Composite

FIGURE 2 Weekly Shanghai Composite

FIGURE 3 Weekly Shanghai Composite

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