Category: Trading Articles

Today's fear is likely tomorrow’s reward

If there's any question of whether fear has yet to set in, just take a look at the long dated government bonds. They have climbed all the way back up to test the spike highs from the October 15th equity market lows. Equities are nowhere near the lows at this juncture and seemingly will not get there. What gives?

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  • Written by LA Little

Category: Trading Articles

Currency Neutral Overseas Investing

The global equity marketplace is more accessible now than it ever was but with increasingly volatile floating currencies, investing in overseas equities requires that you consider the effects of the currency as an integral part of the trade. For example, purchasing many of the more popular European ETFs like the iShares MSCI Germany (EWG) will result in sub-par returns as compared to the German market itself if the Euro is losing value as is the case now. There is a direct correlation between Euro depreciation and the performance of ETFs that are proxies of overseas markets. Let's take a closer look.

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  • Written by LA Little

Category: Trading Articles

USO turning?

The energy sector may hold the next big trade

Staying on the right side of the market isn't simple but not impossible either. Over the past two months we witnessed a short term market top, a plunge and washout bottom and now another violent V-Shaped rally to new highs. Predicting these turn of events was virtually impossible and if anyone actually predicted it, then they should head down to the local drug store and pick up a lottery ticket. But one doesn't have to predict to profit. That correlation is not necessary. You just have to see when risk is increasing - up or down - and position appropriately. You need to recognize where opportunity lies across the many trading and investment opportunities available to you and seize it.


Reducing risk near the highs then adding some of that exposure back at the washout lows and later as the bearish retest and regenerate failed to stop the advance, are the latest examples of neoclassical reads - pure tape reading focused on how supply and demand line up. These reads are not limited to equities only but apply to all markets where volume, time and price are available for analysis. This includes currencies by examining their ETF proxies. As recently stated, almost all currencies were set to devalue relative to the dollar and were doing so even before China and Europe teamed up late last week to push them even lower. A reading of the tape had already told us this was coming so a further devaluation in the Euro should not have been a surprise. Supply and demand do rule.

So where might the next opportunity to stake out a potentially larger directional trade be?

One possibility is energy equities. The energy sector has, by far, been the west performing sector. Whether you are looking at the large cap integrated oils or the drillers, the carnage has been absolute. A 30% decline in the drillers in less than half of year is a testament to just how bloodied the group is. But where there is pain there eventually come relief. The key is to be patient enough until the supply/demand equation starts to turn and the formation of bullish patterns develop.

If we look at the commodity that is the root cause of the pain in this sector, it has finally begun to show signs of supply/demand equilibrium. Although these first signs of a tentative turn are now evident, we still do not yet have enough information to know that the bearish plunge in prices has bottomed and some sort of range trading is now in order. The chart tells us that we are at a point where this potentiality can take root.

OPEC is slated to meet the end of this week. Saudi Arabia has been reluctant to pull back production short term as their longer term goal seems to be to fatally wound the fracking competition - to make it untenable for the U.S. producers to continue to drill in this fashion. In the process they are wounding the OPEC community. The market at least senses that a potential turn is at hand. The confirmation that a turn is at hand would be for the bearish retest and regenerate zone to fail indicating that a range trade is most likely on this time frame. 

Clearly, the market has discounted a lot of the effects of the oil plunge in those companies tied to it be it the drillers or the large cap integrated oil concerns. But again, here we are seeing signs of a potential turn as well. With the drillers and the integrated oils, price has refused to trade lower in spite of commodity doing so over the past five weeks. Here's a chart of the integrated concerns which are clearly trending higher now.

Integrated's trending higher

A glance at the drillers charts shows that they too are refusing to move lower anymore.

OIH consolidating and building for move higher

Any way you look at it, the potential for a bottom looks high as does a press back to even higher prices. Of course one has to pick their spots to make the money and risk management work, but in a mature bull market; one that has just witnessed another fast stretch higher, rotation into the lagging groups is the norm, not the exception and this group finally looks like it may be primed for some of that action.

 

This article originally printed on MarketWatch on Nov 25, 2014 9:26 a.m. ET

 

  • Written by LA Little

Category: Trading Articles

Mean-Time-To-Failure statistics give the green light

In 2010, when doing research for my third book, Trend Trading Set-ups, it I stumbled across the idea that trend is like a light bulb - it has a life cycle. Since trends aren't all created equally that life cycle varies depending on the time frame and the quality of the trend but the great thing is that it can be measured. The result is that one can therefore forecast the cumulative probability of a trend failure (MTTF) at any given point in time. Two months ago, the probability of such a failure on the intermediate term time frame was quite high (80+%) across the major indexes and then, like magic, we got a hard fast correction over four weeks that broke swing points and ended up resetting the MTTFs. That reset has provided a green light for a push higher on the daily and weekly time frames not only through the end of this year but potentially beyond that.

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  • Written by LA Little

Category: Trading Articles

For currencies, worthlessness is in vogue

August 15, 1971 is not a date that most would remember. It does happen to have a historical ring to it though since it was on the day that President Nixon nixed the gold standard and cast aside the Bretton Woods agreement. That announcement, and the easy money policy of Nixon's friend and Federal Reserve Chairman Arthur Burns, eventually led to other countries dropping their peg to the dollar. The end result was floating exchange rates between currencies. Now, more than forty years later, floating exchange rates are seemingly in disarray. Never has the world witnessed what it is seeing now - a fast paced race to worthlessness by most major currencies. Why is this happening and where does it lead?

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  • Written by LA Little

Category: Trading Articles

What the bulls need to get another push higher

With QE3 drawing to an end and the market interpreting the Federal Reserve's notes as more hawkish (witness the spike higher in the dollar on that news), the question is
"Will this market finally take a rest or not?" My thoughts have centered around the notion of a range trade developing ever since we noted the washout at the lows back on October 15th. So are we ready to finally set-up the range trade?

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  • Written by LA Little

Category: Trading Articles

More QE is just a matter of time

Back in mid-August I wondered if the Fed would be forced to do another round of Quantitative Easing (QE). Now I am reasonably sure that this will happen - in time. Let's consider why.

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  • Written by LA Little

Category: Trading Articles

Forget the news, just read the tape

A week ago it looked like stocks were washing out and that a rebound was likely. I said as much that day. The sellers had waited the better part of two years to put their foot down and wreak some real havoc. Like usual though, all they were able to create was a short lived, fast and furious decline. Now, with a 6% rise in basically three trading days, the bulls are foaming at the mouth. I expect that they need a rest as well now.

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  • Written by LA Little

Category: Trading Articles

Are stocks washing out here?

Rather than recount the recent warnings posted here in this column prior to the financial throe currently being experienced, let's consider how this selling ends on a short term basis. With this type of set-up, the first bounce usually comes after some sort of washout move of which today may qualify. To events need to occur. First, those sectors/indexes that initially led us lower have to show relative outpeformance showing they are washed out. Secondly, all of those stockholders who are clinging to hope that this market will bounce back as it has so many times before will have to give up. We have half of the equation starting to occur but the other half remains.

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  • Written by LA Little

Category: Trading Articles

Three steps to staying on the right side of the market

Roughly fifteen months ago my investment stance was unequivocal - you stay bullish until there is a reason not to (see Quit Worrying About a 1987-style crash and Do not worry about a crash until it's time). Those two articles outlined a fundamental axiom of neoclassical technical analysis thought - that there is a structure to market declines. Given this fact, rather than live in fear of a crash, informed investors and traders should instead focus on identifying the potentially devastating structure that must manifest before taking significant steps to protect their portfolios. Those thoughts were ridiculed by some - embraced by others. In the end, the theory has proved to be true keeping us bullish most of the past fifteen months while most other commentators had long since given up on the bullish trend.

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  • Written by LA Little

Category: Trading Articles

Bearish view keeps building

Two weeks ago we considered how Shades of 2007 were evident in the current market and just last week we talked about the need for trench coats and umbrellas. A week later we need to add some knee-high rubber boots to our survival gear and consider a life jacket.

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  • Written by LA Little