You're now on the archive server. Commenting has been disabled.
Have You Sold Anything Yet?
For those of us without a crystal ball, we have to rely upon techniques or signals to get in and out of the markets. These could be moving average crossovers or other more "sophisticated" methods like counting negative divergences, which I have developed and discussed previously. Regardless of what you do, just have a plan. Honor the signals; know where you would get back in if you are wrong.
I have yet to read or hear of one seasoned pro (or otherwise) who knows where this market is going. Even the analysts I respect the most seem to have one foot in and one foot out of this market. We have lots of opinions from lots of smart people, and that is all. So why worry if you get it wrong or sell too early, but I do believe you need to take some action.
So have you sold anything yet?
From my vantage point -that is, from my quantitatively driven research - the clustering of negative divergences bars on the weekly charts of several key ETF's should be a concern if you are an equity bull. Why? If we go back in time, a clustering of negative divergences has often been associated with a market top, but not every market top. The ensuing sell off could be moderate in scope lasting lasting several months or it could mark the onset of a much broader and deeper sell off.
Figure 1 shows the i-Shares Russell 2000 Index ETF (symbol: IWM), and is an example. The indicator that counts negative divergences is in the lower panel, and negative divergences are noted by pink markers on the price bars. This is a look at IWM from July, 2007, and what we note is that this cluster of negative divergence bars signaled the bear market in IWM. Prices have yet to close higher than the negative divergence bars, and at that time, little did we know that this signal would lead to a bear market of epic proportions.
Figure 1. IWM/ weekly (July, 2007)
******
On the other hand, there have been a few times when prices moved higher despite the clustering of negative divergences. When this happened, it appears to represent a blow off top or more rarely (1954 and 1995) part of a sustainable trend. Figure 2 shows the blow off top in IWM that occurred in December, 2003 with a second sell signal in January, 2004 that led to a moderate sell off and buying opportunity several months later.
Figure 2. IWM/ weekly (December, 2003)
*****
Once again, without the use of a crystal ball it is impossible to know what tomorrow or next week will bring. But we can get some clues from the price action.
If price closes over the high of the most recent negative divergence bar (on a weekly closing basis), then the market or ETF (under consideration) in all likelihood is going higher. Whether this represents a blow off top or a more sustainable trend is yet to be determined. If prices remain below these negative divergences, then they do, and you look like a genius for selling. But again, if prices do move higher, you have a mechanism for getting back into the market - a weekly close over the high of the negative divergence bar.
If you sell now and prices do go higher, just look at it as taking out insurance and playing good defense. If you have to buy back later on a close over the negative divergence bar, I would use the low of that bar as a stop loss.
I previously presented this table three weeks ago and these are the ETF's that I follow that have a clustering of negative divergences. Column 1 lists the ETF's by symbol; column 2 is the high of the recent negative divergence bar; column 3 notes a daily or weekly close over the high of the negative divergence bar; if column 3 has asterisks, then prices have yet to close over the highs. If column 1 is shaded in blue, then this is a new addition to the list.
Table 1. ETF's/ negative divergence clusters
*****
Several observations are in order.
1) On the prior list, the QQQQ, GLD, and FXI each had a weekly close above their prior negative divergence highs. Several weeks later, QQQQ and FXI had a weekly close back below the high of their negative divergence bar. After today's (Tuesday's) action, we are back above those highs on the QQQQ only. We await for a Friday close.
2) SLV closed above its negative divergence about 4 days after I wrote the original article, and it has not looked back.
3) The same could be said for MOO, another ETF helped by the falling Dollar.
4) UDN (bet against the Dollar) and FXE (bet on the Euro or against the Dollar) have yet to have that weekly close above the high of the negative divergence bar. They have had a daily close greater than the high of the negative divergence bar.
5) ETF's that benefit from the weak Dollar (EEM, WIP, XME, PIO, QQQQ) have had a daily (not weekly) close greater than their nearby negative divergence high.
The "everything but the Dollar" trade continues. If there is a weekly close above the high of the recent negative divergence bar on the UDN, there is a high likelihood that we could see a blow off top in the equity market. In this year of outlier events, the outlier trade may be realized.
1.2006: Sell education bonds for daughter and buy gold coins at about $400/oz. Reason: Savings bonds are stupid. Decide to keep her college fund in PMs.
2.2007 (late): Completely out of domestic stock market, move funds to short term US treasuries. Reason: Bad feeling. I tell everyone about my bad feeling. (PMs not an option due to stupid 401K.)
3.2008:
a.(summer)Buy silver coins and canned goods. Reason: Can’t afford gold.
b.(August)Completely out of international stock market and into short term US treasuries (stupid 401K). Reason: Really bad feeling. I tell everyone about it.
c.(throughout) Boyfriend tells me I’m crazy. Family whispers concerns behind my back that I may have come unhinged.
d.(late summer) Borrow maximum from stupid 401K, pay off debts, and buy silver and gold bars ($700/oz) with remainder. Reason: ZOMG!!11!911!!bad feeling. I tell everybody about my bad feelings.
e.(Autumn) Make sympathetic noises to friends and family as they lose half their investments. Count my money.
4.2009:
a.Hoard canned goods all winter.
b.(early) Put toe back into stock market when S&P hits 666. Reason: Mark of the Beast, seemed like a good idea.
c.(May) Get out of stocks and back into Treasuries. Reason: I listened to something other than my gut, besides a nagging feeling over making money off a market that had sold itself to Satan. I read the wave theorists, the chart trackers, the doomers, and really smart people who knew their history. Surely they knew better than I did.
d.Get back into stock market in October. Reason: WTF?
e.(yesterday) Sent pictures of women in gold bikinis to my boyfriend with the headline GOLD, BEETCHES!!! Counted my money. No I ever sold any of the metals, you crazy?
I’m not in the financial business, just a bewildered divorcee who wants to send her child to college someday. That said I’m the only person I know who has “made money” in this market over the past 3 years. So far as I can tell gut feelings trump technicals, wave theories, history, even reason itself. It’s sescond only to insider information in terms of reliability (YMMV) and since I get no insider info my gut is all I’ve got. Oh, and now I read Zero Hedge. That’s got to count for something.
Hey technical, what studies did you use to make the charts above? I'm interested in looking at this on my own charts and making some decisions.
I'm still in the market doing spreads and lean to the bear side and then to bull side based on technical assessments.
Took all my dollars and bought supplies for the newly homeless (wheeled suitcases, backbacks) because the storm has just begun and dollars won't buy anything in a year.
Saving my gold so that when we get to the bottom, I can open up a manufacturing facility and actually contribute to the GDP instead of being a professional gambler (trader). Hope the unions don't take away my motivation.
Crossing my fingers for the successful family business which will be taken down by the idiotic government workers who have only theorized about the real world and the fat, lazy uninformed citizen-leeches which make up too large of a % of our population.
Moved to a farm and can produce all I need and know how to do it.
Gotten my kids jobs and am teaching them usable skills instead of giving them the usual fairytale childhoods which produce useless idiot dreamers.
Pray daily for the less prepared.
Took out 2/3 as cash. Shifted most of rest to transportation and mining machinery. If economy recovers commodities have to get out of the ground and be moved. If it doesn't most of my assets are safe for next bottom. Unless everything goes wahonee shaped and then nothing much matters anyway.
Thank you. My small-cap signal (medium-term trend-following) bought on March 23 and sold last night. However, I am actually invested in a junk bond fund, various gold stocks, an emerging markets fund, and a Europe fund. All of these still have buy signals, and all of them are still in their "channels". I think I will stay invested. I don't have any idea what will happen; I never do.
I trade in multiple time frames. Even though I think it’s likely we will get the customary year-end rally, I took 1/3 of my longer-term equity positions off the table on Tuesday.
I believe the rally probably has a little more to go, eventually taking out 1229 in the next few months, before stocks roll over and the secular bear market resumes in a big way. But no one can be certain about the timing . The market is being driven almost entirely by a falling dollar, and not the economic reality (not good). The derivative meltdown is far from over, and will rear its ugly head again.
Much depends on the actions and proposals coming out of Washington and the Fed (not good). Of course, in the event of a full-blown currency crisis, all bets are off. I will not discuss my trailing stop methodology; but at this point, everyone should already have planned their exit strategy.
The Washington DC plan has always been a 4 year money grab with Obamcare. Then cap and tax to pay for all the slush funds and bailouts.
The outlier event is "ClimateGate."
Ya aint that a fart in the bed and hold your head under the covers moment.
Thanks for the warning, it is resounding...
But I can't decide wether gold will fall tied to the rest of equities in the much expected leg down.
Yesterday I was almost sure, but this morning gold is very strong versus weak markets around Europe.
it's tough for me to trust traditional technicals when the market seems so "managed" by the HFT folks. I have a feeling they have a set of patterns all their own...
that said, "taking some off the table" until the "world stage" settles doesn't sound like bad advice, whatever the inspiration.
good read for me, thanks. I'm tagging this one for when market patterns return to "normal", as the watch-points/trends you highlight are great.
Sold some old audio equipment and LPs that were in my basement months back.... and got gold. Am so far beating the DOW(n) and NaZZZZZzzzzzzzzzzzzzzz
Glad to see someone else say they don't have any idea what will happen.
The Russell 2000 appears to be tracing out 5 waves down from the top on October 19. This chart shows the bottom of wave (1) that began on October 19, and top of wave (2) (the high on November 23). The rally that began on November 2 was a complex countertrend pattern. The first part of the countertrend was an ABC zigzag followed by a three wave move to the X low on November 13. The second part of the countertrend move traced out a triangle marked by ABCDE. You can see the labeled chart along with some other markets here: http://www.graspthemarket.com/elliottwave/20091130a.php
However, like you said, there is not much more room to the upside here to ruin my thesis. Can an outlier also be a market crash--not that I'm expecting one, but really no one else is either. Thanks for your work above.
The most beautiful chart:
http://finance.yahoo.com/q/bc?s=TSL
Ride your profits and stay the course. Liquidity rally is shifting into third gear.
I like it, Leo. But you really should look into a gold miner or two for a truly bee-you-tee-full chart: http://finance.yahoo.com/q/bc?t=1y&s=TSL&l=on&z=m&q=l&c=kgn