Trading the Bounce

[ducati916]

Something to think about when you select an industry to invest in (trade in). However, also consider the profitability of that industry and earnings growth. Yes we all buy food, but margins are tight and what is the earnings growth likely to be?

jog on
duc

 

[Smurf1976]

So with the US employment data to be released tonight (Australian time) will this be a "sell the news" sort of event?

My thinking is a short move up for the US indices, on the expectation of further efforts from the Fed, then a pullback. That's more a gut feel thing though than any serious number crunching so wondering what others foresee?

 

[ducati916]

Breadth is increasing, which provides overall strength to converting the bounce, into a more sustainable trend:

A look at how bad it was historically:

Just to confirm it is still a 'bounce' and not a trend:

In the last chart (above) we would want to see 50%+ with rising 50DMAs. That (I doubt) will happen anytime soon, we will continue to have a choppy market through the next few months. But with economies gradually re-opening, that number should increase, converting the bounce into a trend. Of course, if it does not, that in itself will be a warning sign.

jog on
duc

 

[ducati916]

So what about risks that could derail the bounce and send the market back down to re-test or surpass the lows?

Things to watch for in no particular order:

(a) Italy defaulting (Italian banks [all] are insolvent) needing a Greece style bailout;
(b) European banks have some really weak banks that are also insolvent (particularly France, Germany, Spain);
(c) New York State and City are insolvent, and will require a bailout;
(d) CMBS & EETC defaults are set to rise (although credit spreads are not as elevated as in 2008/9).

What I'm agnostic on (what I have no idea what the outcome might be) is the US$, should it:
(a) strengthen;
(b) weaken

jog on
duc

 

[qldfrog]

So what about risks that could derail the bounce and send the market back down to re-test or surpass the lows?

Things to watch for in no particular order:

(a) Italy defaulting (Italian banks [all] are insolvent) needing a Greece style bailout;
(b) European banks have some really weak banks that are also insolvent (particularly France, Germany, Spain);
(c) New York State and City are insolvent, and will require a bailout;
(d) CMBS & EETC defaults are set to rise (although credit spreads are not as elevated as in 2008/9).

What I'm agnostic on (what I have no idea what the outcome might be) is the US$, should it:
(a) strengthen;
(b) weaken

jog on
duc

Warning, opinion not facts below for a US dollar view
I believe the real economy in the US has an advantage above the rest of the world.
EU political monster is dead, shown as irrelevant and negative.
that will free the UK and ultimately Germany..for the best or worse, to follow their own destiny..but this will take time and a lot of bumps along the way.
China while not killed will initially be hurt and lessen, but nevertheless getting stronger in the asian area as the US withdraws.
This leaves the US growing on its own mostly domestic market.
That would lead to a stronger USD vs the rest.with no incentive to devaluate as exports are not as primordial.
That is for the real economy.but of course, the financial view is not as clear cut, as the US is as much a basket case as the others.
We have not seen yet a financial crisis.it may strike anytime and i am surprised it did not with the virus.
That crisis would smash the rebound yet could even help the USD
So overall medium term 1y or so, i am still bull on USD.now need to see ideas confirmed by facts

 

[ducati916]

So with earnings winding down, some takeaways:

Earning misses are not being punished. There is already a big discount on majority of stocks. Upside beats, also due to the uncertainty, are also down with regards to moves higher. Sort of a wait and see attitude.

If you want to open a position based on an earnings beat: do it later, at the close.

jog on
duc

 

[ducati916]

So a couple of charts:

You will know that I hold positions in:

(a) Oil Producers; and
(b) Financials; and
(c) Industrials (defence).

They the top 2 worst and the 3'rd is not far behind. Given that I use x3 leverage, the falls are x3.

I hold them because they fell the furthest. They have (in my opinion) the most to gain going forward. The leaders (currently) will likely lose that leadership and slow. Financials are critical to the economy. Oil is critical to the economy. Defence (as far as the Yanks are concerned) is critical to national security (hence the economy).

It might take 2 months, it might take 2 years. Eventually, these industries will return, because, they have to. The economy cannot function (currently) without them.

A little Horace for you:

"Many shall be restored that are now fallen and many
Shall fall that are now in honour."

Ars Poetica.

jog on
duc

 

[makteb]

Interesting and not interesting depending on the perspective. My comment may or may not be interesting. We are here to learn (some to teach) the art of trading and fundamentally we need history, discipline and cash? The price history action of charts teaches, our discipline will reward and cash to transact on the bounce. Of course there is all the noise and distraction to test our inner beings.

To trade this bounce, you would buy a small parcel. A bounce is only a bounce after the fact.

If the bounce is fake, from previous experience you learnt DCA is an important method to manage funds and risk thus you would allocated funds for a second drop to next support all pre determined. If you are an "all in" kinda trader, your better parking your hard earned money in a managed fund.

If the bounce takes off, then you bought some at the bottom and you DCA up according to your prognosis.
Make no mistake, these outliers as mentioned those on the forum, are indicators, the rise and fall. There is no better simple indicator than this...other than price itself. When your Big Mac is $1, you know you are on to something good.

This is how i am trading this bounce/mid way drop/next 6 months because i don't know what will happen next until after the fact.
But history paints a picture for me.

 

[ducati916]

Latest sentiment polls:

In the past, when sentiment bearish, the market moves higher.

Bullish sentiment dropped down further to 23.31% from 23.67% last week. That is the lowest level of bullish sentiment since the COVID-19 pandemic began and the lowest number since last October when the percentage of investors reporting as bullish bottomed out at 20.31%.

Bearish sentiment likewise fell slightly this week from 52.66% to 50.61%. Although that is slightly lower, the majority of those surveyed are still bearish.

Of the previously mentioned past ten weeks, even if bearish sentiment was not above 50% it was at least one standard deviation above its historical average. That now ranks as the longest streak since 2008 (14 weeks) and the fourth-longest in the history of the survey dating back to 1987.

With such a large divergence between bulls and bears, the bull-bear spread now stands at -27.3 which is slightly better than the -28.99 reading last week but still clearly at the low end of the past decade's readings.

The takeaway: sentiment is bearish, possibly even 'very' bearish and has been for some time. The market however is still above the lows. It is choppy, there is paranoia, there is plenty of bad news day-in-day-out, yet still the market is above its lows.

Time is on this market's side. The more time that passes without the market breaking blow the low, the less likely it is to do so, because over time, issues induced by the causes will be solved and/or recede.

jog on
duc

 

[ducati916]

A bounce is only a bounce after the fact.

I have removed all the noise from your post that distracts from the central premise.

Here is the current market. Is it still a bounce or is it a new trend?

The problem with your position as stated is: it is only a bounce if we go to new lows. Then (after the fact) we can state with authority that it was a bounce.

If it goes higher and never goes to a new low, it was never a bounce, it was the start of a new trend. I assume most would like to get on the train early.

The issue therefore is: lack of certainty. There are 2 choices: (a) trade, (b) don't trade. If (a) there are many strategies to engage with the market.

jog on
duc

 

[Student of Gann]

SP500 14th - 15th May Low should hold . 2761 is an important price level . the next price level down is 2730.

 

[Student of Gann]

SP500 Should see Top 29th May .

 

[makteb]

SP500 Should see Top 29th May .

If I understand your reply, you believe the top of this bounce is happening soon before decline?

 

[Student of Gann]

14th May 2766 Low is in place . trend should continue up to 29th May High .

 

[Student of Gann]

 

[aus_trader]

Student of Gann, thanks for the short term view of the markets.

Do you have any longer term price projections ? For example Up towards New High's, Sideways Grind or Down to re-test the Lows ?

 

[makteb]

Thank Gann for the explanation and thoughts

 

[Student of Gann]

I have a Curve out till August but let's see how this Forecast plays out .

 

[aus_trader]

I have a Curve out till August but let's see how this Forecast plays out .

OK sure. I'll be watching the market around the end of the month as per your topping pattern...

 

[ducati916]

So yesterday I posted this in the Gold forum:

Is inflation, moving forward, going to be an issue for common stocks?

If rising inflation creates a response from the Fed. with regard to rising yields, probably.

When rates last started to rise in 2018: in January 2018 the 3mth sat at a yield of 1.5%+/-. By July 2018 it sat at 2%. By October (when the stock market started to sell off) it sat at 2.4% +/-. The 30yr Bond went to just under 3.5%.

Historically that is a very low yield. The market has little to no tolerance for rising yields, which, could very well happen if inflation is once again adjudged to be a risk. The Fed. reversed its tightening posture with regard to yields and the market recovered in early 2019.

So the end of last week saw moves in Gold, Silver, Oil and the 30yr Bond. Now these are single day moves. At the moment, it is simply a fluctuation and nothing to rebalance your portfolio on. However it is something worth watching simply because there has been an increase in the financial 'media' about inflation.

It is not however being overly discussed by non-finance persons.

Inflation is one of those phenomena that can be created out of 'belief'. If enough people believe; and start acting on that belief, there is the potential (if the underlying circumstances, viz. credit expansion are present) to drive almost a self-fulfilling prophecy.

Unfortunately the above chart is of too short a time frame to really give much information as a comparison.

So we have (above) Silver, Industrial metals (Copper, etc) 20yr Bond, US Dollar and Energy. I probably should have added Agriculture to that also. I used XLE as USO is somewhat broken atm.

This is what I will be keeping a close eye on moving forward. Plotting the relationships as ratios also tends to clarify the picture (information) with regard to these relationships.

On the above, there would not seem to be an excessive threat of inflation currently. Yields are still low. Energy, historically cheap with current high inventory. This will change moving forward as the world has lost production. It remains to be seen just how much. The dollar is also stable atm.

Silver, although it has jumped...is still below its early 2020 high. Until it trades through that point, Silver is not signalling anything as far as inflation. If it trades through that high I would be paying much closer attention.

If inflation does move higher, it will (in my opinion) be because of oil and the damage to production inflicted by the Saudi price war. That would mean oil moving north of $70. To that point, I think the market would live with it. After that, I'm not so sure. Early moves signalling inflation will likely first show up in the Dollar/Bonds.

As to the virus...only a crushing, worldwide re-infection driving a second global shutdown (if that even happened) will see the 'bounce' fail and move below the lows already seen.

jog on
duc