Category: Trading Articles
- 30 September 2015
Way back in March of this year, the probabilities of a range trade at the highs looked quite probable and an article alerting to a roller coaster market that was taking shape was shared here. That up and down movement lasted for almost half a year until one week before the markets came crashing down, the probabilities of a larger fall were high enough to issue a direct warning. Now, five weeks into the downdraft and with the indexes poised to try and break lower still, there is enough evidence to suggest that even though lower prices are most likely still to come, it is unlikely they are going to come in a crash manner as many keep expecting. Instead, my neoclassical work suggested that it will come by way of a death by a thousand cuts type decline.
Category: Trading Articles
- 26 September 2015
The $RUT has a decision to make on Monday- see the following 3month 20min chart.
Category: Trading Articles
- 31 August 2015
Recent action provides a risk-management litmust test
In October of 2014, when the market was under severe pressure, there was an article that appeared in this column outlining the neoclassical approach to risk mitigation and management. It is the cornerstone of the neoclassical risk management approach which says that
- There is a basic structure that precedes all market declines
- That structure is evident before the decline occurs
- Though not a necessary and sufficient condition, the structure does provide an effective means to risk management
- That risk management approach is centered on staying long until the probabilities favors shedding risk and then continuing to do so if the markets continue to form the same bearish structures on longer time frames
That basic structure that is present in all declines was evident for the past few months as this column repeatedly reminded readers. Even so, we continued to maintain exposure with a close eye on the developments. On Wednesday August 12th, when the S&P was about 2% off its all-time highs, the evidence finally suggested that break dance to the downside was imminent and a clear signal to get safe was issued. Unlike so many, this wasn't one of frequently repeated bearish calls - it was the only clear cut call issued and it specifically noted that the risks no longer supported a long only strategy and that anyone still in that position should immediately reconsider their stance.
Looking back, that reduce exposure warning, came just one week before the market proceeded to drop 11% in free fall fashion over five days, culminating in a "mini-crash' on August 24th which, oddly enough, seems to have gotten very little attention despite the issues raised. For those nimble enough, the fast loss of great wealth created some great buying opportunities which was also foretold in this column for regular readers.
At this point, the market is back to the same situation it was in back in October of 2014 and the risk management principals are probably worth revisiting. Paraphrasing from the original article,
- When the potential structure for a larger decline if first apparent, reduce or eliminate trading positions but do nothing with your core positions
- If the structure does actualize (which is where we are now), then you wait to see how it develops
- If and when price rises to retest the prior breakdown areas (in neoclassical terms this is a bearish retest-and-regenerate formation) and rather than working higher instead starts to regenerate lower, then you continue to reduce risk, letting some of your core positions go
- Finally, if the general weakness continues over a long enough period of time such that the potential for additional multiple breakdowns on multiple timeframes (now on the intermediate- and long-term time frame) sets up, then the potential for a crash finally exists
This last item is now in view on the indexes and has to be monitored just as the prior item (the bounce to do a bearish retest and regenerate) also has to be examined carefully to decide what probably comes next. Here's a couple charts showing these points graphically.
On the daily time frame it looks like this.
On the weekly time frame it is the same general area but potentially extends higher
And the downside danger is a break of the October lows on a monthly basis which would most likely kill off this bull market and open up the possibility for even larger percentage declines.
But before you get to pessimistic and begin selling everything, review the checklist above. It's not about all in or all out. There is a middle ground. The idea is to reduce risk exposure before the initial drop. If you did that, you are in excellent shape having stayed with this bull market all the way up and removing your more risky exposure at the last possible point. Now you are in the driver's seat as to when to get back in or to cut exposure again. Now you monitor and plot your next move - up or down.
In retrospect, this is where the market was in October of 2014 where it proceeded to rally back to new highs. This time around, the bounce behavior so far looks similar to last October although the structure that got us here (a long period of potential distribution/range trading) does look different. So, if anything, it does require one to be both diligent and prudent in how they approach the next move. You want proof that the market isn't going to work even lower and that proof would be failed bearish retest and regenerate sequence - at least on the short term time frame - for starters. If that doesn't look to happen when the time comes, then the preceding massive decline may have only been the first act in the break dance to an even lower low. In that case, further reducing exposure is the prudent course of action when the market yields its next set of clues.
This article originally published on MarketWatch on Aug 31, 2015 11:38 a.m. ET