Sunday, July 29, 2012

Week-end review (23-27 July, 2012)

The activity statement for the past week is shown below

Starting the week (and the blog), with a €100k initial capital, the realized performance was €6,483.53 or a 6.43% time-weighted rate of return. 


The stated intent of my blog is to keep track of my trades and my performance, I therefore, via this blog, did not mean to be consistently conveying a comprehensive view of the markets.

Having said that, each trader has his own view of the wider movements of the markets and although I have learned that to be able to trade I do not have to be too fixed on egoistic ideas of where the market should go next, there might be times/junctures when stating a bias might be more appropriate.

This, in my view, might be one of those few instances.

Long and medium term view

My long term view of the market is visually represented by the above monthly, log-scale chart of the Dow Jones Industrial Average ($DJI).

I think it is self explanatory, but few clarifications might help.

 - The fib fans have been anchored to the 1982 low and to the 2007 all-time high.
 - 1982 is relevant because: a) it was the year of a global third world debt crisis (see the following documentary, to appreciate the similarities with the crisis we live in our time: Prisoners of Debt: Inside the Global Banking Crisis); b) it was a time when global central banks, the governments and the IMF decided it was preferable to inflate their way out of the crisis, rather then face it (the effect of this is visible on a monthly, non-log scale chart of the same $DJI dating back to 1900,... notice how 1982 is the year when the exponential global-liquidity-driven growth starts).

Reverting to the $DJI monthly log-scale chart (see a close-up below), notice also how 2009 found support at the lower fib fan, indicating the 1982 growth trajectory was not broken.

Finally, notice how, since the 2009 low, the market rode the middle fib fan on its way up, again corroborating the view that the 1982 growth trajectory was in place.

and now? ...

2012 saw a warning sign, a RSI/price negative divergence appearing at the upper boundary of a large descending channel, formed with anchor points the lows of 2002 and 2009 and the all-time high of 2007 (see chart above).

This, in my opinion, is enough to warrant further investigation into what proportions might be unfolding.

The market might be on his way up, still riding its 1982 growth trajectory, measured by the fib fans, or it might have developed a counter proportions (the large descending channel).

My current view is that the market has stalled at a very important juncture.

It is too early to say if the prevailing long-term bullish proportion (the 1982 fib fan) has run its course, but what I think it is possible to say is that, even maintaining this bullish stance, there is room for the large descending channel to prevail, at least temporarily (weeks or months).

To help me gauge the next movements of the market, I will use the fib matrix on the weekly $DJI chart above.

A break and staying above the 1st May, 2012 top @13338.66, would signal the bullish stance wins.
A failure to break above 13338.66 and a start of a decline (in the next few days/weeks), might see the market test the 11706 area.
Should this support (11706) fail, my medium/long-term bias might switch to bearish and the main proportions affecting the market, might switch from the up-trending fib fans to the down-trending channel.
Should the 11706 support hold, the bullish stance will have to be tested again, at the top of the red channel.

Trading the short-term

In my opinion, trading can and should be conducted identifying intra-day anchor points and their emanating set-ups, without the need to elaborate too much on medium to long term direction/forces/proportions.

In this week-end review, however, following the dissertation above, I would venture in showing the above tradable hourly $DJI chart.

The -50% fib diagonal extension @13123, reached on Friday at the close, is sufficient, in my experience, to say that an ABC correction might have run its course.

If this were the case, a potential wave 2 would have completed and a wave 3 down could unfold, to at least the 11706 area (as stated above).

This wave 2 set-up might extend higher, in the next days, but a break and staying above the 13338.66 level would invalidate it.

For as how much this potentially bearish set-up is intriguing (at least for a trader), we have to keep in mind that next week both the FED and the ECB are scheduled to release official statements and we all have understood that they will try everything to counter the deflationary forces that the bearish proportions explained here imply.

For this reason, as traders, extra caution is warranted.

Post Scriptum

Have you also had the impression that this week rant by mr Draghi (Enter the Draghi, ... the first part of the video on mr Draghi is fun), was a bit over-done and emotional and resembled the rant by former Greek finance minister Giorgos Papakonstantinou warning short sellers that they will be crushed? When I saw mr. Draghi, I thought that, if Central Bank policy communication becomes open reprimand, this might signal a weakness and not a strength on their part. Let me know what you think...


  1. A very well written, thoughtful essay ... thank you for sharing. I am positioned long and expecting the Dow to test and likely exceed its May top, but like you, I also see that the market may be putting in the final strokes of an a-b-c correction, which would imply lower prices soon. I would only differ in that you say that swing to lower prices would be a wave 3, and I would rather characterixe it as a wave "3 or C". The reason for this, of course, is that I am still bullish into the end of the year to the middle of next year, so I would give odds that if the market does resolve lower near term, it would be int C down of Major 2 of Primary 3.

    At any rate, I enjoyed your essay, and I have bookmarked your blog.

    Good Trading to you!

  2. Thanks IT, by my count, the SPX is in the final wave 5 of 5 to complete a bull market. Started at the 1266 early June low. So I'm still bullish.

    I 100% agree that this bull market won't reach the 2007 highs. But the macd of the DAX and the CAC beat the US indices in going bullish. Dax and the CAC could possibly hit 52 week highs soon as the big drop of August 2011 fades out of the 52 week time frame.

    I think the DAX and the CAC show the way.

    Your last chart, on the 5 minute time scale wave 1 of a new bull market finished today at the hod (that started on Tuesday) after subwave 5 extended for almost 2 daya. Wave 2 finished today at the lod. Still Waves 3,4,5 to go of wave 1 o3 3(that started at 1329) to go. In my opinion.

  3. Your welcome IT.

    I'm guessing the weekly macd of the dow,spx gold and silver will go bullish this week, maybe the ndx if aapl keeps on outperforming.

    On the 5 min timescale wave 2 of the 5 minute bull market didn't finish on the lod monday. Another lower low today. No bearish divergences to be scared of onthe daily chart.