Friday, February 27, 2009

02.27.09 - Watershed Day?

The good news today... is that with numbers like this, it becomes much easier to beat to the upside down the road. With prices down over 50% from peak values, the market knows this and can begin to think about recovery down the way. How long that road is; however, remains anyone's guess. Cumulative Tick and AD lines are constructive for now. While several indices have actually gone positive, I expect the S&P 500 to face potential resistance near yesterday's close. Keep an eye on that rising VWAP all day long.

Never Investment Advice

Thursday, February 26, 2009

02.26.09 - Struggling to Hold On

The market has given up most of its morning gains and is poised to break back down below the daily pivot (SPY $77.15). The NASDAQ 100 (QQQQ) is actually negative on the day. All daily directional indicators have turned south, and we had a mild negative bias coming into the day.

Trade nimbly -- while the short term trend may have shifted, we are still in a bear market. On the bullish ledger, 52-Week Highs - Lows continues to repair itself. And with the A.M. gap just about closed, if we can hold this range we'd have another higher-low. We'll see...

Wednesday, February 25, 2009

02.25.09 - Higher-Low Reversion

Yesterday's large bounce and volatility crush set us up for a reversion to the mean on perceived tax-and-spend rhetoric and poor housing news. I thought we might string together a second gain, but the models beat my personal outlook once again. Although intra-day directional indicators are weak at best, at the mid-day it seems we will (hopefully) be putting in a higher low today, arresting the relentless down trend that has been in place over the last three weeks.

10:05AM PST - Look at the five-day chart to the right: inverted head and shoulders setting up? Hey, a bull can dream...

Did someone say "mark to market"?

Never Investment Advice

Tuesday, February 24, 2009

02.24.09 - Pivot Reversal

Daily directional indicators remain net positive, albeit downward sloping after price failed to pierce the daily floor pivot at SPY $76.07. SPY RSI-2 remains well under one for the third day in a row, as about as extreme as I have ever seen.

Reading: MarketSci, Trading in Abnormal Environments

Year-to-Date Change:

SPY -17%
DIA -18%
QQQQ -5%
IWM -19%

Monday, February 23, 2009

02.23.09 - Shorts Cover but No Buyers

Shorts covered over the weekend in front of the banking news, but no buyers showed up to carry the baton forward, and the gap has closed on strong momentum all the way down to S1 (SPY $76.20).

While we are holding that level less a couple dimes just above the Friday lows at the mid-day, I can't point to any internals supportive of a reversal play. This market continues to be broken. And just as I hit post... looks like a full court retest of those Friday lows. Will they hold?

Last Two Hours Sector Performance

Financials and Consumer Discretionaries beat Semis/ Energy/ Staples. SPY RSI-2 = 0.29 and 52 Week Highs - Lows improved from Friday. Worth thinking about [on the long side].

Saturday, February 21, 2009

Ponzo's Time Machine

A while back, I posted a "linkfest" from Euan Sinclair's excellent book, "Volatility Trading." One of the links was to an eclectic financial time-series analysis and mathematics website maintained by Prof. Peter Ponzo at (yes, you read that correctly).

The good Professor's site is quite literally packed with thought provoking material, including the focus of this post: a search engine that seeks to match the past 25-week's price behaviour to the most similar period back over fifty-years of historical data according to the maximum pearson coefficient.

Investors worldwide are currently grasping to estimate price support for the major equity indices. The problem they face, is that the indices have come so far down that one needs to look back more than ten-years to apply traditional support-level analyses.

Now, this post isn't about the merits or demerits of technical analysis, but given this problem, I thought it would be entertaining - at the very least - to crank up Ponzo's matching engine to find the current period's most analogous historic epochs. To accomplish that, I slightly modified Ponzo's code to output the five most relevant epochs, ranked from most to least mathematically analogous. The highest ranked historic six-month periods turn out to have commenced on (Yahoo! Finance Charts allow date entry):

  1. May 5, 1969
  2. September 14, 1987
  3. August 21, 2000
  4. May 6, 2002
  5. May 13, 2002
So -- really four periods here excluding the May 2002 overlap. Nevertheless, if that isn't entertaining enough for you, Ponzo's Time Machine goes one step further, projecting the current time-series forward by four months based on the the matched epoch's subsequent market behavior.

The marked dark blue line in the chart below represents the most recent six-month period for the S&P500 Cash Index, while the marked red line represents a four-month forward projection using the top five matches from above weighted according to rank, as follows:

(Chart should read February 2009)

As shown, all but one projection series ended lower four months down the road, the interesting exception being the 1987 match. In fact, the weighted average projection suggests a further -5% decline from last Friday's (Feb 20) close by the end of the outlook period. The aggregate range indicates a projected S&P500 low of 660 (-14%) and a high of 800 (+4%). Not exactly thrilling prospects, and I can only imagine what the results would have looked like had I extended the analysis back through the 1930s!

Granted, this current economic crisis is like no other in terms of its root causes and rapidity of associated market declines. At the same time, we are currently highly oversold and well overdue for a powerful bounce, but Ponzo's indicated matches do provide us with an interesting historical range to ponder in an otherwise vacuous data point arena where both technical and fundamental analysis fail us. If there is enough interest in this study, I will update it periodically as we move through this difficult time.

o More on Nearest Neighbor Analysis, submitted by TraderFeed.

Never Investment Advice

ETF Rewind - Week 8 (02/20/09)

(Click Image to Enlarge/ Glossary)

Last week's performance looked just like the prior week's - albeit magnified - leaving the S&P500 (SPY) down -7.5% (note: 5-trading days). In fact, the Financials (XLF) lost a whopping -19.1% on nationalization fears (FT - Fears Rattle Markets; AP - White House Response). Only Precious Metals (DBP) and the Dollar (UUP) managed to post gains of +4.9% and +0.1%, respectively, on a global safety trade. The only other metric showing gains was the VIX (Implied Options Volatility), closing the week back near 50 and stretched +9.2% above its 15-day moving average.

In normal times, this would be a bullish indication, as would the majority of tracked securities showing near- and intermediate-term oversold price index readings (SPY RSI[2] = 1!). However, we are so overstretched to the downside -- this market is clearly broken. Some modicum of positive news flow will be required to turn this train wreck around going into the end of the month. Perhaps clarity on the banking situation will provide that; we'll just have to wait and see.

Week Nine of 2009 features the following reporting calendars, including Consumer Confidence, Housing Data, Durable Goods, and Preliminary GDP:

In addition to Geithner's "Stress Test" details on Monday (CNBC - No Lehman Weekends), market watchers will also be keeping an eye on developments overseas at HSBC (Independent - HSBC Considers Cash Call) and in Germany (BBC - $63B Stimulus Package). Meanwhile, many of our states continue to march towards effective bankruptcy (Bloomberg - Stimulus Fails to Fix States' Woes). Rest up this weekend!

Never Investment Advice

Friday, February 20, 2009

02.20.09 - Another (Large) Gap Lower

From last night's ETF Rewind beta commentary:

"Today marks one of the highest oversold readings across multiple time frames we've marked since starting publication last November. That said, once again we have mixed [mechanical] signals and market normalcy is officially negative within a confirmed down trending market. With options expiration tomorrow here at the bottom of the channel, I have a sense we could break either way hard for either a short relief rally, or a move into a significantly lower range. Caution is the word of the day."

Well... So far the SPY S2 floor pivot has held twice and we are retesting right now (about $76.50), in fact... looks like its breaking down [history, it broke]. Cumulative Tick is extremely negative and the A-D line is flattened. Even the small bounces we saw earlier had little energy behind them. Although a supportive volume spike appears to be forming just now and the VIX is holding 50, "caution" is indeed the word of the day.

Reading: BZB Trader on ETF Rewind

Thursday, February 19, 2009

02.19.09 - Small Bounce at Prior Lows

The morning gap filled quickly on declining Cumulative Tick and Advance-Decline readings. After tagging the Volume Weighted Average on a brief recovery attempt, we have seen progressively weaker internals. However, just right now there has been a small bounce off of yesterday's lows and price is testing the daily Pivot (SPY $78.90). I had mixed market timing signals coming into the day.

Never Investment Advice

Wednesday, February 18, 2009

02.18.09 - Digesting (Yet) Another Plan

The market has vacillated widely between its daily floor pivot and first level of support (SPY $79.85 and $78.50, respectively). While most major indices are marginally positive on the day, note that Declining Volume is trending higher while the Cumulative Tick is trending down. It would be a bullish bar if we could finish here or higher on the day, but it's too early to pronounce that victory at the mid-day.
[FOMC Minutes]

Nice post on Traderfeed.

Tuesday, February 17, 2009

02.17.09 - No Reason to Be Long

At Friday's close, I started to see some long swing trade signals set up. However, the long weekend's Asia trade was a strong clue to wait it out for today's open. While some research indicates a good edge towards fading bear gaps down, as of right now we are seeing no evidence supporting that trade intraday. In fact, the Advance-Decline line is so squashed, I can't even see it on my charts! (Cyan line in bottom pane). Note that this could change quickly with price in as narrow a range as it has been. With the VIX pushing 50 yet again, anyway you look at it these bear market retests are scary indeed for the fully invested.

Last 20-Minutes Sector Chart

Consumer Staples (XLP) "relative winner."

Stimulus Plan - The New Beginning

The new beginning starts with a resounding thud.

Never Investment Advice

Congressional Sessions - Out of Order

Congress is out of session -- Hurra! Below is an interesting market observation by The Congressional Effect Fund. Pretty hilarious fund premise, to say the least! For your cynical side's future reference, the 2009 calendar can be found here.

"A History of Financial Damage by Congress

Going back to 1963, we find that the S&P 500 Index has gone up only 1.6% a year during the time when Congress is in session... and a whopping 17.6% annually when Congress is in recess...."

Thank you Dom B. for pointing this out!

Saturday, February 14, 2009

ETF Rewind - Week 7 (02/13/09)

(Click Image to Enlarge/ Glossary)

If Treasury Secretary Geithner's "Bad Bank" presentation last week was its focal point, you might have called it "The Week that Wasn't." Week Seven took back prior gains and then some, leaving the S&P500 (SPY) down -4.9%. In fact, among the tracked securities, only Precious Metals (DBP), Treasury Bonds (TLT) and the Dollar (UUP) managed to post gains of +3.2%, +0.1% and +0.7%, respectively.

Holiday shortened Week Eight of 2009 features the following busy reporting calendars, including housing data, release of the latest FOMC minutes and leading indicators:

Looking ahead, traders will naturally keep a close eye on how the market responds to the signing into law of the $787M stimulus plan (AP - Obama Savors Win), and the signaled home loan relief proposals. Whatever they are, hopefully they will have some semblance of finalized substance minus pork this go. Note below how price action has a lot of room to run to the upside on the right news flow. Enjoy your long weekend!

Never Investment Advice

Friday, February 13, 2009

Solving the EMA Backtest Dilemma

Warning: This post is directed towards newbie system developers, backtesters and data snoopers only!

Over the years, I have found that many of my mechanical systems are improved by applying exponential moving averages (EMAs) to either the raw time series, or, in other cases, actual signal lines. This has the effect of smoothing the data, but in a time-responsive manner. Here is the simple math over at Decision Point. Wonderful -- you say -- so what's the dilemma!

The problem with EMAs and many similar smoothing mechanisms, is that they contain an eternal memory going back to the start of your data series. If you are a system developer, this has the disadvantage of occasionally altering your signals depending on the date you start your program as earlier periods are dropped out of the analysis window. Unless you run your model against an ever growing database, this will eventually have the effect of generating "oops" moments when historical "on the margin" signals become unstable as the EMAs themselves subtly shift on each new run. This is ruinous for the careful backtester and will make even well conceived systems appear arbitrary.

One simple solution? Calculate the EMA against a set rolling window with the first point always calculated against a similarly running simple moving average (i.e. not just the first period in your full data series). As long as you have a fixed "starter" series of data (say 20 or 40 periods), your calculations and signals will remain stable while retaining the benefits espoused above. But wait -- the astute programmer says -- that will require a special function or array! Hey, I didn't say it would be that easy!

If you want something simpler still, you could always try something like this: (Price[0] + Price[1]*2 + Price[2]*2 + Price[4])/6. But... since I've brought it up and gone through the trouble of writing this post, I'll go the extra mile and post an Excel VBA Function into the comments section below later this long weekend for those who are interested.

* * VBA Function Code Posted to Comments * *

02.13.09 - Friday the 13th

Feels like slow action today after a morning pop back to the overnight highs and then subsequent trail back down to the five-day moving average. That has proven support so far, but note how negative the cumulative tick is as down volume continues to rise, widening its margin over advances. Even as I prepare to post this, we are seeing a bit of a low volume puke. However, from a news risk perspective another stimulus plan vote is on deck, and it seems anything could go in this light volume preholiday trade.

Thursday, February 12, 2009

02.12.09 - Mixed Messages

Today's news featuring both the likely passage of the economic stimulus package and higher retail sales plus fewer new jobless claims reminds me of the many academic papers hypothesizing that market cycles are accentuated by government interventions, which are perennially late to the game.

At the mid-day, we are seeing a nice bullish hammer forming just above the prior SPY swing lows ($77.75 bad tick... s/b $81.30, which we are now under!). Indicator-wise, however, it's one of those odd days where we see lack of alignment. The Advance Decline line is rising, Semis are pulling hard and the VIX is falling, but Cumulative Tick remains negative as yet and Down volume continues to outpace Advancing volume. Also, we are seeing some short-term resistance at R (edit: error) S1 ($82.65). So for now I will fade both sides, keeping size small while waiting for a trend to develop.

Reading: MarketSci/ Why Mean Reversion is Strengthening

Never Investment Advice

Wednesday, February 11, 2009

02.11.09 - Consolidating on Negative Tick

We are seeing sideways action, but I'm being cautious due to the negative tick and AD action.

Tuesday, February 10, 2009

02.10.09 - Mid-morning Cliff Dive

The market's are showing their displeasure with Treasury Secretary Geithner's vague presentation, down 2% to 3% across the board. Financials (XLF) are down over 6%. Also, recall that markets were largely short-term overbought, and the news value of this speech was leaked yesterday in a likely trial balloon, leaving us even more susceptible to a correction on the event's passing.

While cumulative tick has been horrendous, to say the least, there are currently signs of a nascent recovery, a prospectively significant supportive volume spike has been put in, and the VIX appears to be moderating for now. That said, look closely for potential resistance at the VWAP and each respective floor pivot level throughout the day. Cliff dives like this usually don't recover easily.

Close: Usually and didn't! Really bad performance by the Treasury. I still have limited shorts on. I won't be surprised to see follow through selling, but don't want to be greedy either.

30,000 Visitors & Counting

Monday, February 9, 2009

02.09.09 - Overnight Gap Fill on Strong Tick

Despite opening weakness and early overbought readings on a daily basis, stimulus hopes have the markets holding their Friday highs on strong cumulative tick and advancing volume. I'll be keeping a close eye on the VWAP today and continue to hedge on further gains. XLF is far outpacing the market today.

Interesting thoughts on using longer-term RSIs for intermediate trend detection: Vix & More.

Never Investment Advice

Saturday, February 7, 2009

ETF Rewind - Week 6 (02/06/09)

(Click Image to Enlarge/ Glossary)

Last week saw a powerful "stimulus induced" upswing that actually left the NASDAQ 100 positive on the year (QQQQ +7.9%). This was particularly impressive set against the backdrop of the highest unemployment levels reported since 1974 (US News - Labor Report).

In fact, every single one of the tracked sectors and styles ended higher on the week and near breakout levels. By the same token, as we head into the middle of the month with so many indices now well into overbought territory, much will clearly hinge on the market's reaction to Monday's Treasury Announcements and Stimulus Plan Vote (Bloomberg Links). Will February finally provide traders with a breakout of the multi-month range? With the economy still accelerating to the downside, bets will certainly be placed both ways.

Week Seven of 2009 features the following reporting calendars:

Enjoy your weekend!

Never Investment Advice

Friday, February 6, 2009

02.06.09 - Hope & Fear Trade

The market is moving higher on hope and fear today. The longs are hopeful of a better tomorrow; the shorts are afraid of pending passage of the stimulus bill, Tarp II (or is it III?) and mark-to-market rule changes. Cumulative Tick has been moving sharply and steadily higher along with advancing volume. We have seen some resistance at SPY $86.60, but the trend is undeniably higher even as we begin to look short-term overbought on a daily basis. I'll be looking for support near the VWAP for today, although I am continuing to add to hedges with intermediate puts "just in case."

Never Investment Advice

Thursday, February 5, 2009

02.05.09 - Impressive Recovery Past R1

Today's recovery off of the opening lows was supported by an easy to interpret reversal in the AD and Cumulative Tick lines, making it a particularly nice trend trade. However, we did see some resistance at yesterday's highs, which was tipped off by the dotted red volume spike shown in today's chart. Such spikes often indicate a 'key' price level where significant supply is both offered and received. As such, the spikes often turn out to be either turning points or, minimally, pauses in trend.

As of now, it looks like we are shaking that off as we break back above resistance. Lastly, all leading sectors are in bullish alignment. Keep an eye on this going into the final hours.

Wednesday, February 4, 2009

02.04.09 - Mid-day Lull

After an early follow-on run higher post-ISM Services, price has tapered off along with participation, as evidenced by the now declining slope of the Advance Decline Line. Cumulative Tick has more or less flattened, which has my guard up.

Nonetheless, today it is the Consumer Staple Sector's (XLP -1.65%) turn to lag, which I consider relatively bullish over yesterday's Financials (XLF)/ Semiconductor softness. When all is said and done, however, this extended down leg from the morning highs needs to find support soon, or they will all fall down.

Never Investment Advice

Tuesday, February 3, 2009

02.03.09 - Financials Lagging Badly

Most of my intra-day indicators are mixed to negative as we see mostly a sideways trade around the VWAP and above the daily pivot. Thus far, the falling five day moving average has proved resistance (dotted cyan line). My biggest concern; however, as noted earlier on Twitter, is the strong relative weakness of the financials (XLF -2.6%; Purple). As has been one of the few discernible trends of the new year, volume is extremely low.

Monday, February 2, 2009

02.02.09 - New Month Gap Fill

The S&P just went into the green for the day after filling a large gap down. Up volume is beggining to outpace downvolume, the AD line is upward sloping, and non-effective volume spikes on a falling VIX are indicative of short covering. Overall, volume is very low though.