OK first newsletter for the S&P 500. I should state that I’m a medium term trader who looks for intraday strength and weakness for adding to and reducing of my overall position.
Next I should say I’m a bear for the following reasons. The world is poor with the exception of the 1% who have seen most of the benefit of global QE and taken that money and invested it in real goods – real estate. There has been a 7 year expansion of stock valuations and despite the odd correction due to oil weakness and perceived slowdown in the Chinese economy and a flash crash in May 2010 – see this video if you want to see what a crash really looks and sounds like! (https://www.youtube.com/watch?v=WrxlVjZJawQ). QE has be stopped and the Fed “PUT” has been cancelled, unless you subscribe to the Bullard QE4 idea.
So you might think this makes a me a fundamental trader, I am not, I see the fundamentals as a guide and then look for the trend to change to confirm – or if the trend changes I look for clues to support the idea. Ultimately, the price is the price, I don’t care what you think if there are more sellers than buyers the price is going one way and the vice versa is true. The reason I prefer to be medium term is twofold, lifestyle (I like to play golf and not worry about my positions unless there are critical levels or data releases) and absence of volatility: generally the algos are much more aggressive in the daily markets because the day traders are more often the weak hands and easier to push around for profit. I know this because I used to do exactly that for a US investment bank in London. I won’t do trading stories now but I might in later letters.
So the S&P:
I like to start by looking at the weeklies on a Sunday to set up for the week. For those looking for capitulation in these markets I have bad news for you – a lot of the long only funds – the sort who may do this the most, particularly the overseas investors from China and Japan, have already lighten up partly at the highs and partly on the first run down to 1830/1860 in August 2015 – if you are looking for this capitulation we need to see prices well below 1800, possibly lower. I do not think we have seen a crash at no point has the market fallen out of control it has always been a controlled decline, never short of bids. This week we have seen a close on the weeklies below the lowest close of both the oil correction of October 2014 and the China correction August/September 2015. We may see some recovery from these levels but as we all know bear markets are faster and nastier than bull market which just grind higher. Bear markets spend 90% of the time going up! You’ll see on the chart the old weekly CLOSES of 1880.50 October 2014 and 1810.50 April 2014. I do expect capitulation but not before we significantly breach these levels. We may trade higher again to try and squeeze some medium term shorts but so far that has failed. Look at the reaction to the Non Farm Payroll on 8 January – strongest number for a long time, Obama on the TV heralding a strong economy and the rally we got was about 12 handles before plunging 50 handles from the high. This shows the sellers are in control but they is no panic. We are extended to the downside versus distance from the 13 WMA but this is common in bear markets – provided we don’t trade above the NFP high 1964.5 this trend is still strongly in effect. I use 13 WMA as it a full quarter of trading. I use 21 DMA as it represents a full months of working days – I did a lot of work running code to test different averages when I worked in the bank and these along with (for some reasons 12, 13, 51 and 252 DMA worked the best, but the past is not a guide to the future, on the flip side, people are still people) On a daily basis if we see aggressive buying above the 21 DMA 1905 currently intraday highs of 1927.25, 1946.25, and 1964.5 we have to reconsider but until then I will use these levels to sell in front of and add to my position. It will always feel uncomfortable to sell when everyone else is buying but that is the way to make money – remember the algos will always try to push the price through certain levels generally to the upside as weak hands tend to be short not long. They have been less successful in the last couple of weeks as paper sellers have capped rallies.
To the downside I see support around 1830, 1810, then 1739 and my personal target of 1590 (first Fibonacci retracement from the move up from 666 low) I will be a seller on tests of moving averages, old highs for failed rallies and a buyer outside the lower end of Bollinger bands on a 4 hourly chart.
Do trade with stops but don’t put them where the algos can reach them Two or three ticks above or below yesterdays range just smells like money to them and keeps them coming back for more! I wish you good luck for your weeks trading!