Behind the Headlines

Unmasking the VooDoo: Overbought and Oversold

noreply@blogger.com (Michael Kahn) — Wed, 06 Mar 2019 18:51:00 +0000

Wouldn’t it be great to have indicators that tell you just when the market moved too far in one direction and was about to pull back, if not reverse? The holy grail, you say? Indeed, it would be.

We technicians love to bandy about terms like overbought and oversold, which we think mean just that. An overbought market means too many people bought too many shares/contracts so there is nobody left to buy any more. The market MUST be about to turn lower.

Ditto for oversold. The decline overdone. Too low. Must be a bottom.

That sounds about right. Too bad it is wrong.

Famed technician Alan Shaw used to say, the most bullish thing a market can do is get overbought and stay that way.

Have we all forgotten the very definition of trend? You know, the one from physics that states, somewhat, that a trend in motion tends to stay that way unless acted upon by an outside force. Just so we are clear, that outside force is increased supply or demand, depending on trend direction.

Stochastics reaching 95 is not an outside force. Rallying above the upper Bollinger Band is not an outside force. Neither are VIX spikes nor sentiment survey extremes nor Elon Musk smoking a doobie. Yes, they do tell us about the environment for the market but they are not outside forces that turn the trend.

The only thing that can kill a bull trend is a rise in the amount and aggressiveness of sellers. You know, supply beating demand. Boom! And they said we’d never use what we learned in intro college courses.

How many trends keep going up as short sellers get crushed? Not enough sellers.

How many (dollar) trends kept going up as the balance sheet of the Fed exploded? The dollar was supposed to collapse under the weight of money printing but it did not.

Bad earnings but the stock rallied anyway? Sorry, no sellers.

I think you get the point. Overbought and oversold indicators tell us how far the trend may be stretched but they are not the reasons trends snap back. As I keep preaching, two lines crossing on a chart is not the reason the market moved. The lines crossed because the market moved.

Keep that straight and you will never be ridiculed when you get interviewed or booed when you make a speech.

As with age, overbought/oversold is just a number. It all depends on what else is going on in the market’s, or your, life.

Interest Rate Breakout

noreply@blogger.com (Michael Kahn) — Tue, 09 Oct 2018 14:22:00 +0000

Quick Takes Pro

23 hrs ·

More on our YouTube channel: https://www.youtube.com/user/quicktakespro

The Changing Economy

noreply@blogger.com (Michael Kahn) — Thu, 26 Apr 2018 19:07:00 +0000

I am an avid follower of Howard Lindzon, founder of StockTwits and an early stage investor on a level I just cannot comprehend. This week was the Stocktoberfest East conference in New York and, despite my usual discomfort and dislike for the city, it was well worth the trip in.

Howard talked about all sorts of trends as they related back to investing - both public and private. Robots, artificial intelligence, social and transactional themes carried over from previous years. What was a bit new, at least to me, was the deepening of the millennial theme. It seems that they like cities and prefer experiences to things. Maybe I knew the latter but the word "density" was used to describe the former. Density means that everything is right there. No waiting. No traveling.

While I knew about decentralization - blockchain and the sharing economy - they used a new term, fractionalization.

I actually have some experience with fractionalization. A company called Motif Investing presented at Stocktoberfest (West) a few years ago and they allow investors to create a portfolio of stocks using fractional shares. If you can't afford even one share of Google at $1051 (stick it Alphabet), then how about 1/15th of a share. And a quarter share of Facebook, for good measure.

It's like a personalized mini-mutual fund. And Motif is not alone. A quick check of the Google shows Stockpile, Acorn, Folio and more.

Stocks themselves are not tangible but this concept spread to the physical world. There was a vendor at the show called Rally Road that bought classic cars and sold shares to the public. It's not a time share where you get to use the car for one week in the year but rather you own a fraction of that car all the time.

You just can't drive it. The car stays in cold storage, nice and safe.

The point is that you can invest in this exotic asset on a retail investor level. If it goes up in price, so does your share.

It's not a brand new idea. I already mentioned time shares and mutual funds. How about limited partnerships on oil rigs, real estate and more?

The difference is that everything is completely transparent. You can even plot the price action to see how you're doing over time. We technical analysts love that. Although the data is monthly, only :-(.

Next, we'll probably see shares of jewels, space ships and maybe even brothels.

Finally, there was a company called StockX that offers bid/ask on high-end sneakers and few other products. Again, I love that you can track the prices but even better you don't have to deal with the other party. As with a stock, you deal with the exchange who guarantees you'll get what you expect, whether the real product or cash.

At first, I thought this was a ridiculous concept. Maybe that is because I think paying $200, let alone $700 for sneakers, is PT Barnum's dream. But then the CEO explained how it is transparent, safe and efficient in terms of establishing fair value.

Unlike eBay, where you can find your bargain using multiple pages, not knowing for sure if you had a good price. Think about bringing all those prices together on one page. It would force everyone to respect a fair market price.

For now, the business depends on the company fulfilling orders, which does not seem scalable. But then again, Amazon fulfills plenty of orders. If I can buy a car or some other asset that depends on salesmen then they'll have something. There would no longer be a sales person to mistrust. And unreasonable markups would be a thing of the past. What a boon for small manufacturers of any kind!

The times they are a changing, for sure. Some for the worse - like the crypto scam. Some for the better - like remote health monitoring.

See you next year at Stocktoberfest.

The Wisdom of the Talking Head

noreply@blogger.com (Michael Kahn) — Fri, 02 Mar 2018 18:40:00 +0000

When I read the comments made to anyone's website articles, I can only conclude that the commenters believe the quoted pundit to be either completely ignorant or really evil. I know from personal experience that I substitute financial Ouija board wisdom for useful analysis.

That's why I stopped reading comments on free mass market websites altogether. If I want to learn about how dumb and out of touch I am I can just ring up my kids. That's too bad, because the 95% of the comments calling me an idiot swamp the 5% of commenters with legitimate questions or constructive disagreements.

Let's break down what a TV (or substitute your favorite media) talking head is really doing. First, I truly believe that most of them are just working stiffs trying to further their careers by donating their analysis for free on a news program. They think that they need to be right in their calls. Well, at least mostly right. If they blow it all the time then they will not be asked back again.

Don't gloss over that word "free." They are not paid for their appearances and at most get a free limo ride from their office to the studio. The real value is more intangible - exposure. The more times you see a so-called expert the more you come to trust him/her. They hope that translates into book sales, newsletter subscriptions and new clients for their firms.

Let's say Talking Head X says the stock market is going to go up and banks will lead the way. You make a mental note and go about your business.

Within a week, the stock market goes down and the news of the day sends bank stocks reeling. Was the pundit a moron? Or did they want you to buy so they could sell into the bump?

Either way, you wonder how they still get the big bucks, let alone still have a job after such a boneheaded call.

But what was the pundit's responsibility to you? He/she was just interviewed for their opinion. You did not pay for it. And even more important, you were not privy to when he/she put out an alert to clients saying that things changed and they should not buy bank stocks, or at least get out immediately.

You judged Talking Head X on one moment in time that was, admittedly, incorrect, but not necessarily a money loser. Remember, none of us are in this business to be correct. We are here to make money. Similar to baseball, if you get one third of your calls right and use proper money management (cut losers and ride winners) then you get very rich.

Here is my favorite quote in the comments sections - "If this analysis had any value he/she would be trading it and not talking about it." Therefore, this pundit is a huckster.

Do you think the same thing when you see an advertisement for an engineering training course or a set of ratchet wrenches? After all, if you can train people to engineer something then you should already be applying it to build a driverless car that runs on bitcoin.

Just because you learned to swing a hammer does not make you a master carpenter. Therefore, just because you learn to read a chart or a balance sheet does not make you Warren Buffet (and I mean that to emphasize the "oracle" part of his nickname).

You can learn plenty from TV talking heads but don't take what they say as fiduciary trading advice tailored to your unique situation. If you do, it is you, not the pundit, who is the fool.

Unmasking the VooDoo - Michael's Rules

noreply@blogger.com (Michael Kahn) — Wed, 31 Jan 2018 19:34:00 +0000

This post is a little different than the others where I usually take a deep dive into one bit of technical analysis or another to expose what's really going on beneath the hood. In this post, I'll simply list my rules for dealing with the analysis in the real world and not in some idealized trading lab.

Sorry AI. This is your daddy, RI (real intelligence). This is what you are trying to be when you grow up.

Follow these rules. You may not make big bucks trading but you will up your win rate. Plus you will definitely avoid misinterpreting the market's message and taking bonehead trades.

I've got some comments below the list, as well.

Michael’s Rules

If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none
If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.
You can torture a chart to say anything you want. Don’t do it.
Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader)
Look at both bars (or candles) and close-only line charts to see if they agree.
Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern.
Patterns should have symmetry. A triangle should look like a triangle and not a mile high and an inch wide (or vice versa). A head and shoulders should look like a central peak with two smaller but equal peaks around it.
Price rules but it is better when volume, momentum and structure (patterns) agree. Sentiment is a luxury.
Always confirm one type of analysis with another type. For example, confirm RSI not with MACD but with on-balance volume or relative performance.
Don’t get hung up if all your indicators do not agree. They never will all agree and you will end up missing every opportunity. Therefore, pretend you are a trial lawyer gathering a preponderance of evidence, not guilt beyond a shadow of a doubt.

Comments:

on point 5 - In other words, get different charting points of view. They don't have to be in lock step but they cannot tell you radically different things. If they do, find another thing to trade.
on point 6 - This is a pet peeve. You cannot count the trend as part of the pattern. The pattern must be a separate chart entity. Also, cup-with-handle patterns are continuations, bottoming reversals. Call the latter something else, please!
on point 9 - RSI and MACD are essentially the same thing. Look at something that covers volume. Look at something that has some sort of sentiment component. Look at something with a time component.

Unmasking the VooDoo: Trends

noreply@blogger.com (Michael Kahn) — Fri, 17 Nov 2017 21:00:00 +0000

When discussing technical analysis and trends, the erudite snoots among us, which unfortunately can include me, like to talk about physics. Objects, or trends, in motion will stay in motion unless acted upon by an outside force. That's inertia and yes, markets have it. How else do we explain momentum stocks, let alone bubbles?

As the old Faberge Organics shampoo (with wheat germ oil and honey) commercial used to say, "If you tell two friends, then they'll tell two friends, and so on and so on and so on." The same goes for the markets. It's the ultimate expression of keeping up withe the Joneses. Everyone covets everyone else's profit-making assets

Trends exist because investor B wants in on the action of investor A. But why?

My reasoning is that trends exist because information flows around the market imperfectly. Some people get it sooner and others later. Some people act aggressively and some not at all. Eventually, everyone assimilates the information but guess what, the market is already way up by then. But that's another topic.

If not for this fact, stocks would only trade the bid-ask spread until the next news or earnings report. They would then jump or fall, in one fell swoop, to the next price level where they would trade around the new bid-ask. It is the imperfect flow of information, either lagging or leading when someone figures out the news before it is releases, that allows smooth trending.

Nowhere but in the financial and commodity markets do people want to buy more as the price goes higher. My economics 1a professor, Barney "guns and butter" Schwalberg would not approve. Yet, in the markets, the more people that want it, the higher the demand and higher the price, and (drum roll) the more other people want it.

Talk about FOMO!

With that said, there is still a bit of sanity left here. If prices rise too fast - and that is clearly subjective - then some people wake up and realize they should probably cash some of this windfall in. Supply increases and sure enough price action heads a bit lower.

This could happen a few times and the market establishes a sustainable trend with a velocity that makes sense for that market at that particular time in history.

Right now, Bitcoin merits an insanely steep trend. It's new and, as far as a concept can be, really shiny. Maybe next year, when $30 million simply vanishes as it did just this month in competing crypto-currency ethereum, we'll see the market's invisible hand show itself.

Here is the headline "A coding error led to $30 million in ethereum being stolen." That is absolutely frightening, but I digress, as I always do.

The real question for most markets most of the time is what do you do with trends. The answer is, "ride them."

The next question is how you tell when they end. The answer is, "the market will tell you."

Huh? So they will ring a bell at the top? or the bottom?

Well, not exactly. It is durn near impossible (yeah, I speak hillbilly) to know when the peak or bottom in any market is happening as it happens. Chances are you will have to give up a bit before the signal becomes somewhat clear. But that's the whole point of stops. They let you ride the trend until it changes.

Now, you may have other constraints such as scaling out of a position after X% and Y% moves. Or maybe you see better opportunities in other markets in trends that are not quite so old. Or your funnymentals change. Whatever your reason, you decide to get out. But that does not mean the trend is over. Only the market knows that.

The old saw, "the trend is your friend" is absolutely, positively true. However, you cannot forget about the second part of that, "until the end." How may people go broke NOT realizing the trend changed and they continue to BFTD? Can you say Internet bust?

Bonus thought: We usually like to lambast the little guy for being in the wrong place at the wrong time. It is the crux of COT (commitments of traders) analysis saying that when the little speculator gets massively long the bullish trend is about to end.

The thing is that the little guy is right during the meat of the trend. Elliott Wavers cleverly call that "wave 3." They may be slow at the start of the trend and overly enthused at the end but the middle of the trend needs the masses to really get going with size and power.

So, you still have to know a little bit about the trend you are in. Identifying that is more than half the battle when you make your buy, sell or hold decisions. Everything else is gravy.

Unmasking the VooDoo: Chart Patterns

noreply@blogger.com (Michael Kahn) — Wed, 25 Oct 2017 21:45:00 +0000

If you are not a charting aficionado you might think that trying to predict future price movements from past price movements is pure folly. And guess what? You would be right.

What? Did I just say that? Well, yes I did but there is more to it than the simple answer. We cannot predict price movements but we can assign porbabilities to what might happen based on what already happened.

"What's the difference?" you ask.

It's a big difference. If you say you can predict what will happen you are gazing into an orbuculum. That's a crystal ball, for you lay folk.

What technical analysts do is gauge future possibilities based on the footprints the elephants leave in the butter. Here is the phrase that pays:

People tend to act in a similar manner when faced with similar situations.

Chart patterns are those similar situations. The "forecast" is the similar manner of action. Nowhere does it say "will" or "must."

Let me pull a large quote from my favorite author with that phrase embedded.

"Chart patterns are formed by the buying and selling actions of people and people tend to act in a similar manner when faced with similar situations. Some blame this on a self-fulfilling prophecy: if enough investors believe in the significance of a chart pattern ending then they will act, and thus their actions will assure that the assumed result will occur. "

- A Beginner's Guide to Charting Financial Markets: A practical introduction to technical analysis for investors by Michael Kahn.

Wow, that guy makes sense! Let's continue:

"But investors may not act the same way this time and the charts will tell us when that is the case quickly before losses begin to mount."

That implies that technical analysis does not expect to be right all the time. If it did, then probabilities would be 100%. Therefore, trying rate the efficacy of technical calls just by the success rate is a failed methodology. I challenge you to show me the price/earnings ratio at which a buy signal will always result in profits. Or a percentage of orders or inventory that is 100% right when making a buy or sell call on a stock.

Any single technical analysis-based call can fail. However, string enough of them together with stop losses and re-evaluation at achieved price targets and the Cajun chef will ga-ron-tee a nice positive rate of return.

What is a pattern, anyway?

Charts are just graphical representations of the tape. They show us how price changes over time and the forms they take actually do tell us a bit about what was going on in the market when they formed. Does the shape of an EKG tell the doctor about what is going on in your heart right now? And can the doctor then "predict" whether you will have heart issues in the future?

Charts form based on the buying and selling actions of people. And, they really only have three flavors:

They can be pauses for rest in an ongoing trend
They can be pauses as the market decides it wants to go the other way
They can be pauses when the market just has no clue which way it wants to go

Number 1 is called a continuation pattern. Number 2 is a reversal pattern. And number 3 can be a trading range or just a directionless market filled with either uncertainty or apathy.

Patterns have tops and bottoms and they are indeed called resistance and support. Typically, when prices move through one or the other the trend continues in that direction. Something happened to trigger a mood change from the rest or uncertainty of a pattern to the conviction and movement of a trend.

Fortunately, markets have inertia, just as in physics. If they are in motion (trending) they tend to stay in motion. And if they are at rest they tend to stay at rest - both until acted upon by a force.

That force can be truly from the outside, such as news, earnings and legal matters. Or it can be inside the market when sentiment changes or a related stock or index breaks out from a pattern. In either case, pattern becomes trend and it will stay that way until something makes trend turn into pattern.

How do patterns form?

I am not going to get into the nuances of all the things that happen in patterns with volume, momentum and the shapes of various patterns here. Those things give us additional clues as to which way the market can break out but they are not needed to understand just how a pattern forms.

When a pattern first starts to form, the trend hits an insurmountable speed bump. Keeping it simple with a rising trend, it pulls back, finds a new support and rallies again. But it is stopped at the top of the pattern, which now for the first time starts to actually appear. The cycle happens a few more times.

What is happening now is the bulls see a cheap price at the pattern bottom. The bears see an expensive price at the top. Both act accordingly. Nobody has enough nerve to do anything else.

In the case of a triangle or any other pattern with sloping tops of bottoms, the bulls tend to sell out earlier within the pattern. The bears tend to close shorts earlier. Uncertainty builds as neither side is willing to let the market move to their desired prices. They take action earlier and earlier.

Finally, one side finds a reason to push their agenda. For an upside breakout, the bulls no longer sell out at the pattern top. In fact, they buy more. And away we go!

Different pattern shapes are just theme and variation. It is the same dynamic going on in all of them. However, pattern shapes do give us more clues as the eventual resolution.

Conclusion

Chart patterns help us decide what to do based on subjective probabilities that the market will do something somewhat specific once the patterns are broken. The market does not do X just because it broke out. The pattern breaks because the market decided it was time to move. And it lets us know about how far it will go be the way it formed the pattern in the first place.

It is our job to read these signals and do one of the only three things we can do - buy, sell or hold. We do not know exactly where the market will go and how long it will take to get there. However, based on the signs, we will get a very good idea if we should ride that tiger with a lot of money or with a little or forget about it completely.

Nobody cares if you predicted a market target. Only your wallet cares that you made it fat.

Future of Capitalism

noreply@blogger.com (Michael Kahn) — Wed, 11 Oct 2017 18:59:00 +0000

In another round of file cleaning on the old computer I found my notes taken when reading The Future of Capitalism by Lester Thurow. The book was written in 1996 and I read it in 1998.

Wikipedia - Lester Carl Thurow (May 7, 1938 – March 25, 2016) was an American political economist, former dean of the MIT Sloan School of Management.

Actually, this is kind of spooky. I made (in 2017) comments in parens places.

Surging inequality (a big political talking point)
China focus will change to India focus (not so much)
Communism had good education (don't know what this meant)
No competitor to capitalism now so it will not implode (true dat)

Economic Surface of the Earth

End of Communism (Plate 1) (well, Cuba pushed that way a little and North Korea will if they push war)
Offers lots of cheap labor (another political talking point

Migration (plate 4) pushes unskilled workers into 1st world (ditto)

New technologies (plate 2) generates skill shift (in spades)
Need to offset this (by massive skill investment) is resisted by the elderly (plate 3)

Global economy (plate 4) forces wages down (indeed)

Without dominant power (plate 5) there is no economic locomotive. (better watch out)

Progress occurs when technology meets ideology

Inflation is extinct (true dat, too)

Japan will crack (it is number 3)
Europe is biased towards social programs so jobs will flee (Nostradamus)
Global bubbles burst together (looks like that could happen very soon)
Uncertainty breeds religious fundamentalism (its familiar in uncertain times) (O...M...G...)

Capital is human and no longer ownable

Need to spur long-term thinking and R&D - Government's only role (we wish)

Bill Meehan in the archives

noreply@blogger.com (Michael Kahn) — Wed, 11 Oct 2017 14:08:00 +0000

I was looking through old documents buried on my computer and found this raw text excerpts that I believe eventually made it's way into the Market Technician's Association newsletter in 2000 or 2001. It was comments about a recent MTA seminar written by Bill Meehan, whom we lost in the Towers on 9/11.
--------------------

RealMoney.com comments on the Seminar

excerpted with permission from a column written by Bill Meehan.

Voodoo, as I use it here, refers to only one of the colorful descriptors that many on Wall Street use to denigrate those who spend their waking hours devoted to the art of technical analysis. Kooks, I believe, is how academia prefers to label chart readers. However, nothing was quite so satisfying as listening to Dr. Andrew Lo of the MIT Sloan School of Management present mathematical proof at the Market Technicians Association's annual meeting that technical analysis cannot be dismissed, at least when it comes to pattern recognition, as mere voodoo practiced by kooks.

It's good to have one's belief verified by such an acclaimed professor. The work continues, especially as to why the results were so significant when looking at Nasdaq stocks and so inconclusive when looking at those traded on the New York Stock Exchange and the Amex. Perhaps readers might have some ideas after reviewing the data.

Oops! I noticed that I made a big mistake above. Having the chance to meet and spend quite a bit of time with Dick Arms, who so graciously fills in for me, was actually the highlight of the meeting for me, with all due respect for Dr. Lo and his paper. And meeting many other leaders in the field was a real thrill that alone is worth the modest cost of joining the MTA.

Passing on Wisdom

I've been a bit out of touch with the market virtually all of last week, without many of the technical tools that I rely on. Therefore, I'll relay a bit of what another presenter at the MTA meeting had to say about the current technical state of the market. In addition, I'll throw in my two cents about the Federal Reserve and some of the psychological indicators that keep me from becoming more bullish in the short term. As time allows this week, I'll also do my best to respond to readers who sent me email while I was away.

While most of the meeting's presenters were very interesting (although a few were speaking a foreign language to my mathematically challenged brain), Phil Erlanger's observations about short interest struck me as particularly important. The MTA's current president focused on adjusted short interest, a sentiment tool that he developed, which has a very strong track record. The Erlanger short interest ratios for the Dow, S&P 500 and Nasdaq Composite are all at multi-decade lows and at levels far below those generally seen at times of high market risk. The charts were startling and alone should make one pause, although relying on one technical indicator isn't wise, in my opinion.

Bill Meehan is the chief market analyst for Cantor Fitzgerald, a Manhattan-based institutional trading and research firm, and writes daily for the Cantor Morning News. He can be reached at bmeehan@thestreet.com.

Unmasking the VooDoo: Guru Calls

noreply@blogger.com (Michael Kahn) — Thu, 14 Sep 2017 20:19:00 +0000

I originally wrote this in August 1998 when I covered technical analysis for BridgeNews to explain what a big stock bull saw in the charts to suddenly turn him bearish. The names have NOT been changed because the call turned out to be pretty darn good.

What did that mean?

Why a big bull turned into a big bear

This week, mega-stock bull Ralph Acampora, chief technician for Prudential Securities, did something that most people on the Street thought would never happen. He issued a sell signal. Shudders went though the masses. If this guy, who was famous for predicting Dow 7000 when the Dow was 1000s of points away and who clung to his Dow 10,000 forecast for 1998 before last week's fireworks, can turn sour on stocks, what will the itchy trigger fingers of the masses do?

Let's examine what really happened from a charting standpoint. First, Acampora follows trends and patterns in stock market prices. This makes him different from that other mega-stock bull Abby Joseph Cohen, chief market strategist for Goldman Sachs, who leans more heavily on fundamental analysis. We're not going to say here which is better nor who is right. As a column that attempts to debunk the mystery associated with the Acampora side, technical analysis, we'll just focus on what Ralph saw.

There are basically two keys to his new bearish stance -- market breadth and market trends. The former measures how many stocks are going up and how many are going down. It measures how much of each day's volume is attributable to each of these two groups. In other words, is the rising tide carrying most of the boats higher? If it's not, too many of the boats have sprung leaks.

The latter concept, trend, is subject to how the stock market is sliced and diced. There are blue chip stock indices, such as the Dow Jones Industrial average, that show the "market" fairly flat over the past few months. There are indices of big stocks, such as the S&P 100, that have been rising nicely. There are indices of small stocks, such as the Russell 2000, that peaked back in April and are down 30% already. Which one of these really is the market?

The answer is that none of them on their own fit the bill. Perhaps an unweighted index, such as the Value Line Index, which gives its approximately 1800 components an equal voice, is the answer. If it is, we've been in a bear market since April.

Acampora, as well as a whole host of technicians, saw that market breadth had deteriorated badly. More stocks were going down than up. More volume was attributable to declining issues that to rising issues. More stocks were setting new 52-week lows than 52-week highs. More S&P industry groups were lagging the S&P 500 than were leading it. This is curious in that we would expect the number above to equal the number below. The industry groups together are the S&P 500.

Again, Acampora was not alone in noticing that the small stocks were going down while the big stocks were going up. Stocks with Asian exposure, such as the technology sector, were sliding since the Asian stock meltdown last autumn. True, the tech heavy NASDAQ Composite was climbing but when we examine it more closely, we see that only four stocks account for nearly half of the index's movement. That's not the market, for sure.

The 299 point sell-off we had last week was underway well before Ralph said a word. No, comments from somebody famous did not help matters but the bottom line is that the stock market was already on shaky ground.

Let's now look into Acampora's new downside target -- 7400. This is 1200 points away from where we are today. First, the jargon. If a correction is defined as a 10% drop, we've already had one. A bear market takes us to a 20% drop so that's where Ralph gets his wording.

Second, how did he get his 7400 number? You can bet he didn't just pull it out of his hat. The Dow 7500 level was the arguable bottom of the July 1997 - January 1998 trading range. It served as the starting point for the rally that broke free from the range and lies at one of the key percentages to which markets often fall back during declines. For those of you so inclined, it is the 38.2% Fibonacci retracement of the rally that began in late 1994.

We cannot know today whether we will see 7400. More conservative technicians will wait to see if shorter-term technical levels are violated before moving into the bearish camp. However, the moral here is that we need to question our indicators, including our definition of the market or what our advisors are saying. Market breadth and small stocks were flashing warnings a long time before the Dow got smacked.

Acampora still looks for the magic Dow 10,000 in a few months. For long-term investors, he does not sound like such as bear after all.

Unmasking the VooDoo: Fibonacci

noreply@blogger.com (Michael Kahn) — Fri, 01 Sep 2017 17:56:00 +0000

If you ever want to sound foolish during your next television interview on the markets, tell them that the market is approaching a Fibonacci level and will do X when it gets there. It is sort of like doing a DIY network interview and saying the house will have four bedrooms because you are using a 32 ounce hammer.

Both the hammer and Fibonacci are tools used in their respective fields. A hammer is used in carpentry to, among other things, frame a house. A Fibonacci - usually a Fibonacci retracement - is used in investment analysis to frame the market's recent move.

Obligatory definitions

Here is the section where we have to define what Fibonacci is and we'll focus on Fibonacci retracements. If you have any interest in who Mr. Fibonacci was, feel free to fire up the Google. It is irrelevant to what we are doing here.

Mr. F's claim to fame was discovering a mathematical sequence that seems to describe a lot of geometry in the real world from how petals spiral on a flower to how stars spiral in a galaxy. And from that sequence we get the "golden ratio" or "divine proportion" which somehow describes pleasing and useful relationships in art, music, architecture and design in general.

The ratio of .618 to 1 comes from a sequence of numbers where any number is the sum of the two that preceded it. Here is it in all its glory:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946, 17711, 28657, 46368, 75025, 121393, 196418, 317811, ...

As you can see, the numbers start to get huge. Fortunately, we rarely encounter any above 144.

And even more fortunate, the ratio of any two consecutive numbers settles on .618 fairly quickly. As follows:

0, 1, 0.5, 0.666667, 0.6, 0.625, 0.615385, 0.619048, 0.617647, 0.618182, 0.617978, 0.618056, 0.618026, 0.618037, 0.618033

First, this is the ratio calculated out to the number 610 in the sequence.

Second, and more important, you can see how the ratio oscillates higher and lower as it hones in on the .618 value. Any ratio beyond what is shown above is pretty much just rounding error away from that value.

Voila! the golden ratio!

Fun for math nerds

The ratio has all sorts of neet-o properties. For example, 1 / .618 = 1.618.

And 1 - .618 = .382. Guess what the square root of .382 is? That's right, .618.

.382 / .618 = .618

You have probably seen these two percentages on the charts an they are roughly equal to the simple percentages traders have used for years, namely 1/3 and 2/3 (or .333 and .667).

Guess what is not a Fibonacci number. 50% or .5. Check out the sequence. It is nowhere to be found. And you cannot concoct it from math-ing 0, 1, and .618, either.

Still, traders do attach meaning to a 50% retracement or pullback and it has wormed its way into analysis using Fibonacci. Don't fight it, exploit it.

Using this stuff

Now is when we get to dispense with the formalities and use the name experience chart watchers use - fibos. Don't confuse this with fibbie, which is the FBI. Or fubar, which was what you may be feeling right now trying to digest all this fibo stuff.

Fire up any charting software package and under the drawing tools section you will see Fibonacci retracements and possibly Fibonacci extensions, time and arcs. They are all just different ways to look at two points on a chart - usually a high and a low - and then draw stuff off of them at specific percentages.

Take a look at this chart of the S&P 500 from 2007 to 2011. Using the basic set of fibo retracements of 38.2%, 50% and 61.8% look how nicely we could project where support and resistance might be.

Here is where you can get into trouble. These levels are likely places to find support and resistance levels but not always. And sometimes you might be tempted to add more fibo lines until you find one that fits.

My advice is to never add more percentages except for one... and it is a bizarre one. We'll get to that later.

Remember, we are only trying to frame the market, not nail all of its turns and accelerations. We'll use other tools to attack that part.

Anyway, we can see that the rally peaked at the 61.8% retracement and the ensuing correction stopped at the 38.2% retracement. Whoopee! It worked once. We can even see the market stumble in the vicinity of the 50% level.

Let's repeat this. Fibos are likely place for turns, not guarantees. But we can beef them up a bit by measuring fibos from other points and see if they overlap, or cluster. If they do, then we have a better support or resistance target.

Check out how the rally from the 2010 pullback low to the highs of 2011 is 161.8% of the pullback itself. Something usable must be going on here.

Even better, what if moving averages hit those fibos? Or normal horizontal support or resistance? Or trendlines?

Getting the drift? As with any tool, the more things that point to a price level the more likely that price level will be important.

Now for the bizarre. Some people use a 78.6% retracement level. Note how this is kind of close to 75% but that is not what makes it bizarre. It .786 is the square root of .618.

In my book, if a market can retrace this much of a previous trend, it is rather likely to retrace the whole thing.

The other fibo stuff

We touched on extensions, time and arcs so let's put in the quick definitions. A fibo extension is a number bigger than one and it projects where a market can go. Look for such numbers as 1.382, 1.618, 2.618, 3.618, etc.....

Draw an arc centered on the origin for each ratio (usually the original ones less than 21) to find trend targets.

And instead of measuring price, do it on the time axis. Think about looking for a 61.8% price retracement that took 61.8% of the time of the previous trend to happen. Make a fibo box out of it.

Fibos are also used in Gann and Elliott Wave analyses. For the latter, we like to see Elliott Wave 3 to be 1.618 or 2.618 the length of Wave 1. That is a whole nother can of worms so we'll end this right here.

Use fibos on your charts but please use other things along with them. They can help you frame the market but like a hammer, you will have to decide where to put the door and windows. Fibos do not dictate where you buy and sell.

Unmasking the VooDoo: Sentiment

noreply@blogger.com (Michael Kahn) — Fri, 25 Aug 2017 20:03:00 +0000

Usually, when I discuss the major parts of technical analysis I'll use an analogy of a table. Price is the top of the table and the most important part. The legs are volume, time and sentiment. They support price analysis but do not supplant it.

Everyone gets price from patterns to trends to momentum. Everyone get volume. Most people get the concept of time, too, which includes such things as cycles, analogs and some esoteric stuff such as Gann.

But sentiment is often the red-headed stepchild of the analysis. Sentiment is hard to gauge. It is hard to quantify. And it is usually fairly hard to gather. Just look at your charting software list of studies. You'll see RSI and cumulative volume. You might even see an Elliott Wave "recognizer" but you are not likely to see something called sentiment.

These things do exist but they are not derived from trading as all the other parts of the table. Sentiment is the true oddball of technical analysis because it is the only analysis that seeks to figure out what traders are thinking. It's not like everyone inputs their feelings into an app on their screens and sends it off for tabulation at a vendor.

Yes, I know there are surveys that do just that but for every collector of sentiment there is a different method and interpretation.

And there are many, many different types of surveys and proprietary indices. There are surveys of traders, of investors, of newsletter writers. Then there are surveys of the actions of traders, which are different from surveys of what traders think. There are surveys of money managers and of Wall Street strategist equity allocations.

There are a few oddball things such as the trend of carpenter tool prices and railroad car usage. Most people may have heard of the trend in oil rig counts.

Have you heard of the hemline indicator? They get shorter when people feel feisty and good.

How about the magazine cover indicator? This is a real thing and it is actually pretty good.

The ratio of football revenue to baseball revenue? Football is a darker sport. Baseball seems to do well when people are happy. Just ask George Carlin what he thinks about these two.

How about horror movies vs. romantic comedies? Same logic.

Giving credit where it is due, those last two come from socionomics, which looks at social mood as an indicator of the stock market. It actually works in reverse but they are closely enough correlated for this discussion.

And if that were not enough, there are a few things that are generated from trading including the famous VIX index, which is concocted from options prices. There is the ratio of puts to calls. Of put volume to call volume. Of equity only puts and calls. Of index puts and calls.

I supposed if we go there it is not far to include the number of stocks above their 200-day averages and at new 52-week highs or lows.

Have I convinced you that sentiment is wild and whacky? And hard to quantify? And hard to even obtain the data?

Using Sentiment

Let's assume you have access to some sentiment data or perhaps just have eyes and ears to follow the news. What do you do with it?

First of all you have to understand that sentiment is a contrary indicator. And most of the time it tells you nothing useful. If the market is going up then sentiment should be happy.

It is similar to the trend is your friend until the end. Most of the time, the crowd is actually right and you follow along. Only at the extremes is it wrong and you need to go against it. You know, buy when there is blood in the streets. Sell when E*Trade runs ads with cab drivers buying islands. Or when the local pizza shop owner brags about how many houses he flipped.

Remember way back to 2008 when the market was going to hell in a hand basket? It was a brutal bear market and the government was panicking to do something - anything - to look like they were able to stem the tide. My father-in-law, rest his soul, called me to sell everything in his portfolio. I sold a little so he would not be mad at me but I kept the rest.

When the public gets so scared that they throw in the towel you know sentiment is at an extreme for bearishness. In fact, the American Association of Individual Investors survey was at a record high for bearishness. Something like 70% vs. its historical 28% (I am just going from memory on those stats).

Take a look at what was on the cover of Time Magazine on March 9, 2009. It said the economy was holding on for dear life. it talked about foreclosures, about nationalizing banks, toxic mortgages and your disappearing savings.

Guess what day saw the absolute lowest close on the Standard & Poor's 500 index? That's right March, 9 2009. It nailed the bottom.

Usually, there is a lag in these things so don't obsess over this perfection.

Why does this work? When editors or general interest media take the pulse of their readers and finally believe that readers want to read this stuff then we know sentiment is very one sided. You may rag on Barron's covers but Barron's is not general interest. It's covers are driven by professional sentiment, not the general public.

The same thing works at tops. Think tulip bulbs. Bitcoin. And right now, some think Amazon.com. None of these markets, save for Amazon, had any connection with the real world. They were the greater fool, burning match theory in motion. They went up because of FOMO. You didn't think I could schtup in a millennial reference, did you - fear of missing out. Go buy some etherium. YOLO.

When an actual survey goes extreme, you can bet that whatever trend was in place is nearing its end. But remember, sentiment is not a trading trigger. It sets the environment for that trigger to be really meaningful.

If you can find a stock with a reversal pattern or some other technical positive in place and sentiment is awful - like SNAP was in mid-August - it might be ripe for at least a trade if not investment. Likewise, when all the Amazon haters finally acquiesce (i.e. shut up) then we can consider the stock is too high.

Unmasking the VooDoo: Moving Averages

noreply@blogger.com (Michael Kahn) — Fri, 11 Aug 2017 22:49:00 +0000

As with all technical indicators, moving averages are just tools chartists use to figure out what they need to do in the markets. Notice I said they are figuring out their own actions, not divining where the market is going. Of course, the two are related but that is not the point.

What is the point is that pundits and journalists like to report when the market breaks one of the more widely followed moving averages. In this edition of Unmasking I am going to take a look at what a move through an average - or a "crossover" - really means.

Let's start with just what a moving average is. If you want the full definition feel free to fire up the google, the bing or even (shudder) the yahoo. And if you know what a moving average is, feel free to skip the next two paragraphs.

A moving average, or average, is just an mean price over a certain period of time. A 50-day average is the sum of all prices - usually the close prices - divided by 50. Easy peasy. Since the calculation is redone fresh each period, the value window of data "moves" over time. Get it? Moving average!

Yes, we can change the span, period, input type and even the weighting of the calculation using any number of oddball formulas but again, if you want to learn about that, it's back to the google for you.

So what is the big deal with these things? Do they create trade triggers? Which ones do we use?

To answer the last two questions: maybe and whatever floats your boat. Yeah, not much help but these are answers you need to develop on your own. I'll just tell you what I do with them.

And to the first question, the big deal is that they help us see the forest for the trees. They smooth out jumpy price action to let you see the major and minor trends. You change the parameters depending on what you are trying to do.

You do realize that the government actually uses a moving average on some of its big monthly economic reports, right? Why? They say it smooths things out. Score one for the chartists.

You can use averages in pairs or even triplets, garnering insights as the averages dance around each other and with the price plot. But let's KISS (keep it simple, schmegegge).

Let's talk about the 50-day moving average. Yesterday, August 10, 2017, the S&P 500 and Nasdaq both closed below their 50-day averages for the first time since July (June for the Naz). The financial headlines were quick to point that out and with the news of the day - a potential nuke crisis in North Korea - boy did they make a big deal. Gotta build the click through count.

Chicken Little was ready to sell everything and head for the hills. Now, can we take a peak at the headline from July 6, 2017 when the S&P 500 last closed below this red line in the sand?

July 6 - Nasdaq challenges major support amid geopolitical tensions, S&P 500 nails 50-day average

In the words of that famous portfolio manager Homer Simpson, "Doh!"

Six days later, the Spoos reached another new all-time high. Talk about a crappy sell signal!

Let's look at the charts. As you can see, price action violated the average on four separate occasions before the current event since the November pre-election low. The 50-day average did not deliver a successful sell signal one time. None. Zilch.

That does not mean that a drop below the average is always meaningless but I'd rather look for something more reliable, such as a support break, to tell me to sell. Rather, I'd use breaks of the average to set up or confirm other signals.

So again, what is the point? The point is that averages help us figure out the trend. Just look at their name - average. Let's expand the chart all the way back to the start of the major rally in early 2016.

I added the trend channel with a little technician's license to make the upper line more meaningful. That means it touches price action more times.

Look at the 50-day average. It more or less runs through the middle of the channel. Price goes above and below it yet it still was a bull market. The average itself spent most of the time rising.

The next question about that time when it was not rising naturally will be, "How do you know it will go back up?" Well, you don't but there are other tools to use, such as the popular 200-day average and any number of indicators.

The point is that in a bull market being above the average is good but being below it is not necessarily bad. In a bear market, being below is good (for the bears) but being above is not necessarily bad (for the bears).

So, slap on your averages, short-, medium- or long-term, simple, exponential or VIDYA, and find out what the current trend is. However, selling just because price dipped below your average is not always a good idea.

Millennial Breakdown

noreply@blogger.com (Michael Kahn) — Tue, 18 Jul 2017 13:04:00 +0000

I've written sporadically about how the new generation (I guess I am now in senior citizen territory) cannot do simple tasks that we boomers take for granted. Where does the postage stamp go on the envelope? How do I fold the New York Times to read on the train?

I blogged a similar topic here in March 2017.
(http://quicktakespro.blogspot.com/2017/03/the-coming-crash-of-internet.html)

Remember way back when...in school you had to learn basic math even though you had that nice Texas Instruments calculator? I never got the hang of that one but my Casio with none of the fancy functions worked just fine. Who did not enter 01134 and turn it upside down so it says hEll0?

But I digress, as I always do. The point was that you needed to have some math skills to really understand what the calculator was doing. Does the answer makes sense? Did I hit + instead of -? You get the point.

You need map skills to know that blindly following google map directions can get you stuck in rush hour traffic in the heart of downtown Manhattan instead of taking a better route. I also mentioned that last March.

So, even though you do everything by email there will be the odd time when your water bill must be mailed to the utility because they do not take credit cards. You need to know where to put the stamp.

I admit to clinging to the old ways of having a little cash in my pocket and planning my travels in advance. Here is the story. My 22-year old daughter flew back to NY to spend the weekend with friends and of course visit us. She ended up at a friend's summer house in the boondocks of Northern New Jersey and needed to get herself back to us on Long Island Sunday morning. No problem, right?

She asked me for help picking a bus to NYC. How should I know? She finally figured out where the bus was but she had to get there. Did her friends wake up early to drive her? Of course not. But no problem! Uber!

Well, let's say there is not much coverage in the NJ boonies early on a Sunday morning.

Long story, short, I would have know exactly how I was getting back to the city to catch a Long Island bound train on time before I even left for Jersey. I do not expect all of my needs, whether travel or food or even sunscreen, to be waiting on demand in real time for when I summon them.

The bottom line is she waited for her friends to drive back to NYC. Oh, and they did not even drop her off at Penn Station. She had to take the subway.

Millenials are so much more sophisticated than I ever was but they are helpless in the face of any glitch. They are so much smarter than I am yet who gets the call when things go wrong?

OK, I'm done. Where's my prune juice?

And get off my lawn.

The Fallacy of Analogs

noreply@blogger.com (Michael Kahn) — Tue, 04 Jul 2017 16:19:00 +0000

One of the key tenets of technical analysis is that we can use previous patterns to forecast what might happen in the future. It is not the same easy modeling of fractals (please tell me you get the sarcasm). We cannot build the big picture from a lot of little pictures as we can with snowflakes, coast lines and galaxies. And if you think that patterns are self fulfilling prophesies, please stop reading now and navigate to Ihaveaclosedmind.com.

Patterns do not predict the future. They give us a better probability of a future outcome because people act in similar ways when faced with similar situations. You get to define what is similar.

Note the liberal use of the term "similar." Also note the term "probability." If these things worked perfectly as expected then there would be no market.Who would take the other side of an upside pattern breakout if the probability were 100% that the market would rally? That little level of uncertainty allows bulls and bears to place their bets, manage positions and even operate in different time frames.

Now that I've established that patterns work, at least with a decent enough probability to make correct calls, let's look at two patterns together. These are called analogs and they are used to find similar behavior in the past so we can forecast what will happen in the future. Or, patterns in one market vs. another, including a commodity and stocks that gather that commodity.

Who has not found patterns in the Dow that look a lot like the one in place in 1929 just ahead of the crash? Who has not compared the tech bubble to the housing bubble? You get my drift.

Sometimes these analogs are useful (asterisk). But sometimes they look great until you realize you've stumbled upon coincidence?

Check out this overlay of bitcoin and the Nasdaq-100 for a recent six-month period. Both markets were soaring. Super performing FANG stocks (the acronym for the go-go technology names) drove the Nasdaq-100 to dizzying heights. And bitcoin, the new crypto-currency was making different but equally as powerful waves as the next great thing. It kind of made sense that these two world changing markets looked the same.

Sure, there are a few times one zigged while the other zagged but overall they tracked each other quite nicely. Therefore, as I write this and the tech sector is getting somewhat hammered in what the bulls hope is the long-awaited correction we can excuse bitcoin's recent weakness. When one turns up, it should signal time to buy the other, too.

Of course, this was a fairly small set of data so let's go back a but farther to see if things still look as good.

This chart shows about twice the span of the first and it is still not too bad. The July 2016 period was a big headache and January 2016 was even worse. However, nobody would argue that they two plots still looked rather similar. Damn! We got something here!

Um, no.

Bitcoin spent all of 2014 falling while the Nadsaq-100 had another spectacular year.

In statistics, most people find a relationship using one span of data and then test that relationship using a completely independent set of data. The second set is called "out of sample" and it is important to make the case that some theory works all, or at least most, of the time. Testing on data used to create the theory is like eating your own cooking. You may like it but everyone else heads to the vomitorium.

Fun fact - Although we use it for dramatic effect, a vomitorium is not a place to puke after over indulging. It was one of a series of entrance or exit passages in an ancient Roman theater. It means "to spew forth" and they were designed to provide rapid egress for large crowds at amphitheatres and stadiums. Think about that as you head home from the ball park.

Getting back to the topic, there is no analog here. It was coincidence. You know, correlation does not imply causation. Yeah, I don't like that phrase, either.

Then why do we look at them? Perhaps for the same reason we see a man in the moon. We are programmed as humans to look for order where there might not be any. I think it is some primitive survival thing but I'll let you look that one up.

And now for the asterisk. Did you miss it? It was in the fifth paragraph and above the first chart.

Why are these analogs useful at all? My take is that they give us two charts to analyze for support, resistance, trend and pattern at the same time. Then again, you could analyze them completely separately and still find the same support, resistance, trend, pattern and eight-by-ten color glossy photographs with circles and arrows and a paragraph on the back of each one.

Never miss a chance to quote Alice's Restaurant.

Ending on a serious note, stocks and bonds sometimes move together and sometimes they move opposite from each other. Sometimes they compete for investor dollars and sometimes they are risk-on vs. risk-off proxies. The real challenge is knowing which condition is in place sooner rather than later. Is it an inflationary environment or deflationary? Is the economy this or the dollar that? Are we in the old economy or new? Oil or natural gas or solar? Etcetera ad nauseum.

I do not completely dismiss analogs for use in the big picture. I also would use them as I use regular chart patterns in the probability assessment task. However, thinking one market will dictate the fortunes of another is folly. Pure price analysis of the market you trade is still the best way to figure out what you are going to do. Buy, sell or hold. After you show how smart you are with equations, speeches and theorems, it all boils down to what you do. That is the whole point of any analysis.

(charts courtesy of TradingView)

Unmasking the VooDoo - Head-and-Shoulders

noreply@blogger.com (Michael Kahn) — Mon, 26 Jun 2017 01:39:00 +0000

Whenever I think about the famous - or infamous - head-and-shoulders pattern from the world of chart reading I always seem to go back to the late, great Mark Haines of CNBC who in the summer of 2009 asked every guest, whether they were a technical analyst or not, if they were worried about the head-and-shoulders pattern that formed in the market. I cannot remember if he was looking at the Dow or the Spoos but that is far too picky for this episode.

Anyway, what he saw was this:

It sure looked like a head-and-shoulders, which as "everyone knows" is a reversal pattern. Keep in mind the environment we were in at the time. The Internet bubble popped and the raging bear market was only three or so months in the rear-view mirror. That is, for the few who recognized that it was actually over.

Haines and countless others were still in panic mode and in extremely skeptical of any rebound. Therefore, a possible reversal pattern was looming to squash investors one more time.

I also have to give Mark credit for recognizing the pattern with it variation of a left shoulder but we'll get more into the details of the pattern a little later.

Anyway, let's see what happened after the gentlemanly freak out on television:

Oh snap! What the heck happened? The world's most recognized pattern (by non technical analysts) failed to end the rebound. And the market went up - a lot. And fast. Hokey Smokes! (Think Rocket J. Squirrel).

Let's dig into the deets, starting with what exactly a head-and-shoulders (H/S) is supposed to be.

While the pattern works in bull and bear trends, albeit it must be upside down for the latter, let's stick to everyone's favorite - the rising trend.

As we know, as trends trend they usually exhibit a bit of ebb and flow. Advance and pullback. Three steps forward and one step back. You get the picture. It is good when each push up makes a higher high and each fall back makes a higher low.

The fun happens when one of those pullbacks does not make a higher low. It can make the same low as the previous low or (shudder) it can make a slightly lower low.

Fortunately, the market or stock or commodity or bitcoin heads back up.....but cannot get back to the previous high. What we have here is a warning. And dollars to doughnuts I bet that momentum readings or volume or some other indicator makes a lower high, as well. Actually, I'll bet it made a lower high when price made a higher high, too.

The trend may be in trouble here. But is it a reversal pattern? Well, not yet. What has to happen to complete the H/S is a lower low below the level of the previous low, or in most cases the previous two lows since they were the roughly equal.

What may also happen at the same time is a breakdown through a significant moving average, perhaps the 50-day. And depending on how long the trend has been in place, we may also see a breakdown below the trendline that guided the rally the whole time.

You would think that would make a compelling argument, right? And it does.

But in technical analysis everything us open for discussion. Everything. A rally can turn around without any warning at all. A stock can break out from a trading range and then break down and then break out again. We operate with the odds, not with crystal balls. Iron, maybe but never crystal.

If the odds that a stock will rally after a solid breakout from a solid pattern are 95% (I made that up) that still leaves room for failure. It is our job as chart readers to recognize failure sooner rather than later, cut losses and live to trade another day.

Nobody gets it like they want it to be
Nobody hands you any guarantee

- Jackson Browne, Boulevard (1980)

As we can see in the second chart, the market did indeed break down from the H/S pattern. I bet the folks at CNBC were pulling spare tighty whities out of their desk drawers.

But the darnedest thing happened. The market turned right around and started to move higher - for the next seven months with nary a hiccup. Talk about damaging your shorts!

I saw two things back then. First, basic risk control and common sense said that four trading days after the breakdown - when the market surged higher and back above the broken support line - aka the neck line - the whole reversal thing was destroyed. And if you missed that signal, certainly you abandoned your short trade two days later when the market surged again.

If you did not see that then you really should just give Vanguard a call and let Bogle manage your stash.

The sentiment thing was a bit trickier. People were still crazy bearish or at least crazy nervous. And the publicity given this pattern seemed rather panicky. What a lot of people don't get is that sentiment - at its extremes - tells you exactly the opposite of what is likely to happen. If everyone is bearish then there is nobody left to get bearish. There will be nobody left to sell since theoretically everyone has already sold. Supply dries up.

It's like dry kindling just waiting for a spark of demand to appear to light things up/

Sorry, got off track with a discussion of supply and demand in the markets. Anyway, the breakdown failed and everyone came rushing back in to buy. Up, up and away!

Let's examine the H/S pattern in 2009 a little closer:

The pattern is supposed to be a reversal pattern and therefore it must have a trend to reverse. Typically, I like to see it last no more than one third of the time the trend lasted before the pattern started. And, I don't want it to be more than a third of the price gain of the rally.

If the H/S pattern exceeds either of these two parameters it is not a H/S reversal pattern. It may look like it but it is far too big on a relative basis so it must be something else. It may send the market lower but that's not the point. We are examining the specific head-and-shoulders pattern here.

What we see here is that the H/S pattern was about a third of the height of the rally that preceded it. I used the Fibonacci extension ratio to get 38.2% (almost). That's close enough for me.

However, when we get to time the patterns falls apart. The rally lasted 40 days before the pattern and you are correct, we cannot tell that until well into the pattern's development.

The next 40-day mark is drawn in for your viewing pleasure. As we can see, the pattern lasted longer than the rally it was supposed to reverse. that means it really cannot be a reversal pattern at all. Again, it may lead to lower prices but that would be due to a simple support break.

Well, there you have it. The H/S pattern must be commensurate with the rally it is supposed to be reversing. Sentiment was a bonus here.

And what about falling trends? Just flip the whole flipping thing upside down. Same rules apply. We can that an inverted head-and-shoulders. Or, you can call it an upside down head-and-shoulders. Or, you can call it Ray, or you can call it Jay but you doesn't hasta call it Johnson (yeah, look up that pop culture reference).

And now, for the pièce de résistance - the inverse or continuation head-and-shoulders.

Nah, I lied. I'll save that for another day but here's a tip, the same rules apply in terms of price and time.

Nothing is more bullish than a failed bearish signal.

- Mike Epstein

Unmasking the Voodoo - Cup with Handle

noreply@blogger.com (Michael Kahn) — Fri, 31 Mar 2017 21:36:00 +0000

Anyone who ever discovered a relationship in the stock market and decided to go public with it probably created an indicator - which they named after themselves - or described a pattern or cycle and gave it a really catchy name. I want to focus on the latter in this post.

First of all, let's start with marketing. Ralph's OK Chart Pattern is not going to sell a lot of technical analysis books. It won't get a lot of page reads online. And it won't be worth anyone's while to publish it without the advertising potential. Forget about seeing it coded into TradeStation.

It does not matter if it works or not. Or even if it really works. I mean reeeaallllly works all the time and makes oodles of coin to impress the ladies (or gents, I don't judge). The only way someone will care about Ralph's OK Chart Pattern is if they 1) find out about it at Ralph's OK workshop at Traders Expo or 2) find out about via a catchy headline such as "Ralph has unlocked the secret of the market with a chart pattern that works every time with no draw downs!"

OK, that's extreme. But what if Ralph's pattern had a better name? One that is easy to remember. And one that cuts through the clutter of every other Ralph out there with his own pattern?

To me, cup-with-handle is just a perfect name. First, you can visualize it even without a chart. Second, it actually describes what you see. And third, there is actual technical analysis behind it.

Of course, a lot of people seem to forget that last part.

There really is a some theory behind the picture but why let that get in the way of a good forecast?

Back in the day when William O'Neil concocted it, the cup-with-handle was a bullish continuation pattern that formed over a period of three-six months.

Let's dissect that definition. First, it is a bullish pattern in an uptrend. Nowhere does it say it works in a down trend although we technicians like to think every pattern works in all markets and in all time frames. For sure, some do but not all. In the stock market, and that is where the pattern was developed, up trend and down trends have very different personalities.

Next, nowhere does it say that the cup-with-handle is a reversal pattern. It says it is a consolidation in an uptrend. It did not say it was bullish no matter what.

Now, that does not mean there cannot be a similarly shaped pattern at the end of a bear trend that reverses the market to the upside. It's just not a cup-with-handle.

Now, I just pooh-poohed the notion that the pattern only works in a three to six month period. If you really understand what is going on then you will see that it does translate to other time frames - barely. The built in technicals of support, volume and consolidation do apply across time frames. But again, can we call it a true cup-with-handle? Going by the definition handed down by the creator at the IBD alter it is not a true cup-with-handle.

OK, that's picky. But the part about it being a bullish consolidation pattern in an uptrend is untouchable.

Now it is time to get into the pattern so you know what you are talking about - in a way people can and want to understand - the next time you get interviewed on the Consumer News and Business Channel. Yeah, that's CNBC.

Nerd Note: Originally established on April 17, 1989 by a joint venture between NBC and Cablevision as the Consumer News and Business Channel, the network later acquired its main competitor, the Financial News Network, in 1991. Cablevision later sold its stake to NBC (Wikipedia).

Sorry, I am still kicking myself for turning down a gig with them back then.

Anyway, the cup-with-handle describes what happens after a rally. The stock eases back down on diminishing volume. Endures a period of low volume, low volatility trading. Starts to recover as volume picks up before finally erasing the whole decline.

If you want a chart, visit with my little friend Google. or be wild, try Lycos, Hotbot, Ask or Webcrawler. OK, you can try Yahoo, too.

Now, at resistance from the old high the stock pauses again.

Think about this for a moment. In any pattern, a pause at resistance gives bulls and bears a chance to think about life without having to trade. In most patterns, price action touches resistance or the upper border of the pattern a few times. Why? Supply overwhelmed demand at that relatively high price.

Sometimes a stock will slice right on through resistance immediately after bouncing off support. This sort of breakout - usually due to momentum - is not reliable. I'd rather see everyone calm down at resistance so that a breakout attempt results when there is a sea change of attitude. What was once relatively expensive suddenly becomes relatively cheap. That's a true breakout.

It could be a product launch, the CEO finally clearing that intestinal blockage or some other mood bending occurrence from the Fed, oil prices or Gollum. It does not matter why on the charts.

The charts tell us that something changed. Knowing exactly what does not make us any money. Taking action does (or should).

Picking up where we left off, we have a stock that rallied, pulled back in a defined manner to really allow all excesses to be wring out and then a pause back at the old high. Remember, we like pauses at resistance as good setups.

Then the stock eases back a bit. Aye, a bit. It's subjective but if it looks small relative to the overall pattern then that is ease-y enough for me.

What is that important? Because it tells us that bulls were mostly holding on to their shares. A lack of buying rather than heavy selling caused the small price decline. How do we know? Because volume eased back with it.

You might recognize that as a flag pattern elsewhere.

The fun comes when the small pullback is resolved to the upside. Another sea change towards the bullish side and away we go!

And if the pause keeps going and either a lot of time passes (like months) or price sags too much then there is no breakout and no buy signal. Just as with any other technical chart pattern.

Sure, you can describe the pattern with what unfolds on the chart but the voodoo-less way would be to talk about why the ups and downs appear:

A stock rallies
It reaches a point where the price entices supply to appear and demand to wane.
That creates a pullback as bulls lock in profits.
Then the market loses interest and the stock languishes for a while.
But since the stock was bullish only a few weeks ago some people decide to buy it on sale.
They tell two friends and they tell two friends and before you know it the stock slowly recovered.
That was not lost on the bears and the other nattering nabobs who see another chance to sell at the old highs.
Once again, the stock eases back but not too much because not too much supply came out.
Something sparks the next breakout and suddenly what was expensive is now considered cheap.
Bulls pile in and volume increases.
The stock rallies again.

Note how some of that is silly for a stock in a down trend. The premise that the stock is generally a long-term winner is important in the intermediate-term gyrations.

When you know why a pattern forms you will understand what the market is telling you when it happens.

And one more thing - the cup portion has to look like a cup. It cannot be a sharp reversal with a champagne class. That leaves no time for the market to forget about it. And it cannot be an overly long period of malaise with a fancy soup dish. A quiet stock is not a dead stock.

It has to be a U-shaped cup with low volume in the middle. It has to let the volume curve play out, too.

Let me live 'neath your spell
Do do that voodoo that you do so well
'Cause you do something to me
That nobody else could do

- Frank Sinatra

Unmasking the Voodoo of Chart Reading

noreply@blogger.com (Michael Kahn) — Tue, 28 Mar 2017 18:55:00 +0000

Did I just call chart reading - and technical analysis - voodoo? Me, a Chartered Market Technician with the letters CMT on my business card? Me, a technical analyst who writes a column called "Getting Technical" for the past 16 years?

Well, the way everyone uses it does seem to be voodoo. And even more so when one of us gets on TV and starts talking about indicators. Even my eyes glaze over when they chatter on about RSI and moving averages did this or that so you should buy (or sell).

I'll forgive the former NFL coach who was hired to sell a technical analysis trading course and called one of them the 200 moving day average. Come on, TA nerds, you get it?

Recently, I needed to justify my analysis to a media outlet that does zero technical analysis and more likely thinks it is garbage. I basically said that you don't buy because two lines crossed. Rather, the two lines crossing is the market telling us conditions have changed and now the odds have shifted in favor of being long.

It's not the lines crossing that means buy. It is the other way around. The market is trying to tell is it is OK to give it a go so the lines crossed. Think of it as the spirit's manifestation on the screen.

We've all seen stories about the market about to tank because the S&P 500 just formed a black or death cross on its chart. Within days, the index is higher than it was at the time of the cross so the hate mail starts to flow. But let's look at it the other way and it will make perfect sense.

First of all, the death cross occurs when the trend has already changed. That is the only way the math works, by the way, because the pattern is defined as the 50-day moving average crossing below the 200-day moving average. That cannot happen when prices are rising.

Anyway, in practice we often see the market bounce right as the cross happens. Why? Because typically it has been falling for a while already. Again, is has to be falling otherwise the short-term average cannot drop under the long-term average.

OK, Einsteins, I know we can make the math work with price spikes and outliers but roll with me here.

So, the market may be a bit oversold and it bounces. But overall the cross appeared because most likely something is wrong. Short of real voodoo telling us what's what that is all we can hope from charts. They do not tell us what will happen. They are meant to give us clues as to what to do.

Rinse, repeat.

Charts do not forecast the future. They suggest that it is time to take an action.

You don't sell when the market is overbought. It may still be going up and will get more overbought. But you pay attention because if the market does start to succumb to supply, the indicator - whatever told you it was overbought - will back down by a certain amount.

The most bullish thing a market can do is get overbought and stay that way.

- Alan Shaw (ret.) , Smith Barney

And as we have to say with any indicator, none work in a vacuum. We need several to really understand what the market is telling us. Plus, we have to understand that it is only telling us its condition, not what it is going to do. That part is up to us.

Charts are tools, not your momma. You have to make the decision for yourself and at no time will you (or should you) think you have certainty. You are playing the odds. And all you can do is control what you do - buy, sell or hold.

The Coming Crash of the Internet

noreply@blogger.com (Michael Kahn) — Thu, 02 Mar 2017 17:09:00 +0000

(only Baby Boomers will survive)

A recent incident with my cell phone got me thinking once again how we rely far too much on technology. This happened after a discussion I had with a younger friend who showed me his supermarket and Dunkin Donuts rewards cards on his phone. He is no millennial. He has a fairly high up job in his financial department so he is not a slave to technology as perhaps a kid right out of college.

I said that he could lose his phone. He said I could lose my wallet, where I keep a few of those rewards cards. I said wallets don't explode and they don't run out of battery. There is the link back to my original statement above.

He said he carries a spare battery. I said I did too but my phone ate up the juice faster than the battery could put it back. I think you get the picture.

Don't get me wrong, it is great to swipe a card or even hold a card up to a reader. Who needs cash, save for the few bucks to tip the valet...unless they take Apple Pay of course. I like that you can have dozens of rewards cards at your fingertips. I like not worrying about forgetting a paper boarding pass or coupon for $5 off an oil change. I also appreciate having a kindle loaded with a years' worth of commuting and beach chair reading.

Of course, if I forget my reading glasses....but that is another issue.

My problem is relying on technology. That is different than using technology to enhance my life and make it easier. My favorite story is about my son and his friends driving from Long Island to Great Adventure theme park in New Jersey. They plugged in the location on the GPS and away they went. But where did it route them? Right through the Midtown tunnel into Manhattan in the middle of a work day. There was no questioning the route. Worse, there was no ability to question the route.

Dad, this thing wants to take us though the city. Is that a good idea?

The biggest worry I have by far is that the infrastructure for all of these websites, smart phones and Internet of Things (IoT) is vulnerable. Maybe to hackers, maybe to terrorists, maybe to unscrupulous politicians. Or maybe to just simple technological failure. Just how much information can you jam into a pipe?

A constipated Internet may be decades away. An exploding web may be even farther away. And even worse, a self-aware Internet may be somewhere out there. Maybe Skynet from the terminator movies is not that far fetched. I wonder if there is a Simpsons episode on that. They seem to be able to predict the future.

My issue is that relying too heavily on technology leaves us vulnerable to problems. I am not saying to avoid progress, only to be able to survive at least a while if something goes awry. To this day, I still am glad I have DOS skills to help get around problems on my Windows computer. I can also read a paper map. And write with a pen. And walk. And call a restaurant for take out. And call around to find a good movie. And deposit a paycheck with a living bank teller. And play non-Madden football with the guys.

Technophobe? Hardly. I am blogging right now. My income is derived 100% online. And I even Venmo money to my kids. I just worry that advancement will cause everyone's life skills muscles to atrophy. Which reminds me, I have to drive to the gym to grab a little exeercise. Wii sports does not quite get that job done.

Dear Publicist

noreply@blogger.com (Michael Kahn) — Mon, 29 Aug 2016 19:57:00 +0000

As someone fortunate enough to have a following in the media I get a lot of people looking to get quoted. They are the lifeblood of any journalist, even one such as me who does about 99% of his own analysis. After all, how better to drive home a point then to quote someone who is a true expert on the topic.

When a publicist puts me on their distribution list all I see in my inbox is blah, blah, blah. I am not going to read your missives and I certainly do not want to wade through your clients' big fancy titles before getting to the point. Or the fact that they advise hedge funds, banks, brokers and high net worth clients. So does everyone who contacts me.

Right now, I have my email filters set to shunt all mail from publicists, whether independent or part of a firm's marketing group, into a separate folder that fills up away from my viewing eyes. I'll check it every once in a while to see if there is anything of value. There rarely is.

Years ago, I taught a workshop at the Market Technicians Assoc annual seminar about dealing with the media. You want to get your name out there? Here is how to do it.

And now I have the same advice for you publicists. Give me something quick and give me something unique. Do not send me a report. Do not ask if I need a quote from so and so. I don't.

Do understand what I cover. I would be quite amenable to a publicist asking me what I need in broad brush strokes. But when you think about it, it will be what your client is best known for doing or analyzing in a way nobody else does.

If I have a question on short interest, I would go to the guy who runs the website called "the short squeeze." If I needed the VIX, I'd head there. If I need something on a particular indicator I would go to the person who's name is on it. Or who wrote the follow-up book on it.

There are plenty more things that people can be "the expert" on from social analysis to assets held in ETFs to cycles to even double reverse whirligigs (a friend made up that last one). How about international? or commodities? or railroad car utilization? or crop yields?

Yes, a lot of that looks fundamental but it can be presented in charts with correlation to the markets.

One more thing, speak English. Simple words, easy to understand concepts. The less digestion I have to do the easier it will be for me explain to to my readers. Not everyone has a degree in analysis.

Yeah, I sound like a jerk. But you and I both want the same thing - for readers to read us. I am not here to promote you. But if it makes my stories better you can be sure I will do my best to get you in there.

Capish?

MTA April 2001

noreply@blogger.com (Michael Kahn) — Fri, 11 Sep 2015 23:13:00 +0000

The 26th Annual MTA Seminar
Lincolnshire, IL
May 17-20, 2001

Although the crowd was somewhat smaller than usual, MTA members, affiliates and guests converged in suburban Chicago for their 26th annual seminar. It delivered the networking, reunions and new friendships that have become the mainstay of these gatherings. It also presented the opportunities to learn from both well-known and not-so-well-known technicians but all had something valuable to offer each attendee.

The Marriott Lincolnshire was a beautiful resort hotel with a worthy golf course, several restaurants and the expected complement of amenities. It was a good environment in which to base a successful weekend.

Thursday Golf

You could really see in his eyes how happy Phil Erlanger was to get his beloved golf outing underway. After explaining the rules to the duffers and outlining various contests in which to compete, five groups hit the links. Team Bridge (John Kosar, Michael Kahn, their boss Kevin Pendley and the director of the CRB Bob Hafer) teed off last at 11:40. Six hours and countless dead waterfowl later, the final four pulled into the starter area only to be met by Mr. and Mrs. Erlanger in a golf cart ready to search the golf course for the lost souls. Hey, it was a day in the sun, especially since Kosar and Kahn had not been on a golf course in literally a decade. When the boss says golf, you golf.

Michael Jepson reported that he has never seen rough like what we saw in Lincolnshire. At the first tee, his drive went a little left into the rough. No problem, he thought, just pull out the 4-iron and punch out. Three strokes later he's still trying to get out! "I was so lost in the rough all day long, I thought they were going to send Jesse Jackson out to save me!" he said.
Congratulations to golf award winners: Todd Gold - closest to the pin, Kevin Pendley - low gross score and Ian McAvity - longest drive.

Thursday

Check-in was smooth and exciting as old friends met in the lobby. Conversations begun a year ago in Atlanta, and interrupted as friends left to catch flights, were resumed without hesitation one full year and one half a country later. It wasn’t until several hours later over cocktails that we felt sufficiently informed of the past to discuss the future.

After an outdoor buffet and cocktail party, attendees moved under the pool deck tent for the evening festivities. Seminar Chair Nina Cooper sketched out the next three days: a trip to the CME and the CBOE, a boat ride past several historical Chicago sites and many exciting speakers. President Phil Erlanger introduced the Board of Directors and Management Committee members followed by Keenan Hauke, who presented this year’s Charles H. Dow Award for the best paper on technical analysis. This year, the competition was fierce and we awarded two awards, one each to Charles Kirkpatrick and Peter Eliades.

Friday

Friday was kicked off with a traditional Ian Notley walkabout where we were split up into many small tables for mix-and-match discussions. After a small time, the whistle blew and we followed pre-determined patterns to switch to the next small table for discussions with new people on new topics. The theory is that by the end of walkabout, each attendee will have met half of the entire group although that rarely works quite that smoothly.

After a coffee break and visit to the exhibitor rooms, the late morning presenters where on. The pace was fast since the schedule was tight. By noon, we were all on board three busses and on our way, box lunches in hand, to downtown Chicago. Next stop, the Chicago Mercantile Exchange and the Chicago Board Options Exchange. In front of the large window overlooking the trading floor at the Mercantile Exchange, former pit trader John Kosar explained the layout of the pits and demonstrated the hand signals in use.

Across the street at the CBOE, where we were welcomed with a cake, there were 7000 computers. These computers generate enough heat collectively that the air conditioner runs 24 hours a day, 7 days a week. The furnace, though present in the basement, sits inactive but we could have used that heat at our next stop, the water taxi tour of the Chicago skyline as seen from Lake Michigan.

Standing on the sidewalk awaiting our tour, the temperature grew cooler by the minute. Adjacent to our post was a drug store. It was a nondescript place, unremarkable in every way except that it was about experience a strange run on warm clothing.

Dressed in short sleeves, we entered this store like an occupying army foraging in the countryside. Bruno DiGiorgi was the first to spot them. They hung above the counter, and were reduced for clearance. They were ugly; so ugly they weren’t hung as one would expect; on hangers. Instead, they were stapled to the wall. They were lightweight, ugly, green windbreakers.

Eight dollars later, our scouts emerged from the drug store much warmer and fully prepared to cruise. Moments after that there were two green jackets standing in the crowd, then there were three, then four. Soon the crowd turned to face the door and place bets on how many of us there would finally be. With every green jacket at the door the crowd cheered. With each addition to our special group the cheers became more enthusiastic. Each coat wearer, seeing no other choice, took his rightful place next to his brothers like some junior high band preparing for parade. We can only imagine what non-MTA customers must have thought as they opened the door to find 50 people, a half dozen of whom dressed in uniform, cheering, pointing and staring at them.

The MTA Bowling Team was born.

An hour later on board ship John Brooks, always the considerate of the comforts of others, offers his eight dollar green jacket to the shivering crowd. “Sixty dollars, firm.” Now that’s a technician!

Saturday

Saturday's closing dinner was highlighted by the keynote address given by Peter Eliades. Next Mike Epstein presented the 2001 MTA annual Award to Phil Roth, who accepted it and then made a $4000 donation to the Educational Foundation.

Once the evening’s dinner, speeches and awards were behind us, Barbara Gomperts wheeled out a piano and with it was Nina Cooper’s request to Peter Eliades for a song or two. Peter played and sang. Sam Hale danced with Karen Beaver. After Peter, Michael Smyrk came to the keyboard to play a great Jazz riff and Mark Scott followed that with an original piece, which he had written for his wedding proposal. Just when you didn’t think it could get any better, there was a sing-a-long.

"It was without any doubt, one of the greatest moments any MTA annual seminar has ever had." said Michael Krauss.

Thinking of the future:

With the great reviews of late, will boat rides and light shows now be de rigueur for upcoming MTA annual seminars? When I complained that since Walter Deemer wasn't present there would be no light show, some quick thinking showman pulled out a laser pen and dealt with that problem.

Should potential keynote speakers also be evaluated on how well they entertain us after their presentation? Is it true that Linda Raschke's virtuoso piano presentation and day trader Barbara Streisand are on next year's short list for keynote speaker? Linda has the edge because her political views are more acceptable to the MTA.

Will attendance trail off as the widely accepted view of MTA seminar debauchery and hell-raising is exposed as the wholesome events they actually are when it leaks out that we now have father-son attendees? How long can it be kept secret that one third of the group took the 6:30 PM bus back to the hotel from downtown Chicago after the afternoon activities so they could get to bed early and be alert for the morning presentations?

No one I spoke with thought the walkabout lasted long enough. Since a very vocal majority wants next year to be near the beach, will it be oversubscribed when it is known that the walkabout will be 1/2 day from Tiki Bar to Tiki Bar--shoes and sandals optional?

Legend of the Green Jackets
By Mike Jepson

Dick Arms and Mike Jepson left the bus, walked around looking for a department store to buy something warm. Finally we walked into what looked like a downtown mall....it was a train station. Anyway, a security guard said that all the stores in the area catered to women only and that maybe we could find something in the drug store at the end of the station. Not knowing that the aforementioned MTA members had just purchased green jackets and walked out the other door, Dick Arms and I walked in the opposite end of the store.

I am eyeing this nice looking tan jacket but Dick buys it. So, I think, "we don't want to look like the Bobsy Twins. Think how dumb we would look walking out of the drug store and on to the boat with our cute, matching jackets." So, I did the smart thing and bought a green one. Moments later as we exited the drug store I was in for a really big surprise! <![endif]-->

Real Estate Put Aways

noreply@blogger.com (Michael Kahn) — Mon, 04 May 2015 17:39:00 +0000

I just read this on MarketWatch:

There’s a new boom in the housing market, and in many cities, this bubble is even bigger than the last, warns Wolf Richter of the Wolf Street blog. He explains that home ownership — the bedrock of the American dream — has been tumbling as houses get snapped up as investments. In fact, the proportion of owner-occupant buyers fell to a multiyear low of 63.2%, Richter said. What’s more, it’s not the “smart money” that’s feasting on real estate. The institutions are getting out of the game and leaving it to the “mom-and-pop” types. “

This reminds me of my days on the municipal bond desk at Merrill Lynch. Those were the days when even a peon like me was wearing blue shirts with white collars and multi-glitz suspenders under my Gorsart suit.

Traders traded with each other and tried to offload inventory on the buy side, which included retail. When bonds finally got "put away" to end investors we knew it was time to move on to the next hot dollar bond issue. When investors had them in their hands, even in block size, the bonds were finally distributed in small enough lots and we knew only dribs and drabs would reappear at any given time to "flood" the market. Flood really meant trickle.

In the real estate graf above it seems that all of the real estate buying has gone to traders, now known as flippers, and very little is getting put away. That means a whole lot of inventory is out there in need of getting sold.

Supply high
Demand low

Get the picture?

If you wanna be my source

noreply@blogger.com (Michael Kahn) — Thu, 04 Dec 2014 21:09:00 +0000

I'll tell you what I want,
What I really, really want.....

I want you to feed me interesting things about the market, relevant to charting and technical analysis, that my readers will want to read.

What? You should do the work?

Well, yeah. If you knew how many solicitations and emails journalists get every day you would understand that we do not have the time, desire or sometimes the knowledge to pour over your missives. Most of you cannot coherently write your way out of a paper bag, too.

I was at an investor conference recently and made some great contacts. Many attendees and presenters had great information generating products that could give me an early warning on changing market conditions. Perfect!

I exchanged email addresses and twitter handles. I sent them queries. I got some responses and most required me to set up accounts (that's fine) and then look around for what I wanted.

Uh, no.

From my point of view, yeah, I guess I need to do some work to create well researched stories. But let's talk about it from your point of view. You want your name in the media. Or you want to create buzz for your products so qualified leads will head over to your website.

Sounds simple, right? SO WHY DON'T YOU FOLLOW UP WITH ME or any other journalist who can make your dreams come true. And why don't you get your marketing person working on something created just for me? Make me feel special, dammit!

No, I am not the PR god and no I am not a big shot name like Cramer or Abelson (RIP). But I do have multiple tens of thousands of qualified readers twice per week, every week of the year.

Journalists have to write - A LOT. I put out five newsletters, two columns and two articles every week, not to mention a monthly column, a weekly webinar and the occasional interview. I need stuff to write about. And so does every other journalist.

Do you think they know you exist? They have their go-to guys on the topics they hit every once in a while and so do I. But we all want more. We want a story to fall into our laps every once in a while and that is where you come in.

Hey Mike, the XYZ indicator we created just signalled a major change
(Not RSI or MACD. I have those on my screen already)

Hey Mike, the number of carpenter benches purchased just tripled. The economy is humming. Now that is different!

Hey Mike, gun permits are skyrocketing. Umm, OK, buy guns stocks.

Tell me something I don't know, that is relevant and is interesting. I guarantee you will see your name in my column. Do it twice (after a reasonable period of time) and you become my go-to guy/gal.

OK, rant over. Time for a drink.

The 2014 Mike Epstein Award

noreply@blogger.com (Michael Kahn) — Sat, 08 Nov 2014 16:16:00 +0000

Mike Epstein Award 2014

Market Technicians Association Educational Foundation

Prof. Blake LeBaron: Abram L. and Thelma Sachar Professor of International Economics at Brandeis University

In 2009, the MTA Educational Foundation established an annual award in memory of our late colleague, Mike Epstein. Each year, the award is presented to the person who best exemplifies Mike’s goals for long-term sponsorship of technical analysis in academia and in practice.

The original mission of the MTA Educational Foundation was to create and fund educational programs in the field of technical analysis. Throughout the years, this mission has expanded to include the creation and support of a complete Technical Analysis curriculum that is now being taught in colleges and universities for college credit. (source: MTAEF.org)

Fulfilling these goals would not be possible without dedicated partners from academia. Advocates on the university side are critical for not only teaching what we already know about technical analysis but forging new ground in the field that we can pass on to the next generation to put into practice.

The MTA Educational Foundation is honored that Professor Blake LeBaron of Brandeis University will accept the 2014 Mike Epstein award. His work goes beyond the indicators that most of us use to the core of how markets operate and how strategies for dealing with them evolve over time.

For most of us, the world of non-linear analysis and simulated markets is beyond our day to day activities of trying to make money for ourselves or for our clients. Indeed, most of the time "regular" analysis does quite nicely. It is the outliers, the unusual and the black swans, that have the potential to drastically change our results and Prof. LeBaron's work seeks to understand them.

For those people who have only heard of technical analysis, it is a somewhat mysterious endeavor. After all, forecasts are made without considering how a company's business is doing or how international trade is flowing. What they don’t realize is that the sum wisdom of the crowd - that thing we call the market - is indeed considering those factors and just about everything else professionals and amateurs worldwide track. But instead of making rational guesses directly from the data about what might happen to future stock, bond and other prices they take the indirect route of measuring what everyone has done and is doing about it right now.

In other words, it tracks where people are putting their money rather than their talk. I'll spare you the colloquialisms about what talks and what walks.

Technical analysis is a pure play on market forecasting and money management. Its input - price - is what actually happened and it is never revised later as a government report usually is. And it is objective. Price is what it is. It is not subject to individual interpretation.

Of course, this is the simplest way to look at it. There are many derivatives of price, such as momentum indicators, commonly in use today. Other market generated data such as volume and sentiment indicators round out the second level of analytical inputs.

The next level is where Professor LeBaron and his colleagues do their work. His research has concentrated on the issue of nonlinear behavior of financial and other macroeconomic data but he is also interested in understanding some of the observed behavioral characteristics of traders. This includes strategies such as technical analysis and portfolio optimization.

It sounds like an earful for most of us, especially considering his many publications with titles such as "Heterogeneous Gain Learning and Long Swings in Asset Prices" and "Chaos and Nonlinear Forecastability in Economics and Finance."

We've heard the phrase "publish or perish" in the university world and with tongue planted firmly in cheek these impressive titles are well above my pay grade. But then consider a few of LeBaron's other publications: "Wealth Dynamics and a Bias Toward Momentum Trading" and "Foreign Exchange Market Trading Volume and Federal Reserve Intervention." Those are of direct interest to most of us.

For the less informed, this writer included, the jargon masks the value in the research.

Blake LeBaron was born in Boston so Brandeis is a coming home of sorts for him. But before that, he was a computer science and engineering major at Rensselaer Polytechnic Institute. He developed his interest in economics there and given his chosen fields of study he knew it was going to be from a data driven, computational approach.

His graduate work at the University of Chicago, where he earned his PhD, was focused on non-linear aspects of finance and his thesis was on nonlinear dynamic chaos, tested on stock returns. What was most interesting to him was finding the deeper meaning in the many the wiggles we see every day in the stock market. What he found was that they are not really as random as they seem. And chaos is not just the absence of identifiable trends but something that hides that meaning.

This led to direct testing of technical analysis in the 1990s.

Today, he is juggling several investigations. One is on minimum variance portfolios and how they are related to trend following. Another compares and contrasts the carry trade with trend following in the foreign exchange markets. And a third is trying to understand how trend following strategies come together to become correlated, and therefore a common factor. Quoting, "This is the 'when alpha becomes beta' dynamic that many people talk about."

I'll give you a moment to let all that sink in.

LeBaron sees changes in the investment world, especially since the financial crisis of 2008. Persistently low interest rates, high frequency trading and exchange-traded funds are making their mark. More significantly, they have changed the overall body of market data over time. That is important to note when attempting to explain market movements because the data a decade ago was simpler and trader intentions were more easily determined. Today, one can express a bullish or bearish opinion with complex strategies including multiple instruments.

He also suspects that investors and traders themselves are changing. Whether it is the rise of passive or semi-passive investing through ETFs or lingering shock over two bear markets in just a few years, something is different. But as all of us in the technical analysis world believe, so, too, does LeBaron believe that that technical analysis can still smoke out market changes early.

He says that students at Brandeis have a great interest in the field. While he is not teaching a direct technical analysis course this semester, he reports that there are enthusiastic students with dual interest in behavioral finance. The students have even formed the Brandeis Technical Trader’s Society to educate members on the subject and on related topics.

From his office located in the middle of the woods off to the side of the Brandeis campus, Blake LeBaron is indeed fostering interest by students in technical analysis. He is also proving that technical analysis is a viable strategy for not only understanding how markets evolve but in putting strategies to work in the real world today.

American Worker

noreply@blogger.com (Michael Kahn) — Wed, 23 Jul 2014 16:32:00 +0000

I really don't utilize the blog much anymore as all I seem to have time to do is tweet. And there is precious little time for that since I write, write, write for a living. Somebody tell me how to get paid on Twitter :-).

But something happened today that needed more than 140 characters to express. I was working this morning in my home office and the doorbell rang. A delivery? Solicitor? I don't think I had any maintenance work scheduled for today.

It was a guy (ethnicity irrelevant). Last year, he saw that my roof was covered in living schmutz (moss or algae or something green) and offered to powerwash it for a good price. I took him up on it and he did a really good job. I would use him for other work around that house if something came up.

He said his cell phone number changed and as any good businessman would do, he notified his customers. But since all he had was in-person communication, there he was at the door. He also asked for more work, which, unfortunately for him, I did not need.

So here is a guy looking for business and working hard. He was polite, confident and willing to deal.

My guess is he does not live in a $2 million dollar house on the water but he is indeed an example of what people in this country should strive to emulate. I took his new number and will keep it for the next time I need him.