Bull bear and what really matters

Lots of hoopla around the "longest bull market ever" this week. But it requires some fuzzy math around the -19% drops that happened in 1997, 1998 and 2011. See this tweet for the details. 

Other usually smart people have made the argument to start counting from the recovery. Um, right. So NDX didn't have a bull market after 2000 until late 2016? What about the ~300+% rally off the 2009 low?

There are plenty of other incidences like this: Nikkei rally from 2012, Shanghai Comp from 2014, EEM from 2016, etc. Plenty of money to made on those three rallies, so saying the bull "doesn't count" because it isn't above a prior high made years or decades ago doesn't work if you are about making money. 

What really matters is whether you should have allocation to an asset class. Let's think about it the other way, when you shouldn't have exposure to an asset class.

Weekly close below YP* (*fractional closes are judgment calls; clear rejection is a better signal)
Weekly close under W50MA
W50MA is falling

Paying attention to these three conditions will get you out of the asset classes that are really in trouble. Here are a few examples this year. 

People who want to do a little more fine turning can include HPs as well.

EWZ clear rejection of YP (and HP), below W50; at the time W50 was probably nearly flat. First long term sell / avoid signal since recovery above YP in 2016. 

GLD first below W50 and HP, and then soon after broke YP and went a lot lower after that. 

26 3 GLD.png

Gold miners GDX have been more significantly bearish for most of the year, and had more damage on the drop.

Remember to use total return technicals on any higher yielding asset. Here's TLT from stockcharts.com, showing a longer term avoid in January, several holds of YS1, and a recent recovery of OK to allocate status (above YP, above 50MA, yet 50MA is still falling somewhat).

INDU RSI peaks

This post is a follow up to the analysis of quarterly chart RSI peaks from a few weeks ago. Today I'm looking at the monthly version.

The chart below goes back to 1915. Yes I know it is hard to see the price. I'll zoom into the specific incidences soon enough. The point is that RSI is in historically rare territory and we want to examine what has happened in the past when it has been up at these levels. 


14 40 INDU M.png

The first of these was a momentum high that was enough to pause the market for several months. The index went fractionally above but did not close higher; and a -16% drop to near support followed. After that, parabolic move began.

There was a cluster of months in 1928 when the monthly RSI was at today's level or higher; 3 months powered higher, then a 5 month sideways pullback, before a zoom to the final top. There was a -13% decline before the real trouble began. I think something similar 'should' be the case today. There was some divergence on the final high via Bollinger bands but RSI was not glaring and the decline was rather sudden, crashing -49% in just 3 months. 

Note the later highs in 1936 reached 80 but not 82+ of today. 

14 41 INDU M.png

Similar to 1925, the first high was not 'it' but a few months later a bit higher high in price with notably lower high in RSI was followed by a -25% drop over 6 months that then had to stabilize for more than 2.5 years before another rally took off. 

14 42 INDU M.png

1955 & 1959
This was the nicest RSI peaks. 1955 went steadily higher for another year before putting in a clear RSI divergence high shown at the slanted red arrows. 

1959 had a high retest before a drop of -17% into 1960.

Note the high that really mattered in 1966 happened with much lower RSI. 

14 44 INDU M.png

Like the late 20s, 1986 had a series of months above current RSI level but most of the gains were in before a sideways period & pullback, then another massive trust to the top. That red bar in 9/1986 was a -10% pullback, something we have not seen in 20 months!

1987 really did come out of the blue and while indexes faded back inside the BB I would not have guessed that a single 1 day drop of -20% was on the way. 

14 45 INDU M.png

This was an amazing move as the first RSI above 82 was just 1 year into the run! While I doubt we are in the same scenario i could be wrong. There was a lengthy topping process with all kinds of crystal clear divergence on the 2000 top. But now that everyone is looking for a top like this it may not play out in the same way.

14 46 INDU M.png

What is the next move? While this could go higher by a few or several bars, the more likely move according to history is a slowing of the pace, some pullback, then a higher high or at least a high test with RSI divergence. No divergence means no worry and no premature top picking just yet, even though i do think YR2 is the place for some pause this quarter. 

The only thing that bothers me with this idea is that now everyone is looking for a topping process like 2000 or 2007. Who knows, the market may be kind enough to give us a year of stall before a truly painful drop, but at the same time, given algos that are now in charge, we may see something rather sudden at some point down the line. 

The point with the two red horizontal lines is that the post election move was not really about Trump but the blast off above the 2015 highs which had stalled the market for quite some time and had started to look like resistance. From that breakout a massive one way move has followed. 

INDU RSI peaks

In this post I am going to explore RSI peaks on the quarterly charts for INDU, or Dow Industrials. TradingView data goes back to 1914 with RSIs kicking in 1918 on the quarterly chart. Red line is drawn at the current level.

Both 1929 and 1987 tops were followed by violent drops that came rather suddenly, with little warning or time. However, both moves had rallied much more excessively than today.

1954 RSI peak didn't have a high that really mattered until 1961, and even that after a drop was followed by another rally to higher highs in 1965. Similarly, the 1999 top gave plenty of warnings through RSI divergence and a nice long period to see distribution to get out.

Sudden top and sharp drop, or gradual slowdown in momentum and time before rolling over? So far we don't have the excesses of 1929 or 1987 in RSI terms, nor do we have any slowdown or divergence in RSI. We only have four examples but I think the conclusion is to remain bullish until we see more excess (RSI 85+) or RSI slowdown & divergence. 

Quarterly RSI values have exceeded the current level in:


3 out of 4 of these are rather glaring tops at the end, so let's explore them all in more detail. 

This amazing run accelerated with the move above the 1925-26 sideways period in 1927. From 1927 Q3, 7 of 9 bars closed outside the Bollinger Band (BB) before the massive drop. RSI reached a peak of 91 on the top. 

The current environment while impressive is nowhere near the excesses of 1927-29. But let's file that for other indexes - Q chart RSI 90 is a potential sell.

That said when 1929 came apart it was in a massive way - if i see a candle like 1929 Q3, i will be OUT and probably short. 

30 31 INDU Q 1927.png

This is a lot more comforting because even though the RSI peak was 1956 Q1 that was just the first in a series of higher highs. There was a sideways period and pullback to 1957 Q4, anther rally to 1959 and 1961 highs, and sharper drop to 1962 lows, then another strong rally to 1965-66 highs. These were the highs that mattered as ~15 years of sideways followed. 

If only the current environment would play out like this... we can sleep comfortably until we see a noticeable divergence top, ideally both on RSIs and Bollinger bands such as 1961 Q4 with RSI merely 71 and the highs all inside the BB compared to prior two peaks. These are highlighted by the red arrows on price and RSI in the chart below.

But it is not inconceivable that the current move could end like 1962 - a sudden drop out of the blue. 

30 34 INDU 1956.png

The power move really began in 1985 Q2, with the jump above the prior 1983 highs, but RSI was still only 68 then. From 1985 Q4 6 bars out of 8 closed outside the Q BB before the massive drop.

The worrisome point about this chart is no warning like 1929 or 1961; out of the blue, higher highs in RSI, a mild wick but nothing that screamed sell.

30 35 INDU Q 1986.png

Q chart RSI was an amazingly above 90 from 1996 Q2 to 1998 Q2, before a sudden shakeout during 1998. Also note how many quarterly bars were closing outside the BB - a run of 10 in a row from 1995 Q2 to 1997 Q3, a pause, then one more in 1998 Q1.

I like the 2000 top, and probably everyone does. Crystal clear divergence. A nice long time to get out. Plenty of warnings and time. 


30 36 INDU 2017.png

Various views of $BABA

Alibaba has been an amazing stock in 2017.  I was thinking about China tech in December 2016 and though one part of the reasoning was not correct, the conclusion was: "maybe China tech will takeover as a sector-like leader."

Anyway, I thought it would be helpful in conjunction with the last post and also while thinking about exit system (GLD this week) to consider a few views of this chart.

Breakout above monthly close high 4/2017. At the time I would have thought that fairly late. 4 consecutive bars outside the monthly BB from 5/2017 on and now working on #5. 

RSI is literally off the chart and I had to adjust the view just to see it up there. OK maybe some minor divergence but not really any of the threatening sort. If this dropped into 60-70 i'll bet smart money would be scooping that up.

16 101 BABA W.png

Above all pivots from 1/10 on; 8/11 came back to close above. Daily MACD turned up early in the year and hasn't turned negative since! Only 2 days below the D20MA since 3/8.

16 102 BABA D.png

Even the strongest trend will have resistance level rejections from time to time. These are Y and H resistance only in red, with selling days from these levels or near tags marked in arrows. 

This idea even more clearly shown by KWEB, which is up a very respectable 66% YTD. Selling at these levels without getting back in would have cost additional gains!

Back to BABA and the moving averages only without price - 10 in aqua, 20 orange, 50 purple, 100 thin black, 200 thick black, and 400 thick brown. It is that kind of slope, especially on D20 and D50, that gets benefit of doubt. 

Pivotal Momentum

Some main principles
Usually best to focus on what has most pivotal momentum; ie, above all pivots (short term trading aside, this means, yearly, half-year, quarterly and monthly levels).
Enter or hold longs when asset classes hold or recover pivots.
Long term pivots (yearly and half-year) more powerful; medium term pivots quarterly and monthly next; then short term pivots weekly and daily - use appropriate timeframe for type of trader and trade.
Assess risk exposure through analysis of key benchmark index pivot status versus safe havens.
Majority of positions 'should be' above all pivots when markets permit; less active approach would focus on yearly, half-year and quarterly pivots only (ie allowing some moves below monthly pivots).
Can vary risk exposure with leverage to go extra long, or be less than fully long, or adding safe havens, or in some cases, shorting.
Risk asset classes that hold pivots as others break are often (not always) the leaders on the next move up; or to put it another way, risk assets that recover pivots first have more pivotal momentum and are often the next leaders. 

Additional tips on entries: better with some moving averages (10, 20, 50, 100, 200, 400) with rising slope on your side; also either MACD (i've tweaked settings) turning positive or an RSI entry (full discussion of these ideas a bit too much for this post).

Additional tips on exits (exits trickier than entries): above all pivots is always candidate for hold. If long term & medium term level rejection, and some other technical concern on higher timeframe chart (upper Bollinger band or overshoot, RSI divergence), then out. If all moving averages have rising slope in a real power move, then often can give trend benefit of doubt.

Best days to position are when multiple key indexes or multiple safe havens say the same thing. I also factor in valuation, sentiment and timing as additional factors.

Pure counter-trend setups (ie buying support levels, below all pivots; shorting resistance levels, above all pivots) are rare; energy spent focusing on these will often distract from better trend moves. Similarly, buying something that is below yearly, half-year and quarterly pivot yet has recovered a monthly pivot will work occasionally - but usually better to focus on owning what is above all pivots instead. 

With this in mind, what risk assets held up best in August and were first choices for buys after 8/22?

Above all pivots throughout August

Slight breaks of AugP (above Q3P, 2HP and YP) then quick recoveries
SHComp - 1 day break
SMH - 1 day break 8/8, then hold from there
EEM - 2 day break
DIA - 2 day slight break 8/18-19, but under SepP 9/5-8
QQQ - 3 day break 8/17-21, 1 day break 8/10

Others that were a bit weaker
ACWI - benchmark global index, not really traded) 5 days under AugPs and all above SepP
INDA - 7 days under AugP, all above SepP
SPY - 9 days under AugP, all above SepP
VTI - 11 days under AugP, all above SepP
XLF - 13 days under AugP, Q3P and 2hP break, still under SepP
IWM - below Q3P and 2HP 15 days

Now turning to safe havens for clues on risk exposure, hedging, or trades in their own right
VIX above 2HP 8/10-14 and 8/17-21; below all pivots 8/22 on
XIV below monthly pivots 8/10-9/8
GLD - above all pivots 7/26
GDX - above all pivots 2nd time 8/15
TLT - held 2HP 7/28 on, held Q3P 8/1 on, above all pivots 8/23-9/12
HYG - below monthly pivot 8/7-30, then again 9/6-11



This isn't qualitative enough for today's crowd but consider these charts:

5/2015 H to 8/2015 L
Projected from 11/2015 H
Gave 1850 as a target - somewhat exceeded by price, but held on weekly close. 

Now I am doing the same thing from the 2/2016 L to 8/2016H, projected from the 11/2016L. This gave 2468 as a target - slightly exceeded by 2 weeks but still potentially in play. 

Emerging markets

Nothing like doubling the gain on SPY over the first half to get some attention. 

Jeffrey Gundlach has been totally on top of this idea for quite some time. At a conference earlier this year, his idea for one trade was a pair with SPY short and EEM long. This doesn't imply bearishness for SPY; it implies greater bullishness and upside potential for EEM. He has recommended higher weightings of emerging market stocks in portfolios well before this as well.

The chief strategist at Oppenheimer is saying this move could have a long way to go. I completely agree. Emerging markets are very under-owned in portfolios despite China and India being responsible for so much more global GDP growth than USA.

But as you know by now I like to tell the story with charts. Here is a nifty EEM vs SPY comparison. These are all ratio charts, which show EEM vs SPY in one % based measure. 

From 2004
EEM above SPY by 140% at the peak of China's bubble - just to let you know that yes these stocks can outperform significantly. 

From 2010
This decade pretty bad for EEM until recently. Note - this is not saying EEM was down by 50% as an asset class. It is saying EEM lagged SPY by -50%. 

From 2013
Moving to a weekly chart now. USA QE pulverized EEM compared to SPY, and then in 2015 oil crashed. 

From 2014
Less bad but still down. 

16 4 EEM-SPY.png

From 2015
$USD strength and oil crash worked against EEMs. Still weaker than SPY by -8%.

From 2016
Wow! +15% from beginning of 2016 which included a dive back to zero after the election. This year has made it all back! So really we're talking 6 months into an outperformance of a trend that had been in play since 2007. 

The most interesting thing to me is the current top 10 holdings of EEM. Korean and China tech! Oil weakness won't matter as much. Since everyone already owns Google, Apple, Facebook etc, and comparatively few own Tencent, Alibaba, etc, I am expecting to see pivotal strength for EEM for a considerable period ahead. 

Best buys from 4/20

Following up on this post, showing how selection of vehicle from 4/20 area buys has made a huge difference in returns.

China tech KWEB leading with over 10% gain from 4/20 open.
SMH & EEM also healthy gains above 5%.
QQQ well above other USA mains at 4.5%.
INDA still doing OK at 3.5%, also above other USA mains.

But relative losers were:
XLF, only 1% compared to SPY 1.5%
IWM, about flat.
XLE, a true negative, down -1%.

So portfolio would have had a huge boost catching the winners here - right idea, wrong execution. What would have been better?

KWEB already had big run up but actually was above all pivots on the 4/18 low - and has turned out the relative winner. Right idea, did enter one, but more much better.

QQQ well above Q2P, only slight break of MayP and back above all pivots as of 4/20.

EEM well above Q2P, only 1 day break of AprP and recovery 4/20.

SMH broke Q2P slightly, recovered all pivots on 4/20.

INDA above all pivots from 1/24, with just very slight fractional break of 5/8.

SPY and IWM also reclaimed all pivots 4/20 (IWM) and 4/24 (SPY), but haven't done much since.

Weekly chart MAs would have settled it - 
KWEB & EEM held weekly 10MAs
QQQ slight break and fast recovery of weekly 10MA
SMH near test of sharply rising weekly 20
SPY also near test of rising 20MA
IWM and XLF had already broken weekly 20MAs, and were down near lower weekly BBs

Anyway main point is that I should have gone with charts that had stronger weekly chart structure instead of thinking Trump trade may return. That was opinion and not really in other charts despite the pivot status of IWM on 4/20. 






Best moves from April low

I was right to be buying 4/20 and adding leverage 4/24, but choice of vehicle made a huge difference in returns.

Here is a 2 hour chart of the USA mains with SPY as the bar chart, and the other 4 in line charts with QQQ obviously leading in red at over double the gain of SPY; DIA in orange about the same; IWM in paler orange only 1% up, half the gain of SPY and just a quarter of QQQ; and VTI tracking SPY quite closely. 

Taking off VTI and DIA for clarity, adding other hot trades - SMH now in orange above the red QQQ; EEM in light green currently matching QQQ; and KWEB soaring above on top in green with 9% gain vs QQQ 4.5%.

12 2 SPY comp.png

OK, taking those off and keeping SPY as the bars, QQQ above in red, IWM in orange under SPY - XLF so far is above the same as SPY in performance, but XLE is actually down 1%. 

12 3 SPY comp.png

So, it was a smart move to finally officially recommend KWEB (blog post on this one 2016 Q4) but not so smart to ignore QQQ and SMH in favor of IWM. To be fair, IWM did have a fast start and led up to 4/26. So perhaps the real error was in the exit, but still, when I have more to say on the entry choice perhaps there will be another post.  

How to beat the market

When I was a strategist at a small fund in 2013 with top of the world returns (one of two funds 110% gain, #3 i believe), a lot the performance came from just two stocks. They were immense winners, and the head trader had the experience and fortitude to hold them the whole way - on leverage. 

Modern portfolio theory might dismiss this as too risky and not diversified enough, but actually the latest research shows - the way to beat the market is heavy concentration in what is going up. It sounds obvious, and to some extent it is, but if it was easy everyone would be doing it already right?

Here's the piece on Bloomberg. "The implication, like it or not, is that a concentration of outsize gains in a minority of index members is tantamount to a death sentence for anyone who gets paid for beating a benchmark." 

Or to put it another way - most gains in the index are the results of just a few stocks, so anyone owning more than those few stocks in more equal weightings lags the benchmark. 

The solution is to relentlessly focus and concentrate upon what is performing the best, regardless of any other factor. Other "factor" here means P/E, value, market cap, revenues, margins, growth, story, blah blah blah etc etc etc. The only thing that matters is what is going UP. Only the study of price action gives any strategy in this regard. 

Key point, by up I don't just momentum, or up by percentage terms for the past 12 months, as the academics like to define it. That only tells you went up last year. Give me a break.

If The Pivotal Perspective can work this well across major index ETFs, how would it do across selecting the top 3 on Dow30, top 50 in SPX, top 10 NDX, or similar idea? Actually I never like rigid rules like this - sometimes it could be appropriate to own 10 Dow stocks, and sometimes 0 or 1. But still the point remains - the very best strategy would be to own the best stocks in the best index, on leverage when conditions support - with hedging on index futures when appropriate. 

In this regard, I have only presented the bare outlines of what is possible here. 


On 2017 pivots and strategy into the new year

Big picture first - USA main indexes will open above 2017 yearly pivots. Safe havens TLT and GLD likely to open below yearly pivots. This is bullish for risk assets and points to YR1s (and possibly higher) for stock indexes and YS1s (and possibly lower) for safe havens. 

SPX YP 2116, YR1 2423
NDX YP 4597, YR1 5306
INDU YP 18456, YR1 21463
RUT YP 1235, YR1 1527

Also, due to the 2016 low in first half, the 2017 1H pivots will be decently higher than the YPs. For example SPX 1HP is on track to be 2207. This will also be the Q1P because the low for the 2nd half was also in Q4. This will be solid support. 1HR1 & Q1R1 will be 2332, a nice and very attainable target. 

Scenarios from here:

Most bullish - USA indexes jump above yearly 2016 levels, continue melt up without any touch of 2017 Q1 pivots (though JanP tests could provide buying chances). Strategy would be out of hedges, hold all long positions and look to add leverage back in. 

Bullish - USA indexes continue fade from current yearly resistance, test new JanPs and head off up. In this case current positioning is fine and we can just wait to cover remaining hedges and add longs. 

Mixed - A test of Q1P now at 2207 implies a 4.5% correction on SPX. This is about the same as the pre-election drop from August highs to November lows. Seems a bit much. But if this happens, we might want to be a bit less long. 

Bearish - Any sharp selling into year end or early January that changes basic pivot status of USA indexes above pivots and safe havens below. At this point seems unlikely. 

So what will it be? Will big institutions re-balance in the new year, thus giving a bounce to bonds and pullback for stocks? Or will promise of tax cuts and FOMC rate hikes lead to re-allocations supportive of risk assets? Will we see any rotations into what has been most beaten up? At this point, both India and China look terrible! Brazil and gold both looked terrible at the end of 2016 too. While I am aware of all these questions, my simple solution is The Pivotal Perspective. We are long the leaders above pivots, and avoid, hedge or short what is below pivots. But we are also very keen to watch the moves that start near the beginnings of new quarters, as there often is a pivot setup and a definitive new move

Thoughts on leaders

What are market leaders? There are several ways to define this concept. 

It could refer to pure percentage return over a certain period: day, week, month, quarter, year.

It could refer to position relative to previous highs and lows. 

Or it could refer to position relative to pivots.

Of course when I refer to leaders I am usually referring to #3 involving pivots, but let's think about things a bit. 

EEM was a percentage leader over USA indexes for much of 2016 YTD. From 12/31 to 9/30 (Q3 end), EEM was up 16% vs SPY 6%. Since then however, EEM has dropped and SPY rallied, so current YTD performance figures are EEM +9.5% vs SPY 8.5%. EEM still ahead, but severely under-performing from 11/9 on.

If we think about relative highs and lows, though, EEM was nowhere near a leader when we look at longer term charts. Its all time high was 2007, and even still well under its 2015 high. Often what has been down the most will have a large percentage move up off lows, yet still can be challenging to buy and hold long term.

Another example is NDX. From 2013, SPX had made new all time highs yet NDX had not; but NDX has been the better thing to own among main USA indexes 2011-15 in terms of percentage return. 

So I find percentage return over a certain period and status of new highs both somewhat lacking. What I usually mean by "leader" is from The Pivotal Perspective - an asset class that holds pivots when others break and recovers pivots before others, or clears resistance before others. This may not mean leading by percent and it may not have direct relation to highs and lows. We could also apply this concept to moving averages on various time-frames as well. 

A few examples that worked well this year:

TLT, early January. When stock index pivots were breaking everywhere I looked, it was not hard to find something above pivots - TLT. As of 1/6, TLT had jumped above 1HP, Q1P and JanP where almost every stock index had broken multiple pivots; in fact, as of 1/6 nearly everything was below all pivots. On 1/7 NDX caved below its YP too, further confirming risk off and safe havens on. TLT was one of the best things to own through July 2016, 6 months from the initial entry. 

GLD, late January. Similar logic as TLT. As stock indexes were below pivots or near major support, GLD was above 1HP, Q1P and JanP for the 2nd time as of 1/25. 

INDU, 2/11 and 6/27. In both cases, INDU held yearly support as others, even SPX and NDX, broke slightly. This is why I emphasized the Dow on the first buys, as well as global stocks which had led on recovering monthly pivots too like EWZ, RSX and EEM.

EWZ, February and March (and later too). EWZ was mostly above its February pivot, moving below only 2 trading days that month, when nearly every other index was below on FebS1s. It was one of the first to recover a quarterly pivot on 3/3 as well.

SMH / SOXX. Along with the Dow, when looking for strength to buy, I noticed that both semi-conductor ETFs recovered a long term pivot before anything else I saw on 3/1. This was the first time I noticed leadership on SMH / SOXX, which has led at other points as well. 

XLF. As all USA mains were below Q4Ps in October, this caught attention by remaining above. 

All these were noted and caught in real time on the blog and/or SPY daily comments. But a couple others were tougher to catch and only possible with a more nuanced, synthetic approach. 

QQQ from July. QQQ broke its YP on 6/27 and still below Q2P on 6/28; and was even under D200 until 6/30+. So it did not hold when others did, and did not recover pivots sooner than others. Yet from there it turned into the next USA main index leader. How to catch that? Safe havens were toppy but only started coming down after 7/6-8. This is somewhat hindsight exercise, but the tell was two small down bars on the QQQ quarterly chart. This meant tech had, over 6 months, made very mild pullback while maintaining long term uptrends. The big institutional players saw that and piled in, especially as the growth theme returned to markets and safe havens continued lower. 

IWM from 11/9 on. IWM went from YR1 all the way down to YP and even broke its YP 11/2-4. Yet it raced back and was first conclusively above YR1 on 11/11, with DIA fractionally above YR1 that day as well. SPY followed above YR1 on 11/15. Yet SPY hadn't come close to any long term weakness, so how to shift over to IWM as a choice for longs from 11/9 on? Both SPY and IWM recovered all pivots on 11/9 but selecting IWM has made huge difference in gains. IWM did make new 2016 highs before SPY; SPY new yearly high on 11/11 (same day as pivot move), with SPY not catching up in that regard until 11/21. 

In addition to anticipated policies of Trump, the other tell here is $USD which has also made a huge rally from 11/9 on. From the first day that $DXY closed above 100 on 11/15, IWM is up a further 3.4% vs SPY paltry 1.4% as I type. Factoring in DXY strength from October on could have meant less emphasis on global stocks and globally influenced indexes. This is not the first time that IWM has led USA with a stronger USD. 

But if you didn't jump in immediately, then IWM was clearly above YR1, and making new 2016 highs, and leading by % gains after election (along with financials) from 11/11 and the better choice for any later longs.

Bottom line here is we are search of next leaders. These are easier to buy and hold and will usually give the best gains until there is a change in leadership. Often what holds up best in market drop is the next leader, like XLF recently. Yet sometimes a new quarter or new macro condition can mean new leadership, like IWM. Ultimately we want to do this:

Always consider what is holding pivots or recovering pivots first
Keep some eye on percentage return from a certain period
Keep some eye on relative highs and lows
Consider longer term charts, monthy and quarterly, for the best trends
Consider big picture macro factors, such as interest rates, $USD, and larger themes of growth vs value, developed vs emerging, commodity impact, etc. 





DB vs XLF, 1 month in

About 1 month ago a work colleague asked whether I thought DB was a good buy, and answered her with this post. 

At the time I said that I liked financials in a rising rate environment but I would go with the market leader XLF instead of DB. What has played out since then?

Total return, 10/27 close to 11/23 close
DB: 14.49 to 15.79, +9.0%
XLF: 19.86 to 22.38, +12.7%

DB 10/28 high to 11/4 low, 14.74 to 13.32, -9.6%; if entered 10/27 close, then still -8.1% on capital invested. Yikes!

XLF 10/27 high to 11/4 low, 19.95 to 19.40, -2.8%; if measuring from 10/27 close, then -2.3%.

More gain with a lot less pain on XLF! 

The smaller drop is hugely important psychologically speaking if you have a position that matters in size or leveraged ie hedge fund trading. For example, considering interest rates, one could make a justification to have financials be extreme overweight in a portfolio, even 50% in an individually managed IRA at this point. Why not? From 2011-15 all you really needed to own was biotech and tech. Thus far from the election, all you need is financials and USA small caps. But if you enter positions that drop -9% in a few days, it is extremely difficult to go big.

There are many ways to win in this game (and even more ways to lose), but the way I saw it happen at a fund that ran ~75MM and produced +100% return in one of two funds in 2013 was to go big on leaders and hold. This doesn't mean piling on after that fact - which is a recipe for disaster. It means catching the leaders in an early stage and playing that move as large as one can take. Then one can adjust the portfolio though rough patches in the futures market. If one has read my posts for a while, you will see this view underlying most of the strategy recommendations. Buy what is going up, instead of trying to buy what has been down the most or shorting tops. When the market is making a real long term trend change, like bonds and gold in January 2016, or Brazil EWZ in February 2016, pivots will make that very obvious. 


New site policy

I'm going to start mentioning shorts more often, and adopt more of a mostly long yet some short strategy. 

Up to this point, I have minimized actual short recommendations because:

1. It is usually easier to buy what is going up, because money is seeking someplace to go. For example, TLT and GLD longs were easier in January compared to shorting the market, and ultimately had more gains as well. 

2. Tops tend to stretch out - which is an advantage on the long side, not the short side. Though to be fair, when it happens the down move is much faster.

3. If you have cash on sideline on a drop, then you can watch to buy the leaders on any signal or speculative signal. This worked great on financials in Q4. 

That said, due to the election and other factors I believe we have entered years of significant volatility. I'm not just saying that due to Trump - consider, I have already laid out some big picture thoughts in August that are playing out rather nicely. 

I also have already posted an ideal bull market high on SPX in the 2250-2500 range from 2017 Q2 to 2018 Q2 here. Keep in mind that bearish version targets have already been met. 

These factors are now combining with the gang of clowns that is now leading the most powerful nation on the planet. So even if there is a Trump honeymoon - which could last one week or two years, who knows - I think markets will ultimately go the way of the Trump Plaza (and Shuttle, Steaks, etc etc etc). In that kind of environment lots of things will be going down. I'll still follow rules for entries as discussed here

For shorts we ideally want to see:

Pivot resistance - Q, H, Y (monthly while above three others not enough)
MAs with falling slope
MACD negative, or RSI setup

To be clear:

I'm not going to try to start picking tops ie shorting at resistance levels. Even though someone less familiar with my perspective may think this would be rather obvious, I have found that shorting at resistance (R1, R2, R3 etc) or buying support (S1, S2, S3 etc) is not the best way to use pivots. We want pivots on our side, regardless of trend. Long above, some shorts if below.

Winners and losers

Here at The Pivotal Perspective we are trying to catch the winners, hold those, then take some gains and rotate into other winners. This can be long term, medium term or short term depending on your style and role in the market. 

We avoid the losers, or hedge, or short. 

A lot has changed this week. Here's a rundown of the things I track. 

DIA - above all pivots, above YR1
IWM - above all pivots, above YR1
SOXX/SMH - continuing strong above all pivots, above YR1, above 2HR2

Strong yet watching
SPY - above all pivots, testing YR1
VTI - above all pivots, testing YR1
XLF - above all pivots, testing YR1
DXY - above all pivots, testing Q4R2
IYF - above all pivots, approaching YR1*

Recently strong
Shanghai Comp - above 2HP, Q4P and NovP, but under YP due to big rally and plunge in 2015

Middling or testing
QQQ - testing Q4P, below NovP
NYA - testing Q4P, slightly above
ACWI - testing Q4P, slightly below
EWZ - testing Q4P, slightly below; also note, recent 2HR1 rejection, testing YR1
RSX - testing Q4P, slightly below; also note, recent YR1 rejection

GLD - 2HP break! (still above YP, but below Q4P and NovP)
GDX - 2HP break! (still above YP, below Q4P & NovP)
CL1 - YP break! (still above 2HP; also note USO weaker below all pivots 11/1)
EFA - Below YP all year, below Q4P & NovP since 11/1 (still above 2HP)
FXI - 2nd break of Q4P 11/9 (still above 2HP)
EEM - YP break! (still above 2HP though)
INDA - YP resistance, 2HP break, below all pivots!
TLT - YP break, below all pivots!

* XLF/IYF both financial index ETFs but slightly different in structure



BO to DT = ?

Let's think about what moves we have seen from 11/9 thus far:

Interest rates have spiked, bond ETFs (TLT & others) correspondingly tanked, with both moves helping generate big lifts for financials.

Industrials (DIA) led up on the main USA indexes.

Biotechs had a huge relief rally too, with DT not having same fervor to control costs via regulations that H does. 

Yet Tech via QQQ has started to lead down. Maybe this doesn't last forever as Tech is still vital component of economy but this is the post-election move thus far. Just compare the bars on charts posted yesterday in the daily comment with DIA soaring to a new high and QQQ dropping all the way back down to nearly test pre-election lows!

Global stocks are doing about face after months of decent performance. This was an easy spot because if you had any EEM longs coming into 11/9 it was down while other things were up! Several USA indexes held or recovered pivots, but EEM did not and closed below the Q4P. That was enough for me in this environment to cut long and reverse short. I pointed this out in the SPY daily comment and since then EEM has gotten hit hard. Other global stocks are dropping too: FXI China, 2016 leader EWZ Brazil massive decline yesterday, India ETFs weaks, and even RSX getting hit. 

Given likely policies of PEOTUS, I think these trends are more than 2 day affairs.

Given the bling bling predilections of the administration to be, I'll be watching GLD carefully too. It has already held up quite better than TLT on the decline. Let's see what happens. 


On entries

What have been the best entries this year?

TLT, 1/5, haha. Actually The Pivotal Perspective started talking about that on 1/6.
GLD 1/14, but at least there were very bullish posts from later January. 
Stocks indexes, 2/11. Caught that near enough on 2/12, but only as a speculative buy and didn't shift more until recovery of at least 1 pivot later in February. 
Stock indexes 6/27-7/6 (leaving aside March-May for the sake of brevity)

OK, just because we have a level doesn't necessarily mean an entry. Often the best entries are:

Pivot level (hold or change of status)
MA (10, 20, 50, 100, 200, 400, or some combination) with some slope on your side
MACD or RSI contributing

If we really wanted to be thorough, we could want some other technical event on weekly, monthly or quarterly charts as well but I will save this for another day. Also keep in mind my basic outlook - definitive days to take action are when multiple indexes are saying the same thing, like 10/28 "trouble alert" combination of USA main index Q4P pivots and VIX. Lastly, if you are trying to spend most of your capital picking off lows to buy and highs to short - pivots are probably the best way to try but you will go broke or crazy or both. Basically we want to be in the best trends. We have better chances of catching those with the 3 entry criteria. So let's return to the list above with chart examples.

TLT buy chances 1/6-12. This had:
Pivot recovery above 1HP, Q1P and JanP from 1/6 on with a well defined risk cluster.
Above 400MA, 200MA, 100MA, 50MA, 20MA, 10MA - all on the same day 1/6! There was 1 close just below 200MA on 1/11 but small red bar not threatening and still above 100MA and 20MA. Some of these had positive slope and some negative. 
MACD (blue line) crossed positive 1/7. These don't always work and sometimes sideways chop, but often entries better with a recent move to positive (or negative for shorts).

1/22+ add had: 
Test and clear hold of YP
Nice rising 10MA
RSI not yet overbought

Now let's check GLD. 1/25 had:

2nd clear move above 1HP, Q1P and already had held JanP on the low
lift above rising 10MA, rising 20MA, slight clear of 100MA on 1/25 and definitive move 1/26
MACD already positive, RSI not overbought
(Note that the first move above the pivot cluster earlier in January was bang into a falling 100MA and failed; often second move will be definitive.)

2/3+ add had:
Slight move above YP but not definitive; jump above D200 though
2/4-5 massive jump above YP

SPY in February:
Wait a second - what was there? On pivot only chart, not much except RSI divergence. Keep in mind this chart shows pivots only, not support or resistance levels. So that is why I recommended this as "speculative" setup as multiple indexes held / recovered YS1s with a low test and sentiment extreme. 

6/28 had:
Slight break and huge massive recovery of YP
Recovery of rising D200MA
RSI recently near extreme

7/5-6 had:
Test and hold of Q4P / JulP combo
Test and hold of 10MA, 20MA, rising 50MA
MACD turn to positive (blue line) 7/1 recent enough and about same price


With that in mind what is giving us the best entry here? 

SPY has an RSI extreme and D200 which may hold, but no pure pivots (Q4S1 could work though, if recovery).
QQQ also RSI extreme, would have to recover Q4P and D100 for better setup; until then, no buy.
DIA does not have pivot, D200 is lower and RSI not yet extreme - no buy.
IWM also RSI extreme, D200 is just below with rising slope, but needs to recover YP.
VTI is like SPY here, near Q4S1 but not on pivot. RSI extreme and rising D200; NYA which is more a confirming index than a trading vehicle needs to recover YP and better if back above D200 as well. 

All these charts are in the USA main index section so will not repost here. Just open in a new tab and check out the ETF charts in each index category. 

USA sector leader SOXX/SMH both similar in structure, just a bit under NovP and falling 50MA. Better buy if test of Q4P & D100 combo, but you certainly could be holding if bought in July or March when first mentioned on this site.

World leader EWZ also just a bit under NovP, holding rising D50. If higher needs to clear NovP. Though I mentioned area that rally likely stops last week, this also could be a long term hold above Q4P if you got in early.

XLF also a current leader, just a shade under NovP and entirely above Q4P this quarter. Not many assets in that category at this point. Needs to lift back above NovP and 50MA 20MA combo which would like turn MACD back positive; or drop lower near Q4P. 

IYF Financial ETF also decent so far with just a fractional move below Q4P, doing much better than other leaders like QQQ, EEM and FXI all of which had bigger moves under Q4P. Financials may take a hit if rates move the other way but for now holding up quite well. 

In general I don't emphasize shorting too much and try to focus on buying what is going up. But if you want to play the game of picking off highs, then the best chances are RSI extremes on multiple timeframes and pivot resistance (like TLT 7/8 or IWM 9/7 or 9/22-23), or when the trend rolls over with:

Clear pivot rejections (at least quarterly), not just monthly
MAs with falling slope
MACD turning negative

Which we basically had on all the USA mains, just the days varied per index and indicator above. 



Looks like resistance

In pivot talks and here on this site I have sometimes used the phrase "looks like" support or resistance. What does this mean? 

Sometimes a level clears but barely, and it doesn't turn out to be a good entry. For example, I pointed out a long on DXY because it seemed a bullish trend was developing but this was a mistake as 2HP did not yet have the "look of support" shown near the arrow. 

If we added a simple moving average - just one to be very clear - then we also saw a reason to pass. This is the downward sloping 200MA in black here. 

Adding in QP and monthly Ps, we see a much better entry on 10/4 when Q4P "looked like" support - with price clearly lifting from that level - which also cleared 2HP and D200 as well. Then 10/7-8 the YP also clearly "looks like" support. 

With all this in mind here is a pivots only daily chart of SPY, with RSI and tweaked MACD at the bottom. 

How many times does it "look like" pivot resistance - not breaks but acting pushing the price down. What I see is labeled with arrows.

Some of this depends on what you count as an incidence. If we are measuring by trading days then there are probably a few more arrows, like 9/28, 9/29 and 9/30 all have the SepP "looking" like resistance, but I only drew one arrow. Yet those were clustered in one window. Probably we should measure apples to apples so we would not count that as 1 incidence in a certain number of trading days. 

Now let's try to get the important moves and take out monthly levels, leaving YP, 2HPs and QPs (yearly, half-year and quarterly). It is totally normal even in a strong uptrend to see monthly S1s from time to time. This will give us the more important changes in trend. 

I am only drawing one arrow in October because that is only time I see a red bar with the pivot pushing the price down, ie, "looking like resistance." The 10/11 move I classify as "break." 

Now let's add some MAs to the picture and see if there are any times were these moves are happening with a rising or falling MA on the same move. In the chart below, 10 is aqua, 20 orange, 50 purple, 100 thin black, 200 thick black, 200 thick brown.

The January move had already dropping below several downward sloping MAs. Really trouble began on 12/31 with rejection of 2HP, drop from falling 200MA and 20MA, already under 50MA and break of 10MA all on the same day.

This also puts the March YP pause as less threatening, yes under D100MA but above a nicely rising 10MA which held as support (and if lower a rising 20MA not far below that).

Now price is already under a falling 50MA, and pushing pushed down by falling 10MA, flat 20MA and still somewhat rising 100MA. This is not as bad as January yet, but clearly worse than March. 

So if we view things this way, the move we just saw on Friday 10/14 was the second most threatening day to SPY uptrend all year, after 1/6 (or really 12/31/15 to be right). There is a similar conclusion with DIA & VTI as well. We'll see what happens. 

Above all pivots

I don't have the time to watch individual stocks and generally keep to:

USA main indexes (SPX, NDX, INDU, RUT, NYA/VTI and their ETF & futures variations)
Safe havens TLT, GLD, GDX, VIX and variations
USA sectors (semi-conductors, biotech, financials... yes there are many more)
Global stocks (ACWI, EFA also a benchmark, Shanghai, FXI, EEM, RSX, EWZ, occasional peek at EWJ / NKY and EWG / DAX)
Oil & DXY with occasional glance at other currencies

Given this is my watchlist what is above all pivots?


FXI is not on this list due to YP, but Hang Seng recently cleared that level.

If not above all pivots, then the next strongest are: above 3 Y, 2H and Q4 but below monthly (SPY, DIA, many others) OR below YP and above the others. The latter category consists of:


If markets rebound next week then the next likely to regain all pivots (in rough order it should happen) are:


XBI held up very well on September drop but currently under YP and OctP. 

Anyway there are different ways to make the same point but this tells you were the best long plays have been (and likely continue into year end) are: technology, semi-conductors (on a tear this year), financials and global stocks, especially the oil related names EWZ & RSX that were beat up last year. 


Symmetry update

Back in August I noticed an interesting symmetry pattern setting up on NDX and wrote about it here"NDX is setting up on something very similar to the upside, with 100% at 4864. Time matches on 9/5, so that would be an interesting area to watch along with AugR1 at 4857."

OK, so by now they got calendar correct on chart and actually it was 9/6. 9/7 just +1 match in time, and it stopped at SepR1 a bit shy of 100% in price. Not bad though eh?

Price chart here:

Time here:

Combined here. Ideal price and time met at 4862 on 9/6. We got 4839 on 9/7. That is just close enough!