Kilgore: Beware Technical Trap, Lower Lows
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Tomi Kilgore warns that the recent bounce may be a sucker’s rally:
“The current rally marks the fourth time since early May that the Dow Jones Industrial Average has bounced more than 5%. Previous bounces have taken the Dow above key resistance levels, and yet subsequent declines have resulted in even lower lows. Essentially, the recent pattern surrounding key technical breakdowns and breakouts suggests the Dow is nearing yet another turning point.
It is easy for bulls to fall into another technical trap, since the Dow has climbed above the 50-day simple moving average, which has acted as resistance since the Dow first fell below it in early May, and is now peeking above a downward sloping line that started at the April 26 high and connects the June 21 high. But rather than embolden bulls, the apparent breakout should actually make them skeptical, especially following a six-session rally. “
Other traps of note:
-When the Dow fell below the 200-day moving average;
-After the Dow closed above the 50-day moving average
-When the Dow hit a new low for the year.
-The break below the June 8 low of 9757 (confirming a head-and-shoulders pattern)
Kilgore wanrs that “those reacting to technical breakdowns and breakouts have been fooled many times. And keep in mind that the Dow’s last six-session winning streak ended on April 26, the day before the market correction began.”
The broad trading range, lack of volume, and short term trends that reverse have some people sitting on their hands. Its not a bad way to prevent them from doing something silly . . .
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Source:
Investors Shouldn’t Be Fooled By Another Breakout
Tomi Kilgore
DOW JONES NEWSWIRES, TAKING STOCK: Jul 13 2010
http://www.cmemarkets.com/v3/2010/07/13/dj-taking-stockinvestors-shouldnt-be-fooled-by-another-breakout/
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July 14th, 2010 at 11:58 am
It has to be if the market is a discounting mechnism into the future.
July 14th, 2010 at 11:59 am
“The broad trading range, lack of volume, and short term trends that reverse have some people sitting on their hands. Its not a bad way to prevent them from doing something silly . . .”
not sure if those are BR’s words or Kilgore’s-
but in any event-
wise advice
July 14th, 2010 at 12:00 pm
If it ain’t indented or in quotes, it is BR
July 14th, 2010 at 12:01 pm
Is this a sucker’s rally, or is this a sucker’s market??
July 14th, 2010 at 12:23 pm
This rally on extremely low volume (means the pros smell a rat and not buying it) was/is a Dead Cat Bounce after the “Death Cross” .
Last time in December 2007, right after the “Death Cross” we had a very similar 4-day “rally” on low volume before the market rolled over.
This is a well-documented response: sell the rumor (rumor of an imminent “Death Cross”), buy the news (cover after the “Death Cross” ).
P.S. Also note high volume for AA yesterday (evidence of the pros unloading into “AA beats estimates” hype, and INTC high volume today [as the smart money are selling INTC into the earnings hype])
July 14th, 2010 at 12:27 pm
It would be great to revisit all of these kinds of posts at future dates. What is the overall success rate for these types of predictions? Is it higher than 50%?
~~~
BR: Go back and look at the prior market calls and do your own analysis
Use the categories “Trading” and “Markets“
July 14th, 2010 at 12:29 pm
Ahab,
this: ““The broad trading range, lack of volume, and short term trends that reverse have some people sitting on their hands. Its not a bad way to prevent them from doing something silly . . .”
sounds of BR, though, either way, w/this: “wise advice”.. No doubt~
~~
and, from ‘old adage’-Land: “When in Doubt, Don’t.”
~~
inessence,
Good Q: ~
July 14th, 2010 at 12:45 pm
BR – it was a rhetorical question – I have, and it’s actually less than 50%.
July 14th, 2010 at 12:48 pm
Without another round of QE (“QE2″) and more stimulus, it seems to me there will be a lot of selling into strength here at some point. The question, as always, is when?
July 14th, 2010 at 1:01 pm
Thor,
BR’s “we’ve gone to all cash” warning was well timed. SP500 went from 1140 to 1040. I wonder did he get back in to catch this bounce?
I dislike the leftward lean and the writing is less fun than ZeroHedge, but its hard to shun good selection and presentation (for free).
July 14th, 2010 at 1:23 pm
Cult of Reason Says
How can you tell by the volume who is doing the buying and the selling?
How do you know the contrapositive of your statement is not the truth?
I never quite understood how any one can tell who’s bet was smart till later when the price changes?
If intell goes back to 30, who made the smart bet, the sellers or the buyers?
I mean really?
July 14th, 2010 at 1:43 pm
At some point the reality on the ground sucks us down. There’s no growth ahead, this quarters earnings are the last hurrah for the inventory rebuild/stimulus. Absent QEII or some other government intervention where do you see any “growth” coming? There’s only so many I-phones people can buy.
July 14th, 2010 at 1:54 pm
Last week the empire was burning, now the earnings are good. Rinse and Repeat. The trend will be dow down 300-400 within the next week. Where is the floor on the next drop is the question.
July 14th, 2010 at 2:02 pm
To B or (not to B) S– that is the question:
Whether ’tis nobler in the market to suffer
The slings and arrows of outrageous HFT,
Or to take arms against a sea of I Bankers?
July 14th, 2010 at 2:10 pm
@ Thor ~ You’ve claimed to have done the legwork on “these types of calls”, let’s see the homework.
Sold my TNA, back in TZA. Downtrend channel has held up well; Until it does not any longer, I will continue to harvest easy money. If the “pullback” starts showing oversold before hitting below 600 on the Russell, I will have to lean toward the market correction being over.
July 14th, 2010 at 2:15 pm
zzzzmd: “who made the smart bet, the sellers or the buyers?”
With all due respect, you (as well as other 90%+ of market participants and the media) do not understand how the markets “really” work.
You believe that for every buyer there has to be a seller (like an art auction). Right?
Yes, sometimes (often during AH trading if there are no market makers manipulating the tape) it could be the case, but most likely (99.99% probability) if you buy INTC today, you will be buying only a tiny fraction of the large blocks of sell orders sitting on the market maker’s books to be distributed to retail investors (retail that most likely will buy INTC today because of the headlines).
INTC price will be supported until these sell blocks are distributed, once sold (the distribution will take a few days), INTC will drop (there is no way INTC can maintain 67% margins in the future, in particular during “new normal”). BTW, most internet companies in 2000 were as exuberant as INTC today about their future margins and growth (we know how fast all it evaporated in the coming quarters).
I assume you know how the distribution works — constant buying and selling (but no major price move or a gradual drift lower [to encourage more "buying the dips" by retail]), but at the end of the day, they sold more than what they bought (they can hide the buying and selling, but they cannot hide the volume).
July 14th, 2010 at 2:21 pm
@ojzitro :
Can you tell me a bit more about your strategy with TNA/TZA? I’ve just completed a little research as to how they work within themselves, or how they’re managed, but I’d like for you to share a bit more if you don’t mind. If you want to do so off the record, I can provide an email address.
Forgive the dumb question, but I’m VERY intrigued.
July 14th, 2010 at 2:25 pm
@ ojzitro –
BR: Go back and look at the prior market calls and do your own analysis
Use the categories “Trading” and “Markets“
- – -
My Dig was at the track record for TA in general, not BR. If you are using TA exclusively to buy and sell stocks, they you deserve to lose all the money I’m sure you do.
~~~
BR: Yes, I understand that — I am pointing out the tools are there to validate/analyze these different calls.
Anytime I highlight a specific analysis, you can pull it up under those one of those categories. And if you want to see just the Technical Analysis calls, you can see all of those under the category: Technical Analysis
July 14th, 2010 at 2:34 pm
FOMC meeting minutes pretty much confirm they know what anybody with half a brain knows, “recovery” is over. Maybe that ding dong who wrote that WSJ op ed piece about the doom and gloomers cares to comment.
July 14th, 2010 at 2:34 pm
Cult
You are correct in That I have no Idea how the markey really works
I have owned huge positions of many stocks since the late 80′s, and constantly wean out of them, because, I am dissapointed almost as often as not (luckily)
I agree in principal in what you say in general, but as a holder of INTC for over18 yrs, I do sence a fundamental shift in the Chip market.
The last 5 years, industry, mine included(hospitals and medicine) have not replenished, or put off upgradseto our IT,PC, etc. technology. Many of our IT solutions are woefully slow, and not highly functioning. Huge resources are being spent, and while I think growth is slow, The IT spending seems to be accellerating for at least a couple of years. Why would the “smart money not want to ride this trade for several quaters, perhaps 4-5?
July 14th, 2010 at 2:38 pm
zzzzmd – my partner is in the same industry you are (clinical pharmacist for a large hospital group) and has talked about this as well, old technology, 5 to 7 year old equipment that is finally being replaced. Not a bad call!
July 14th, 2010 at 2:48 pm
Assuming there is no recovery in sight, why would any business (including hospitals and medicine) spend to upgrade their older but still functioning technology?
July 14th, 2010 at 3:00 pm
What percentage of the processor market is made up of hospital IT?
My industry is not buying new servers this year.
July 14th, 2010 at 3:01 pm
@ashpelham2 – I am using TZA and TNA to capitalize on the swings that have taken place within a downward channel in the Russell 2000. I am selling each swing after it hits the midway point of the channel. I do not recommend 3x funds EVER. They are only good day / swing trades and should never be held.
If you are in cash, you are winning, that is the best outlook right here.
Here is an example of the Nasdaq 100:
http://dshort.com/charts/Kimble/NDX-100709.gif
I am buying the appropriate fund at each point of resistance. I give my stops a higher percentage to fail, and 3x funds have bigger swings. I am also only trading 17% of my total cash, never betting the farm.
July 14th, 2010 at 3:03 pm
@ Thor ~ I don’t care where you dig was pointed, I asked for some homework. Instead you turned you attitude my way, proving my point that you never probably did the homework in the first place.
July 14th, 2010 at 3:10 pm
ojzitro – You’re basically calling me a liar and then turn around and expect anyone here to believe that you’re actually making money with your trades because you say so – seriously? Excellent debating skills there buddy.
Way to go!
July 14th, 2010 at 3:14 pm
@ Thor ~ Let me see your “research”. Then there is no question that your claim taht TA is, on average, less than 50% correct. Furthermore, how do you even research that? I know that I have talked to 5 different people on the phone today, calling for at least 3 separate outcomes.
Where is your work? This is not a debate, it’s a request. Comprehend?
July 14th, 2010 at 3:20 pm
ojzitro – I’m answering you exactly the same way BR answered me when I raised the question to him. The Original question is whether or not the average success rate of TA (Alone) is any better than chance. Is it? Yes or no? If you say it is, can you prove it? Better yet, what exactly is your point? Are you trying to just call me out as a liar? Or do you honestly believe that straight TA has a good track record?
Furthermore – let me ask you a more important question – if I do provide you with a number of studies that show the lack of success for TA, is that going to change your mind at all? Or would you spend the next several hours and comments trying to pick apart every study I throw at you?
In the end, it comes down to belief – I believe, based on my own research, that TA is no better than chance – you believe this is not the case, and apparently also believe that I’m lying through my teeth.
So again, What exactly is your point here? Do you want to have a rational debate on whether or not TA works? Or do you just want to prove that I’m a liar?
July 14th, 2010 at 3:20 pm
My favorite technical analysis involves predictions that support my preconceived ideas about the future.
July 14th, 2010 at 3:24 pm
DH – bingo
July 14th, 2010 at 3:32 pm
@ Thor ~ TA has it’s place…particularly in corrections. I was asking to see YOUR research. You claimed to have done it already. No debate, I love to read and would consider it a privilege to see your work. I blend different methods, and rely on no singular metric for my positions. When a down channel like this is in existence, to not play it is a choice, mine is to do so. I am not “loaded” so getting in and out of positions quickly is not an issue, for others it is hard. I can accept losses and move on when the channel breaks (it always breaks).
“Or do you just want to prove that I’m a liar?” ~ Thor
Is that an admission, because I can accept it. It is human nature, and I hold no man at fault for a little white lie here and there. I have told many, whether or not I am playing a downward channel is not among them.
Here is my last setup, posted here on July 1st. I am the first poster, and posted a price later.
http://www.ritholtz.com/blog/2010/07/clarity-conviction-consensus/
July 14th, 2010 at 3:34 pm
ojzitro – Enough with the “you didn’t actually do the research” throw away comments. I’ve had this debate many times here in the past and my research, as well as my reasoning has been well laid out. You’re trying to call me out as a liar, when it is so easy to search the archives and find the debates says far more about you than it does about me buddy.
I will find the two most recent relevant articles I can find on TA so you’ll at the very least shut the fuck up with calling me a liar.
July 14th, 2010 at 3:36 pm
@ Thor ~ Can’t wait new friend, you sound like a class act.
July 14th, 2010 at 3:42 pm
This first is on the death cross (as it’s all we hear about now) from PragCap – there are a number of articles here written about the Death Cross so search the archives if you want more -
http://pragcap.com/is-the-death-cross-a-useful-indicator
Next is a case study -
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1181367
Abstract:
Technical analysis is not consistently profitable in the 49 countries that comprise the Morgan Stanley Capital Index once data snooping bias is accounted for. There is some evidence that technical trading rules perform better in emerging markets than developed markets, which is consistent with the finding of previous studies that these markets are less efficient, but this result is not strong. While we cannot rule out the possibility that technical analysis compliments other market timing techniques or that trading rules we do not test are profitable, we do show that over 5,000 trading rules do not add value beyond what may be expected by chance when used in isolation.
July 14th, 2010 at 3:43 pm
ojzitro – now rather than try and pick those two articles apart – let’s see you try to prove that TA is affective. Come on there buddy, I know you can do it. Refute those articles!!!
July 14th, 2010 at 3:53 pm
@ Thor ~ I read Pragcap….daily. I read that article, 50 DMA’s and 200 DMA’s are more reference points, I rarely use them in making a decision on a technical basis. Truth be told, once I grab a hold of a good uptrend, I barely pay attention to technicals, as one can scare himself out of his position. What you are failing to address, is that all these HFT black boxes are programed on algorithms. Those algo’s have to have marker points, a road map by which to kick into a different approach. Those marks are sometimes technical, but not always. So in a market where there is almost NO RETAIL ACTION, technicals play a big role. Dismissing them as voodoo is move, I’d argue a poor one.
I will have to read the other study later, although opining on your snippet; What method is “consistently profitable”? And who in their right minds trades on only Technicals?
July 14th, 2010 at 3:54 pm
What price did I get in at on July 1st? What price did I sell at? TA was effective for me right there.
July 14th, 2010 at 3:55 pm
ojzitro, my dear new friend, I only stumbled into this debate. I love magic charts that support my theories and the things I really know down to my bones. Otherwise, the charts are crap to a large degree.
In the not too recent past, some TA shared characteristics with a technique used by engineers and QA professionals called Statistical Process Control. If you tallied some relevant numbers and charted them in a consistent way, you could track normal and abnormal variation. If you correctly analyzed the variation you identified then you might make some money.
In order for these techniques to work, you need unbiased inputs. HFT, low volume melt ups, Fed cash floods, flash trading, the almost total exclusion of main street from the stock market, and other details make TA useless at this time.
When main street returns to the markets and when program trading goes back to less than 50% of the markets, please share your insights. Otherwise, consider yourself lucky for finding a crack in the shielding that allowed you to do well at one point.
July 14th, 2010 at 3:56 pm
Ojzitro – Yes, that is all well and good. It still does not change the fact that rather than try to prove your point, which might have resulted in a decent debate, you resorted to calling me a liar. In that respect – you lose buddy. Keep up the good work.
July 14th, 2010 at 4:01 pm
Thor Says:
July 14th, 2010 at 3:56 pm
Ojzitro – … you resorted to calling me a liar.
reply:
————-
Chin up. Some people have called me a bum. I haven’t let that get in the way of some good degenerate fun. You can overcome this.
July 14th, 2010 at 4:04 pm
@ Thor ~
There was no debate you thick headed fool…there was a request for work that you claimed to have. You instead did a Google search and returned me nothing. I will continue to trade money my way, and you will your own way. I am not looking to sway you. I am looking to peruse your analysis, that you claimed to have. I have been met with rhetoric.
July 14th, 2010 at 4:05 pm
@ Dead Hobo ~ I never called this knuckle-head a liar, I just asked to see his work. He is a knuckle-head though, I will go on record with that.
July 14th, 2010 at 4:06 pm
DH – Good advice. Also, I’m sure you’ve seen the “Arguing on The Internet” motivational poster. . . I won’t link to it because I’m sure most people would find it offensive.
Overcoming my own bad habits is still a work in process, but than you for that :-)
July 14th, 2010 at 4:08 pm
knuckle-head I can live with – absolutely.
July 14th, 2010 at 4:09 pm
@ Dead Hobo ~ I understand your point, yet for know the black boxes rule. And ask yourself this; When do you see the volume from HFT retreating to below 50%? I think TA works great in managing corrective moves, discipline in controlling your mistakes is what makes a good trade. It’s the man, not the field guide.
July 14th, 2010 at 4:13 pm
Yes, the market should be turning around and heading back down about now. But no it probably won’t because Goldman Sachs, JPM, and numerous others who live by the sword of HFT will see to it that they do everything they can to confuse you and steal your money.
Most likely it will come in the form of opening the market WAY higher one morning above a key resistance level after ramping the futures all night when no one is looking. For example, I can see an open above the 50 or 200 just to steal everyone’s money who is short, then go all in on the sell side as to steal everyone’s money who decided to go long since the market opened above a key average.
See, this is why the people working at J.P Morgan and Goldman Sachs went to Harvard and other Ivy league schools. So they could learn how to steal your money and make themselves much, much richer.
July 14th, 2010 at 4:14 pm
ojzitro Says:
July 14th, 2010 at 4:09 pm
It’s the man, not the field guide.
reply:
————
I’m sure the HFT boys and girls will thank you for your contributions. Sucker.
July 14th, 2010 at 4:31 pm
@ Dead Hobo ~ I’m up 10% in this decline, and only risking about 20% of my earnings on this play. They can have it. What’s my other option? Sit on my hands and troll blogs in the hopes of drumming up useless debates?
So if I lose this play, I’ll be up 8%, and have the mindfulness to re-evaluate. How does this make me a sucker?
July 14th, 2010 at 4:31 pm
BASED EXCLUSIVELY on what I’ve read here, I just turned bearish.
July 14th, 2010 at 4:33 pm
This is the only thing that worries me about my short play here at the top of my “useless, and mostly wrong” channel on the Russell.
http://www.bloomberg.com/news/2010-07-14/stock-bears-outnumber-bulls-for-first-time-since-april-09.html
July 14th, 2010 at 4:51 pm
@ojzitro 3:01pm – Thanks for the reply. I was thinking they were only short term positions, but 3x is a bit scary. Still the prices are right for someone with little tolerance for risk. I’m around 90% in cash, except for some energy holdings, US and elsewhere. Already owned a small stake in BP before the Gulf calamity, but went on a buying binge near and around the lows.
I’m actually looking to make it a long term hold, perhaps.
July 14th, 2010 at 5:00 pm
@ ojzitro re: Bloomberg misleading conclusions
Bloomberg title is misleading. (Stock Bears Outnumber Bulls for First Time Since April ’09)
There are three categories:
1. Bullish — 32.6%
2. Correction — 32.6%
3. Bearish — 34.8%
The correction group are the bulls; therefore, to get a true sentiment reading you need to combine Bullish + Correction.
Bullish + Correction = 65%
vs.
Bearish 35%
There are almost twice a many bulls as bears.
July 14th, 2010 at 5:26 pm
@ Cult ~ Yes, and on top of that I have seen X amount of other polls saying various other numbers. Everyone pins those polls as contrarian indicators, the headline may as well read, “Get long dummies”. I have heard more calls for 950 than I know what to do with, also a bit unnerving. Short term indicators are pushing near oversold, and some other metrics I use are telling me to place a bet on “Lower”. Your input gives me a little more ease, but I am still prepared for this market to take off. I am not looking for a new low, if the Russell gets near 610-615, I’ll most likely take profits and wait to see what happens.
Do you have an opinion on which way we head within a week?
July 14th, 2010 at 5:39 pm
Re: “Do you have an opinion on which way we head within a week?”
I have no idea about “within a week” but longer-term lower.
Almost everyone expects S&P to be higher by the end of this year (even the bears as Kass and Boockvar are bullish now).
I was on the same side as Kass in March 2009. I was betting against Kass in August 2009 (when Kass declared the top, I remained bullish), and I am betting against Kass now (Kass declared “low of the year”, but I do not think so).
July 14th, 2010 at 5:50 pm
@ Cult ~ Cheers. I am *cringes* agreeing with Kass. He was early on the top, I am just hoping he was early on the recent bottom call. This is on of the most interesting times in Financial history, I will be happy to profit from the chaos.
July 14th, 2010 at 6:48 pm
The HFT issue is over blown. So what if it makes up over 50% of volume? Market makers and specialists used to make up over 50% of volume, and they had all sorts of tricks up their sleeves (ie naked shorting). It is farcical how people are treating market makers and specialists as if they were some benevolent entity that oversaw the markets for some greater social good. Somehow in that era the markets weren’t casinos, but rather arenas of intellect of the highest order that have been undermined by the cold impersonal algorithms that dictate HFT. Give me a break.
What it really comes down to is that a large subset of human traders figured out how to make money off the MM/specialist racket. With that racket being run out of town by HFT, those traders are crying because their edge has been scooped. It’s kinda like the drug trade, with all the street level dealers getting whacked when a new boss takes over. The only difference is that, as far as I know, street level dealers don’t bother maintaining blogs about the ins and outs of their trade.
July 14th, 2010 at 10:19 pm
Fortunately it appears that almost all the thin volume is prop traders so, if they lose maney, my view would be that it couldn’t happen to a nicer bunch of guys.
July 15th, 2010 at 10:13 am
@ Thor ~ Seems I got lucky again, throwing my chicken bones on the floor and ‘cipherin them. I am now off to slaughter a goat, have a good weekend.
July 16th, 2010 at 10:00 am
Boy…it got quiet quickly. No apologies, just more silence.
July 17th, 2010 at 6:42 am
Given yesterday’s 260 point drop, NoKidding asks:
Hey Thor how was that for timing?