Russell 2000 sitting pretty… (I think/hope :) )

Hi all,

I am trying to incorporate more individual stock trading into my trading style, but I am still (for better or for worse) trading the various instruments which follow the Russell 2000 Small Cap Index (mostly TNA, TZA, etc).   Now, from a high level point of view, the Russell and the S&P 500 will move in generally the same direction, but there can be minor variations in terms of daily movements, support levels, etc. Since I trade the Russell, I tend to largely look at it as my primary tell, and rely on the excellent market recaps of @chessNwine for keeping me up to date on what other major indices are doing.

Let me summarize my thoughts here, and then I’ll expand on them, below,  item by item.

I believe the Russell is sitting on multiple, MULTIPLE support reference points now, all of which have shows to be very resilient in the past, so I feel the benefit of the doubt has to go to them holding here again. Having said that, I admit that the possibility is for those to break, but there is another layer of support just under us, and only if THAT broke, in a convincing fashion, would I change my intermediate term bullish outlook. There was also a reference to the Russell putting in a double top right here, with the 2007 highs – I feel that is extremely premature to say, and that, based on what we saw in 2007, we should have weeks to observe its behavior, before getting long term bearish.

So, without further ado, here are my reasons (probably from weakest to strongest)

a) we’re sitting on a short term support trend line, since the post-Japan bounce:

The fact that we failed to follow up Thur’s impressive recovery with a strong day on Fri was disappointing, but not unprecedented. Just like we didn’t bounce straight up in mid Apr, we don’t have to bounce straight up here. Back then it was the S&P downgrade which sent the markets down, on Fri it was the dollar strength, from renewed worries about the Euro and Greece (how many times will that particular shock/surprise move the markets, eh? Anyone else getting tried of this?) But considering that, even with the dollar ripping to the upside, we still failed to make a new lower low on the Russell, I don’t take that as a bearish sign for the immediate future.

b) we are sitting on a multi-month support trend line, dating back to Sept:

Now, to give bears their due, I should admit – support lines, like rules, were meant to be (sooner or later) broken. The multi-month support trend line had a different slope  going into Jan.  In fact, that support trend line did NOT hold in Jan, failing us even before the full extend of the Egypt situation hit the other indices:

c) the comment in the above  chart leads me to ,y strongest reason(s)  why I have so much faith in the intermediate term, for the Russell: the moving averages:

The 50DMA has provided  a great deal of support for the Russell, lately, managing to hold it up through the Egypt problem, the Libya issues, and the S&P downgrade. The only time, in the recent months, when the 50 proved unable to support the index was with the Japan catastrophe, hitting us while the markets were still little jittery from the Libya worries. But then the 100DMA proved to be a great backstop, holding us and pushing us back up.

I am not so foolish as to believe that we cannot crash through the 50DMA here and now.   The answer to that question will depend on (i) what happens in Greece  together with (ii) how much of that is already priced in.  However, the 100DMA is just below us, and I believe, based on what’s happened in the recent past, that will hold as our backstop. That is my short/intermediate term theory, and that is also my stop loss, on any bull  Russell instruments I might be holding, when that happens. A confident push below the 100DMA on the Russell means to me, in the short/immediate term, bail on the likes of $IWM and $TNA.

On a slightly different, but Russell related topic, I just read Scott’s blog post about the Russell, in which he calls (or suggests?) a double top for the Russell, with a target of 800 followed by 760. I don’t know what time frame he means, but let’s look at the long term weekly chart of the index:

Last time the Russell has come up into what proved to be the ultimate top, it hovered there for 8 weeks, before finally pulling back. Eight weeks! And even then, after the pullback, it tried to re-test those highs again, and only having failed in that attempts, did we see the beginning of the bear market.  Are we seeing anything like that here and now? Not even close.  Of course that doesn’t mean that we won’t start a new bear market on Mon, anything can and will happen, right, but, in my opinion, one cannot put up a chart, and use only one piece of information from it to draw conclusions, ignoring the rest (in this case, using the fact that we’re near the previous market top to call for an immediate  reversal, without giving the chart time to show us if it’ll mirror the previous topping pattern).

The current trend is higher. It’s been higher on different time frames since Mar 2009 and  since Sept 2010.  But nothing moves in a straight line. I will doubt my intermediate term “trend is higher” theory with a break of the 100DMA on the Russell.  There’s no point in even thinking about a new bear market now:  in 2007, after a 4 year run, we needed 2 months, plus another attempt 4 months later, before the market gave up, and reversed into a bear market. Here and now, we’ve only been running for 2 years, latest batch of earnings is good, the Fed shown it wants to support the market and the economy, and we’re consistently making new highs (we just made new highs less than 2 weeks ago!!!)…  Come on…

The Trend Is Your Friend, and currently, until proven otherwise, The Trend Is Higher:

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Greetings, all!

I see myself, in the coming two weeks, writing posts which comment on what other fine people of the iBC/PPT universe have said, in other blogs. Sometimes I’ll be agreeing with them, sometimes I’ll be disagreeing with their comments… As such, I would like to offer this one disclaimer up front, get it over with, so there’ll be no need for me to do it with every post.

This place (iBC/PPT/12631/etc) is filled to the brim with wonderful, super knowledgeable, experience traders and/or investors, whom I could never, ever hope to match in their market skill or knowledge. I admit and acknowledge that.

However, I feel it IS ok to, sometimes, on individual issues, disagree with such an individual, without generating in anyone the feeling that I’m being arrogant or full of myself (the “who does omen think he is, disagreeing with (whoever)” situation).  Any comments I might make, which run counter to what someone else has said will only reflect my own, personal feelings and attitudes about THAT specific topic/issue, and will, in no way, be a reflection of my thoughts, feeling, or respect for that person as an individual or a market professional…

There, it’s said, we’ll always take that as read, so now, I’m ready to blog!

Lol, the first time I was elected KoPG (last year) I had to abdicate after few posts due to health issues… Now I’ll do it for the rest of May, so between those two together, I’ll now have a full, month-long tenure under my belt.. J

Looking forward to it!

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Hi,

I got diagnosed with dangerously high blood pressure today; I don’t know how much of that is due to the fun of the market, but I’ll be taking it easy for the next little while.

I fully intend to still trade a bit, and continue to frequent the UserNotes/PG gallery, but I won’t be here enough to post in the King’s spot… So I give up my crown, and I’ll ask Jeremy to pass that onto whoever was the next one in line…

Thanks for your support, guys, and who knows, maybe some other time 🙂 !

Cheers!

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Greetings,

A few comments were made last week, in the UserNotes section, about the decay factor, of leveraged ETFs. I have, in the past, run some numbers on those, and I thought, in the absence of anything interesting happening today in the market to write about:

why not do a little bit of charting, to provide a visual reference to what we’re talking about.

Before I go on: I realized, just doing this now, that in the past I was looking at the wrong index, for doing FAS/FAZ calc! I was looking at the Russell 1000, not the Russell 1000 Financial Services index, so that pretty much invalidates whatever numbers I has posted in the past for FAS/FAZ decay. The values contained in here are correct (I hope, he says 🙂 ).

I have only done this for the TNA/TZA and FAS/FAZ pairs, as these seem to be the most popular (just based on what I see, in UserNotes). I did also want to run these for EDC/EDZ, since EDZ is a popular hedge, but I couldn’t find the underlying index in freestockcharts.com (I’ve emailed their support people, so I might end up adding this later on, if they reply in time, and point me in the right direction).

To “study” decay I picked three points, about a month apart in the recent past, where the values of the index were (almost) the same (these could be open, close, low, or high daily values). I then looked at, and plotted the corresponding ETF values, together with the percentage gain/loss. In addition to this, I also included the values and the percentage gains (both index and ETF) for the Sept melt up – just as an FYI. This is just a single data point, so I wouldn’t try this just yet, but it APPEARS, just from looking at the past month, and just at TNA/TZA and FAS/FAZ that the bull ones increase more during a melt up than the bears decrease. If you’re thinking “I smell an arbitrage opportunity,” well, I’ll need to look into other past mono-direction market periods, and see how everything behaved then to get some kind of confirmation that this is not a fluke.

Here are the charts, with the values:

As mentioned before, it seems that the bear ETFs decay much faster than the bull ones (2-3x faster) – just something to keep in mind if your strategy includes the thought of “well, if it moves against me, I’ll just hold it until it recovers.” Yes, I admit – I still think that, sometimes, it’s a hard habit to break! Holding it for few days or couple of weeks, not a problem. Few months? Well, you’d need to count on the market moving quite a bit higher (or lower, as the case might be) than where you bought the ETF, to break even…

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Hi all,

Since I find myself throwing these into most of my posts (beyond the simplest ones), I figure I should just say it once, and we can take it as read, going forward:

I’m a piker… little over a year of day trading, then discovered PPT (thanks, @Equalizer!) in June, now learning from everyone here and trying to do The PPT swing trade thing. I trade my own money (mid/low 6 figures) just to make enough so I don’t have to go back to programming trading system for a living…

Nothing that I say should be taken as if it came from someone really experienced, or based on any non-mentioned technical analysis, education, experience, etc. This is why I tend to stick to posts which basically present data, with comments dealing more about the similarities IN THE DATA of the current position, vs some point in the past: I tend to avoid making predictions on the direction of the market, and you certainly won’t hear me recommend any stock 🙂

So, in all my posts, mentally add “in my (unsubstantiated) opinion”, “YMMV”, and (I love this, from Fly himself), “if you follow me, you’ll lose money!” 🙂

Having said all that, let’s get on with my first official post!

Through all of the second half of Sept I found myself on the outside of The PPT mainstream thoughts, re market direction. Ohh, I wasn’t calling for the awesome run we had, I didn’t go long, I made no money on it, BUT I was seeing enough warning signs that a move up could be in the cards that I did not go short. I simply let the market carry me up to here, where I was able to unload my old July TNA buys at a (very small) profit.

Now I find myself on the outside once again: the bullishness is palatable, you can feel it in the air, you can hear it on CNBC, lots of much more experienced people than myself here on iBC are calling for a meteoric rise (Danny, Scott, etc) – yet I have the same feelings now about the Oct melt up that I had in Aug/early Sept about the epic Sept melt down, hiding just around the corner: sure, it’s possible, but aren’t we jumping too quickly to the obvious conclusion?

Here are my thoughts:

1150 is, for one reason or another (details of which are not important), held as a big resistance level. Breaking through that level, in a “confident” way, would send a clear signal to the market: we’re going up. “Confident,” by the way, seems to mean different things to different people; my definition is somewhat fluid, but it certainly means closing above it, and holding above, ideally having it act as support in a day with some moderately bad news. Until that happens, I don’t consider 1150 breached.

Now, let’s look at what has actually happened, in the past several sessions:

What do you see? I donno.. But I can tell you what I see: the repeated inability of the market to breach the 1150 barrier, even in light of pretty good and unexpected economic data. Yes, I know that the Russell 2000 index made some new heights, and is considerably above the Jan level (back when we were last at 1150), but that’s just the indication of the small caps running ahead of the pack lately. When it comes to the market, as measured by the S&P500, we have jumped above 1132, but we have not jumped through/above/over 1150.

I was shopping for groceries today, and happened to see that the WSJ was available for sale (strange, in a Canadian grocery chain store 🙂 ): on the front cover I saw “Europe Crisis Slams Ireland”. There was also an article how a left-wing candidate is all but set to take over the presidency of Brazil. True, these might very well be meaningless by themselves, and the fact that seeing such headlines, at random, and getting a feeling about the market from them is probably more signs of my inexperience, BUT: given that we have not been able to break through 1150 in the face of good econ data, and that issues in Europe, while having subsided from June, are not going away, I’m not convinced we’ll have an uninterrupted run to 1200.

I think that this hover around 1150 is opening the door for SOMEthing to happen, in Europe, or maybe something in the China/Japan relationship over that ship’s crew/captain, or something about a trade way over China’s currency, or their rare earth metals policy, etc, to cause enough stink to drop us down. Not a lot, not a catastrophic amount, but enough to go back to, say, 1130-1120, before turning back up.

Just like, in mid Sept, I decided that I could “risk” 2-3K of TNA, leaving it long in my account, because I felt we just might keep running, I’m doing something like that now. I’m positioning myself for a dip, before we head back up. But, since I don’t like holding un hedged inverses in the face of a market melt up, I’m doing something which lots of people here will think makes no sense. Let me explain:

I bought, after close, 2000 TZA and 1100 TNA – the value of these positions is about the same. My intentions are:

a) if we suddenly punch through 1150, continue up past 1165-1170, at some point I’ll add to TNA, and either close the TZA position, or maybe average down. I consider this to be the least likely scenario,

b) if we suddenly have a catastrophic meltdown, I’ll hold everything until O/S, sell TZA, load up on TNA, and play my usual PPT OS strategy; I consider this scenario unlikely

c) if we hover around here a bit, maybe going up a bit, then reversing down, but without any catastrophic news, just a “normal” pull back, I’ll sell the TZA for a profit, and maybe add little more TNA. I consider this to be likely

(again, all my “I consider this” statements are just based on my own personal feelings and emotions, not any real data)

To those who are convinced we are heading straight up, I say this: I’ve seen several references to studies which show there is very little correlation between performance in one month and the performance in the next month. So, what happened in Sept doesn’t have any statistically significant impact on what will happen in October. Ask yourself: if Sept was basically a flat month, with us hovering around 1150, would you, right now, with the same econ data, the same political news, the same level of the S&P500, be gearing up for a monster rally up? If yes, ok, I respect that. But if no, then (IMO) you’re placing too much worth on the behaviour of the market in the past month – that link is not warranted by the past years’ data.
While you’re at it, ask yourself this: are you just as convinced now that we’ll go straight up as you were that we were going to crash and burn in Sept? Is the evidence for the melt up just as strong as it was for the melt down last month?

Just saying… Keep an open mind and don’t jump to quick and easy conclusions…

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Greetings all!

Seems enough people liked my number crunching and charts-galore posts to get me into the King’s seat for October. I promise to continue the trend, in this seat of power 🙂 !

I have a couple of ideas already, unfortunately, I’m off for the weekend at my parent’s cottage, so next time you’ll hear from me won’t be until Mon.

In the meanwhile, have a great weekend, everyone, and until next week!

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