LunaticTrader

A few years ago I introduced Iceberg charts on this blog. I kept posting them on Twitter and on this blog from time to time and now simply call them the “Icebergs”. Testing has been ongoing and a few new elements have been added, which will be explained in this post.

A brief recap for newer readers. I started experimenting with this idea because a picture says more than a thousand words. But our brain is not really made to read typical indicators that come in the form of a boring graph that dances up and down. Most people cannot combine more than a few such indicators in their mind. But technical charts are usually full of lines, averages and indicators, leaving investors glazed in front of their trading monitors when different indicators point in opposite directions. By creating a type of chart that resembles a landscape we can get very different results based on a picture we can intuitively understand. Thousands of years as hunter-gatherers and later farmers has left us with well developed skills to read the land. By generating a “landscape” based on stock data we can use that part of our brain to get a better read on the stock market. If you are a visual person then you will probably find a much stronger connection with this kind of landscape than with a set of abstract indicators.

The Icebergs are now in version 3 and here is a current example for Crude Oil, which we can use to explain all elements in this type of chart:

The new elements compared to v1 are “gold” (yellow) and “fish” (black and pink dots in the water), and I have circled some examples in this chart. More on them later, let’s first explain the other landscape elements:
1) Green mountains, covered with more or less ice (grey). The more green the more bullish the stock is behaving at that point. Stocks in healthy bull markets show plenty of green mountain, often uninterrupted for months. The mountain peaks should get above 4 or 5 (see right hand scale) to be healthy. Some ice on the mountain is OK, but too much ice (and little green) means the continuation of the bull move is in question. If all green disappears it is a bearish sign.
2) When there is no ice left on a mountain you may see a red line (e.g. October 2016 in this chart), or “lava”. This indicates the market is very hot and probably at or near an important peak. A stock can stay hot for weeks, so don’t sell immediately. I usually sell half or all of the position as soon as the lava disappears. Not all lava will lead to major declines, sometimes you just get a sideways period followed by another rally.
3) Open water appears when no green mountain or even grey ice is present. This means the stock is dead in the water, bulls are too weak to take it higher and the stocks is probably grinding down or near recent lows (e.g. July 2017 in this chart). As you can probably guess, there is no good reason to own a stock that is dead in the water. We wait for green grass to tell us that a new bullish phase may be starting.
4) Sometimes you see icebergs in the water, small grey spikes with no green in them. Icebergs indicate that there is a rally attempt, but it is so weak that (almost) no green grass appears (no growth). Before you know it the stock is falling even further, if not sinking like the Titanic. Long term investors better stay away from icebergs and wait for a proper mountain.
5) Small islands are not much better than icebergs, usually followed by a further drop (e.g. May 2017 peak in this chart). But sometimes a small island is soon followed by a big green mountain, so they can be like the first green sprouts after a long winter.
6) In open water you will sometimes see floating ice (white lines in the blue water at the bottom, e.g. May and June 2017 in this chart). When you see floating ice it means hell is freezing over for the given stock. There is often floating ice at major bottoms, but not every case of floating ice is “the bottom”. If a stock is crashing it is best to wait until the floating ice disappears if you intend to buy near the lows. To play safe it is even better to wait for some green grass if you want to buy after a period of floating ice.
7) New: Gold (yellow) typically appears on a mountain peak, but can also appear on the beach or even in the middle of open water. “Gold on the mountain” (see Oct 2016 in this chart) usually indicates a kind of peak and is a good chance to take some profits. It may appear together with “lava” (red), as is the case here, and then it is an even stronger indication of a top. This doesn’t rule out higher peaks later on, as happened in this case, but if you sold in October you certainly didn’t regret it in November. Also note that not every peak gets “gold” or “lava”. The early 2017 highs came with an ordinary green mountain.
“Gold on the beach” is what you see in April 2017 here. If it is connected to green mountain through ice then we consider it “on the beach”. The meaning depends on what preceded. If the preceding months had mainly open water or ice, then it is like finding land with gold on the beach. This is usually bullish as it suggests there will also be “gold on the mountain” (=higher peaks) later on. But if gold on the beach is found on the declining side of a preceding mountain then it is bearish. That’s what we see in this chart. The gold on the beach was soon followed up by two significant declines.
If we see “gold in water” (not connected to any land) then it is generally short term bearish unless it is quickly followed by new land with green grass.
8) New: Fish (black and pink dots in the water). Just think “bottom fishing” opportunity with this one. Pink (think salmon) means a higher quality chance. Fish can appear when there is still land (see Nov 2016 here), then is usually a good entry for a short term swing trade. But it will usually appear in open water or together with “floating ice”. If you see pink dots under ice you can think “king crab” and that’s a major bottom fishing opportunity with the highest chance of giving way to a significant rally, if not the start of a new bull market. June 2017 was a good example here.

Now, this way of reading a chart takes some getting used to, but once you get the hang of it the system becomes difficult to forget. It really helps to visualize. Just picture yourself as a hunter-gatherer traveling through this landscape from left to right. If you take your bottom fishing opportunities along the road and grab the gold (= take profits) whenever you find it then you are likely to do well. The changing landscape also tells you whether the market is getting hotter or colder and icebergs warn you of potential dangers ahead. It becomes an alive journey dealing with unfolding challenges rather than trying to read abstract indicators like RSI and VIX index.

Let’s take on a few more current examples. Here is bonds TLT:

Bullish energy (green) disappeared in late August 2016, and bonds dropped. A bottom fishing chance in mid September gave a brief rally, but a lot of ice told us the market stayed very cold. New bottom fishing chances (and 2x salmon) led to an even weaker reaction. The market painted a first iceberg in late October, a strong warning sign. Then bonds dropped quickly, giving us a period of open water and more “fish”. In early 2017 we reached icy land and there we got “gold on the beach” for the first time. This was after a period of open water, so it suggested more “gold on the mountains” (= higher highs) coming up. But subsequent rally attempts were too weak, with bullish energy (green) not getting above 4 and being too short-lived. In mid March we got another bottom fishing chance. A few weeks later we saw bullish “gold on the beach” again. The green mountain got above 4 soon and then we found “gold on the mountain” in mid April as bonds reached a first peak. Bullish energy sputtered a bit there but didn’t go away and led to a couple more peaks with “gold on the mountain”. Notice how the gold in late June was lower than on the previous occasions, that’s a kind of bearish divergence but not necessarily the end of the move. Bullish energy has not gone away and is back above 4 again, so there may be more to come. If bullish energy disappears then our outlook would change.

Here is the current icebergs for Nasdaq:

Bullish energy disappeared in Oct-Nov 2016 and the market went through a major pullback. In late November we saw a great example of “gold in the water”. At that moment we didn’t know if that was bullish or bearish. A few significant down days followed, but then bullish energy came back fairly quickly. As the gold in the water was closer to the new mountain than to the old one we could suspect gold on the mountain was coming up next. A period of “lava” in early 2017 proved insignificant and we had an ongoing green mountain with gold appearing on several occasions. We only got sideways or brief pullback after each episode of gold on the mountain, which is quite typical in ongoing bull moves. Note how the gold in early June was visibly lower than the gold in early May. This bearish divergence led up to a more serious correction in late June. But the market held on and bullish energy returned in mid July. The problem is that bullish energy did not get back above 4 and now we see “gold on the beach” after a mountain. That’s a dangerous omen and would be “cured” only if bullish energy (green) gets back above 4. If an iceberg gets painted next it would be another strong sign to get out.
Note that there is no floating ice and no “fish” in this chart. If we get a correction I would expect to see floating ice and/or fish near the lows.

This type of bearish gold on the beach is rather rare. Here is the previous occurrence for Nasdaq:

We see the gold falling away towards the beach with the market at new highs after a long advance with continuous mountain. The market subsequently dropped 10% in 6 weeks. A few observations here. The market did make a final brief rally to new highs in early March, when bullish energy was gone already. That cannot be ruled out. Fish appeared nicely at the lows in mid April, giving a great re-entry point for traders. And even conservative investors who waited for green to get back above 4 would have bought back in late May as the index climbed back above 4150. Not bad.

As a final chart I will take weekly EURUSD:

I will give no comments on this one so you can just try to read it for yourself.

I do intend to post more icebergs charts on my Twitter and here on the blog whenever there is something interesting, so just stay tuned. If you have questions, just post them in the comments.