LunaticTrader

Investing with the Moon

LT wave for February 2019

Posted by Danny on February 1, 2019

The LT wave did a mediocre job in January. Expected weakness in the first trading days of the year panned out OK. But after that the wave gave us a difficult read. The market burst higher into the first expected peak on the 8th, but didn’t really stop there. There was some sideways crosscurrents type trading in the 3rd week, but the market ended right at its highs, producing the best January gains in over 30 years.

Here is how the LT wave continues into February:

ltwavefeb2019

A weak period ends around the 3rd, followed by strength until the 8th. Then a weak period until the 16th, and stronger again until the 24th. The waves are a bit clearer defined then they were in January, so we will see.
There is a noticeable peak value on the 6th and another one around the 19th. Lowest LT wave values on the 1st and the 13th.

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Outlook for Jan 28

Posted by Danny on January 26, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

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Outlook for Jan 21

Posted by Danny on January 19, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Anticipating future price action

Posted by Danny on January 16, 2019

In a recent blog post we explored what typically happens after a huge 4-5% up day in the S&P 500, as was seen on December 26: How to trade after huge up days.

As always, bearish commentators were out to declare how unhealthy huge up days are. But history does not confirm that belief, huge up days have often been a sign that a major bottom was in and a new market advance starting. We are now 3 weeks later and the S&P 500 closed at 2610 yesterday, up another 5.8% since the close of that huge up day on December 26. Bond investors tend to wait a whole year to earn a 5.8% roi, so it’s always nice to do it in less than a month. That’s how knowing a little bit of price action history can help a stock investor.

Now the same investors and writers, who have of course missed the rally or are stuck in short positions, are out to tell that stocks always retest the lows after a rebound rally like this. But is that so? Or is it just their hope speaking?

How does a market behave after a bear market low? Does it often (or always) retest the lows? We don’t know yet if Dec 26 was the bear market low. The strong up day suggests that the market will be higher a year from now, but nothing is written in stone.
Whatever the odds of a further decline or a rally to new highs might be right now, there is only two main scenarios going forward from the current point. If Dec 26 is not the low of this bear market, then it is off course certain that the recent lows will be retested and broken. If on the other hand Dec 26 was the low, then will we see any kind of retest of that low? That’s a scenario we can test by studying the price action after past bear market lows.
One can argue about what is or isn’t a bear market. The criteria are not set in stone. Usually 20% decline is the threshold used to define a bear market, but there have been a few 19.9% declines which just managed to avoid the bear market stigma. So, I prefer to use an 18% or more decline to find the bear market lows I want to study.

So, here we have the historic examples (prior to 1950 the Dow Industrials is used, S&P 500 charts from 1950 onwards). I look for about 10% rally over the course of several weeks after the low and then we can see how much of a pullback or retest typically comes after that first rally:

1921 Bear market low. This was a severe bear market. First rally took the market up 10% in a few weeks but it never looked back and only chopped sideways for a few weeks before heading higher.

1921

1929 Crash low. This one wasn’t the bear market low. But a 50% advance over 6 months could have been felt like a new bull market. The first rally after the November low was retraced about half by the next pullback, but nothing like a retest of the lows.

1929

1932 Bear market low. First rally after the depression lows was retraced about 70% in the next decline. Those lows would never be revisited.

1932

1938 Bear market low. First rally after the lows saw about 50% give-back and then continued higher.

1938

1942 Bear market low. WW2 lows were followed by a steep advance. Only a few brief 2% pullbacks. Traders that were waiting to buy on a good pullback or retest of the lows never got much of a chance.

1942

1946 Bear market low. Post WW2 bear market low saw several retests of the lows in the ensuing years, with the last one coming in 1949, which bottomed out just above the 1946 low.

1946

1957 Bear market low. A mild 20% bear market. First rallies after the low were rather weak 5-6% advances alternating with pullbacks to retest the low. Just a choppy continuation of the prior bull market.

1957

1962 Bear market low. Another mild bear market. The first significant rally was given back 80% in a near retest of the prior low.

1962

1966 Bear market low. Another mild bear market. Here there was little or no give-back after the first significant rally and investors got no second chance to buy (or cover) near the low.

1966

1970 Bear market low. Significant bear market. First rally after the low was retraced about 80% in a near retest of the low.

1970

1974 Bear market low. Severe bear market. First rally off the lows was given back about 75% in the next decline.

1974

1978 Bear market low. Mild bear market. Gave back a little over 50% of the gains of the first rally but no real retest of the lows.

1978

1982 Bear market low. Very steep advance after the bottom and no pullbacks that allowed investors to buy (or cover) anywhere near the lows.

1982

1987 Bear market low. More a crash than a bear market. Here we got a fair retest of the lows before advancing.

1987

1990 Bear market low. Mild bear market. Gave back about 50% of the gains after the first significant rally.

1990

1998 Bear market low. No significant pullback or retest of the low after this short bear market. Traders that had gone short were forced to cover at a loss and that helped to propel the market higher.

1998

2002 Bear market low. Major bear market. First rally was given back 90%, so this can be seen as a proper retest.

2002

2009 Bear market low. Severe bear market low. No pullback, much less a retest, worth talking about.

2009

2011 Bear market low. Mild bear market. The first significant rally after the low was retraced about 60%. Traders who hoped for a retest are still waiting.

2011

2018 Possible bear market low. We got a 10% rally of the recent low. But we can’t know yet if Dec 2018 will stand as the low of this move.

2018

So, what to expect? There are two big challenges in trading the market at the current point. One is that we don’t (and can’t) know whether the late December low was the end of a bear market or just the first innings of a bigger decline. Stock markets and economies, just like earthquakes and a range of other natural phenomena, display a property known as “self-organized criticality“. Any Richter 4 earthquake could be a foreshock for a larger Richter 7 earthquake, but it could also be the main shock, one and done. In the same way any 10 or 20% drop in the stock market could be the foreshock in an ongoing bigger decline (see 2008), but it could also be a mild bear market that is over already. Known parameters like debt levels in the economy, interest rates, or p/e ratios do not allow us to predict what will be the case. It is unpredictable because we can’t tell with any certainty where the critical point is in a self-organizing complex system. Some shocks are the lead-in to bigger shocks, and some aren’t. And sometimes you get aftershocks, but not always…
The second challenge is that even if we could conclude (or hope) that the low is in, we then wouldn’t really know if that low will get retested or not. The average pullback after a first significant rally from a bear market low has been about 50% of the first rally gains. But sometimes you get an almost full retracement and sometimes there is no pullback at all. The S&P 500 is now at 2610, up from 2350 a few weeks ago. A 50% give-back would send the market back to 2480 if 2610 is the high of the first move (which we don’t know yet either). But it is equally possible that there is only a shallow pullback of a few %, which would e.g. take the S&P to 2550 before heading higher already. That can become highly uncomfortable for investors who wait for a pullback to buy or a chance to cover shorts. On the other hand the S&P could go for a retest of the lows and then you would feel pretty stupid if you bought at 2550 or even 2480.
The market never gives us easy edges in one way or another. The best approach is not to get too hung up with any possible outcome, bearish or bullish, and try to feel what the market IS doing from a neutral point of view. Being aware of the different outcomes that have happened in previous similar occasions gives us some sense of what we might expect now. People with strong opinions about upcoming bear or bull markets are usually only prepared for outcomes that confirm their belief. It is better to be prepared for all outcomes and have some sense of the odds for each of those possible outcomes. That’s what studying those charts of historic lows can be used for.
We may be in a bull market that goes on for another 10 years. Or we may be in the early stages of a 50% bear market and a major recession. There is no way to tell because of the self-organizing properties of an economy. That’s why I go with the flow until the market shows me that the flow has changed course, and then I go with the flow again…

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Outlook for Jan 14

Posted by Danny on January 12, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Outlook for Jan 7

Posted by Danny on January 6, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

LT wave for January 2019

Posted by Danny on January 2, 2019

Our LT wave had a good month. Expected strength in the first week did not pan out and hardly kept the market up, leading into the expected weak period which took the market significantly lower. The rebound in the final week came right on target. This is the LT wave for January:

ltwaveJan2019

The month is projected to start with a weak period until the 5th. And after that we enter a period of cross-currents which are difficult to read because the quicker blue line starts moving countercyclical to the slower yellow smoothed average line. Normally they move more or less in tandem, but that’s not the case this month.

What will take priority? I don’t know. Maybe it will be a sideways month, with the market looking for its next major direction, testing both the upside and the downside alternatively. Going on the blue line we see projected peaks on the 8th and the 27th. Bottom values come on the 5th, the 16th and the 30th. I am curious what will come of it.

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Outlook for Dec 31

Posted by Danny on December 29, 2018

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

How to trade after huge up days

Posted by Danny on December 28, 2018

The S&P 500 surged about 5% on Wednesday and had another huge intraday move to the upside yesterday. What does it mean? Bullish investors see it as the start of a new move higher, and bearish commentators are out in full force to declare that this doesn’t happen in a healthy market. Who is right?

My interest was picked by this chart posted on Twitter:

We could say that 4.8% is a rather arbitrary value, but using a 4% or 5% threshold wouldn’t change much to this study. The author concludes that there is no predictive value in it, which is true in the sense that market has demonstrated nearly equal chances of being up or down 1 week, 1 month or 1 year after such a huge up day.

But the thing that picked my interest is the average 14.8% gain 1 year after a monster up day. That’s almost twice the historical average 8% annual gain for the S&P 500. Even if we leave out the 1930s (which dominate the results in that table) and consider the post WW2 examples, we see the tendency for strong 1 year gains holds up very well. Out of the 18 >4.8% up days since WW2 the market was up 16 times a year later. In fact it was up double digit % gains a stunning 14 times. You could have done a lot worse than buying after a 4.8% up day in S&P 500.

To understand why that is the case I took a look at the charts for those monster up days. Here is May 27, 1970:

sp1970

Stocks climbed 5% on this day and it was the very first day of a 30 month bull market. A major buying opportunity.

October 1987:

sp1987

Stocks climbed 5.3% on October 20 and it was the exact intraday low of the 1987 crash. A few more huge up days followed suit. Bull market continued for another 12 years, so it was a historic buying opportunity.

September 8, 1998:

sp1998

Stocks climbed 5.1%. In this case the correction low was revisited a month after the huge up day, setting a double bottom, but then the bull market powered on. It was a good buying opportunity.

January 3, 2001:

sp2001

Stocks climbed 5% on this day. This one came in the midst of an ongoing bear market and was clearly not a buying opportunity.

July 2002:

sp2002

Stocks climbed 5.7% on the 24th, followed by another huge up day a week later. The market did retest the lows a few months later, setting a double bottom, and a 5 year bull market followed. Again the huge up day was a major long term buying opportunity.
Note how strong up days also followed right after the October 2002 and March 2003 lows. Those days saw gains of 3-4%, not making the 4.8% threshold used for this study, but still quite remarkable anyway.

2008-09:

sp2008

The big bear market of 2008 gave us a string of huge up days. The market surged 5.3% on September 30, 2008. But in this case it only recovered about half of the previous day’s 8.8% loss, which would have made the surge more suspect. A series of huge up days followed from October to December. All were early, but would have been profitable buy signals for a >1 year hold.
On March 10, 2009 the market surged 6.4%, followed by another huge up day a few weeks later. This surge marked the start of a multi-year bull market. One of the best buying opportunities ever.

The law of small numbers applies. But it doesn’t look like huge up days are showing an unhealthy market, on the contrary. They most commonly appear in the late stages of a bear market and in the very early stages of a bull market advance. More often than not it’s a sign of health.
More than a few times those 5% surges have come just days after a major low. There are a few obvious reasons for such days. It’s probably a combination of bargain hunting and short covering that causes a buying panic as soon as selling dries up after a significant decline. The big surge traps shorts, who keep hoping for further declines. If that doesn’t happen those shorts become forced buyers that fuel the early stage bull market.

How to trade it? The logical conclusion is to buy on the heels of those huge up days. How do you know you are not buying the first of a series of huge up days in an ongoing bear market like 2008 or 1930? Well, you don’t. There is no way to tell. But a few things can help.
1) A really healthy big surge day usually closes above the highs of the previous day. If the surge breaks out to a multi-day high it is even better.
2) Use a stop loss somewhere below the most recent major low. It’s ok for the market to retest the lows. But a sustained close below the low set just before that huge up day puts major question marks behind the bullish thesis.
3) You want to see follow through. A proper surge day that marks the start of a major advance will be followed by other good up days. As bears are forced to close short positions it will create more +2% days. If the market fails to advance with closes above the high set on your big surge day then something is wrong.

Good luck.

Posted in Market Commentary | Tagged: | 1 Comment »

Outlook for Dec 24

Posted by Danny on December 22, 2018

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

 
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