LunaticTrader

Investing with the Moon

Posts Tagged ‘BMO’

Watershed lines

Posted by Danny on June 12, 2019

Some long term charts and info about a few new indicators from my experiments box. I have started showing those indicators in my charts on Twitter and here on the blog from time to time, so this will be the go to article for people with questions about it.

To me, the main aim of an investor or trader should always be to stay on the right side of the market. Price targets, overbought or oversold, wave counts, etc… are all secondary if not tertiary considerations.
If we can manage to be (and stay) on the right side of the market most of the time, then the rest will take care of itself.

On a most simple level I want to see a market/stock make higher highs and higher lows if I am bullish, or conversely lower highs and lower lows if I am bearish. If that’s not (or no longer) the case, then I better consider that conditions may have changed and I am now on the wrong side of the market. In practice it’s a bit more complex of course, but some people are still doing very well with that basic approach.

Watershed lines (examples up next) are just another attempt at determining that rewarding “right side of the market”. I use them together with “BMO” and “BUD” indicators, which some of the more frequent readers here probably know already. A picture says more than a thousand words, so here it goes with monthly gold. (Note: those indicators work on all timeframes from daily up to very long term quarterly. I will be focusing on some long term charts in this article)

gold_m

Watershed line turns blue (up) during bull markets and red (down) during bear markets and corrective phases. BMO and BUD can be used for more optimal entry and exit. Both have an “optimized lag”, which means they can be early as well as late. That means we don’t have to anticipate possible turns, we just wait until they DO turn. Both are green and going above the zero line during bullish phases, and turn yellow in bearish or corrective phases. The idea is to buy on a BMO low after BUD has turned bullish (green arrow). One can also buy subsequent BMO lows as long as BUD stays green with the Watershed line going up (blue). Some profit taking is best done on BMO peaks when we see BUD starts sputtering, and we sell all when BUD turns bearish (orange down arrow) or on the first BMO peak after BUD turns bearish.

Here we see how BUD turned bullish for gold in early 2018. BMO made a nice bottom in late 2018, which was a great entry point. Now the Watershed line is tentatively turning up, which bodes well for possible long term gains.

Here is monthly EURUSD:

EURUSD_m

This setup is very similar to gold in year 2000. BUD turned bullish in 2017, so we are ready to buy on a BMO low. BMO turned up 6 months ago, but Euro has continued to drift lower just above the Watershed. This is still a good chance to buy while using the Watershed at 1.10 as a stop level.

Monthly S&P 500:

spx_m

Buying BMO bottoms during BUD yellow phases would have taken some of the best opportunities of the recent decades. There is no BUD sell signal yet, but it is sputtering and it is an aging move. So some caution is warranted, but it’s not wise to bet against the market as long as it trades well above the Watershed (currently at 2677).

Quarterly Dow Industrials:

dj_q

This is the most long term scenario we can crank out. Interestingly, BUD has alternated 30 year bullish periods with 10 year bearish (yellow) phases. In the bullish phases the market tends to multiply 10x. If that rhythm continues then we are headed for Dow 100k by the late 2030s. Is that crazy? No, it isn’t.

8% nominal change compounded for 30 years gives 10 times the starting price. People who think the economy must crash because debt is too high don’t understand the effects of long term compounding. If you are old enough to remember what prices were 30-40 years ago then you will see that almost everything has done something like x10. The price of a beer, a house or a car is 10 times higher, the national debt is 10 times higher, the budget deficit is 10 times higher, GDP is 10 times higher, money supply is 10 times higher, and the stock market is 10 times higher… Just 1.08^30.
If you find something that hasn’t gone up 10x over the last 30-40 years then chances are it is a good buy because it will eventually catch up.

Posted in Market Commentary | Tagged: , , , | 2 Comments »

The art of calling market tops

Posted by Danny on April 5, 2018

Most good books about trading, as well as most famous investors, will tell you: don’t try to call tops or bottoms in the market, it can’t be done. So, they usually advocate scaling in and out of positions to get a good average buy or sell price.

But is that so? Is there really no way, other than watching for clear signs of investors’ euphoria or despair, which tend to accompany major long term highs and lows?

Any “it can’t be done” has always looked like an invitation to try to me. True, you won’t be very successful at calling tops with the standard technical indicators like 200 day MA or RSI or VIX. But of course, big banks and fund managers are not using those standard indicators you can find in any free charting program. They have better stuff. Expecting to beat the market with 50 year old indicators is like hoping to win a Formula 1 race with a 1970s car.
You will also not call tops by listening to the experts on CNBC or other financial news outlets. A news channel survives by showing what its viewers want to see or hear, not by ringing a bell when the market has peaked. They simply ring whatever bells are popular enough on the given day, and that are usually the wrong bells. At the top most viewers want to hear only the good news, because they are fully invested.

The approach I have chosen is to develop my own indicators, using a bit more complicated math than the simple moving averages of yesteryear. I have a bunch of different indicators that have been gradually improved and tested over the years.
Today I want to show how my ELC and BMO indicators can be used for detecting major tops on weekly charts. The ELC is specifically designed to turn up (or down) very close to market peaks (or bottoms). At major long term peaks it tends to show a clear bearish divergence. A picture shows more than a thousand words, so let’s start with the Dow Industrials 1906 peak:

dji1

Market made new record highs in early 1906, but the ELC painted a much lower peak. The ensuing 2 year bear market took the index down almost 50%.

By 1916 the market had reached new records again:

dji2

A big bearish divergence appeared at the highs in late 1916 and a sharp 1 year bear market followed. In late 1919 the market peaked with another bearish divergence and another 50% decline followed suit.

The roaring 20s showed multiple bearish divergences before the market collapsed:

dji3

The highest ELC peak came in 1925 already, a full 4 years before the ultimate peak. The highs in the final advance 1928-29 came with lower and lower ELC peaks. A 90% bear market and great depression followed.

By 1937 the market had recovered a great deal:

dji4

But once again the ELC printed a lower high at the peak, leaving a 1 year bearish divergence in place. The market dropped 50% over the next year.

After the second world war a long term bull market started:

dji5

Clear bearish divergences appeared in 1955-56. This led to a milder bear market, more a multi-year sideways pattern. Not every bearish divergence in weekly ELC becomes another great depression. But you didn’t miss anything if you stayed out of stocks until 1958.

I will use the broader S&P 500 from the 1960s:

spx1

By early 1965 we see a clear bearish divergence. A first dip was overcome, but by early 1966 there was an even bigger divergence. The market crashed 25% within a year.

The bull market resumed, reaching new record highs in late 1968:

spx2

But ELC painted a lower peak and the market crashed almost 40% over the next 18 months.

The same scenario in early 1973:

spx3

New all time highs for the S&P 500 but a clearly lower ELC reading. A 50% bear market followed suit.

The 1980s burst out into new record territory and by 1987 we saw this:

spx4

Once again clear bearish divergences on the chart before the market crashed.

The 1990s massive bull market was very interesting:

spx5

Highest ELC value was in early 1996, a full 4 years before the eventual peak just like in the 1920s. We see several bearish divergences that only led to a sideways period or mild pullback. This is something to remember: not every divergence leads to a major bear market, but almost every bear market is preceded by a bearish divergence in weekly ELC.
By early 2000 the market was still making new highs with the ELC making lower and lower peaks and barely keeping above the zero line. The S&P 500 would drop 50% over the next 3 years.

The subsequent advance into 2007 high was a bit unusual:

spx6

The highest ELC peak came in early 2004. Several bearish divergences only led to a mild pullback. By late 2007 the market peaked with the ELC down very sharply from its high earlier that year. In fact ELC hardly turned up on that last peak. This showed unusual weakness and a 60% decline followed.

So where are we now?

spx7

Bearish divergence in 2014-15 only led to a mild decline into early 2016 lows. The ELC has meanwhile printed new highs for this cycle, so there is no bearish divergence in place at the moment.
This means we have two possibilities. If January 2018 turns out to be a major peak then it will be the first time in over 100 years it peaks out without an ELC divergence. The other option is that this market makes at least one more run to new record highs and then we would probably get that bearish divergence as seen on all those earlier occasions. It will be interesting. Exceptions are there to prove the rule, but if history holds up then it is too early to call for a market top here.
I will keep you posted on how this chart evolves. Here and on my Twitter. And with a bit of luck I will try to call the top when my indicators suggest it is that time again.

Posted in Market Commentary | Tagged: , , | 16 Comments »

 
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