Investing with the Moon

Posts Tagged ‘Market trend’

MoM indicator

Posted by Danny on September 14, 2013

A few weeks ago I introduced the “MoM” indicator in the context of my weekly key reversal levels. In this post I will give more info on the MoM and how to use it.

The main idea behind the key reversal levels is “market orientation”, where is the market right now, and where it appears to be going… While charts are very nice and can give us an intuitive “feel” about a given market, they generally contain way too much information. All the years prior tell us where the market has been, but all that “history” is not necessarily very helpful information. We can keep an eye on the past, and it deserves perhaps 20% of our attention, but if we are to trade succesfully then 80% of our focus has to be on the *now*. And that’s the problem with charts, they typically show us only 1% now and 99% past. So, they tend to keep a trader stuck with the past.

The key reversal tables try to summarize where we are right now. Is it a bull or bear market, and is the market rallying or declining? At what key price levels can we consider a change from rally to decline (or from bull to bear)?
That’s all a trader or investor really needs to know.

The MoM indicator is an even more condensed format as it simply tells us where we are on a numeric scale between 10 and -10.  You could compare it to the Richter scale for earthquakes, or a market thermometer if you want.

Various levels in the MoM indicator correspond to market mood as follows:
* +8 to +10: very optimistic – euphoric (red)
* +5 to +8: optimistic (pink)
* +3 to +5 : positive (orange)
* -3 to +3: neutral (yellow)
* -3 to -5: negative (green)
* -8 to -5: pessimistic (blue)
* -10 to -8: very pessimistic – depressed (dark blue)

To see how this works in practice, here is a chart showing you the recent history of the MoM indicator on the weekly Dow Jones chart (click for larger image):

Djia MoM

Good buying opportunities typically occur when MoM bottoms below -5 in the blue pessimistic zone, as was the case in September 2011. Bull markets will usually see the MoM rise into the optimistic pink or red zone, where they can stay for a while. So, a rise above +5 is not a reason to sell immediately, but one should watch out when the MoM starts going down from optimistic levels. Ordinary counter trend pullbacks or rebounds will typically bottom or peak in the yellow zone (+3 to -3) before resuming move in direction of the longer term trend.
Notice how most of the time the market moves in the same direction as the MoM, and that’s why we watch carefully whether MoM is going up or down.

On weekly charts it is rare to see MoM go below -8, but when it does so it are almost always great long term buying opportunities.

On daily charts we will see the MoM go to extreme values more often. Here is a recent daily chart for Dow Jones (click for larger image):

Djia MoM daily

Over the past year we had three drops into the blue pessimistic zone, which presented good buying opportunities.
You can also see why MoM rising into the red optimistic zone is not a reason for instant panic. In ongoing bull markets we will regularly get a sideways pause or mild pullback with the MoM falling back into the yellow neutral zone before starting the next swing to the upside. We then get a series of MoM peaks in the red optimistic zone. So, we can just move our protective stop closer to the market whenever the MoM turns down in the red zone. That will get us out when a deeper correction comes along, as was the case in May-June and in August.

There are more possible uses for the MoM, but that will be for another post. And in case you wonder: yes, it is possible to trade based on this MoM indicator only. In fact, a patient long term investor can do very well based on the weekly MoM only.

Stay tuned,


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Nikkei panic

Posted by Danny on June 13, 2013

Got some questions on the Nikkei crash, so I will give my technical charts and my updated key levels, including those for Nikkei and for long term treasury bonds (TLT).

The Nikkei crash started a few weeks ago, and now seems to be spilling over in other markets.
The Japanese market is down over 20% from its recent peak, but based on my Earl indicators I wouldn’t be in a hurry to start buying.
Here is the weekly chart (click for larger image):

Nikkei weekly

The Earl indicator has been showing a major bearish divergence for months, and once the Earl2 peaked out there was no way back for this market. A quick rebound to 14000 remains possible, but I wouldn’t rush in until the Earl2 is back into bottom territory, which is at least a few months away.

A look at the daily chart for possible support levels (click for larger image):


Also here we had a clear bearish divergence since early April. The Earl has turned up from oversold level for a quick rebound rally. But the Earl2 is not showing any sign of a bottom yet, so it is too early to buy.
Major support levels to watch: 11800 and then 10400.

I expect a short term bottom near 12000, then a rebound rally to just below 14000. Then a 2nd decline into autumn.


Here are my current key reversal levels:

Status Key (W) Mode Key (D)
Nasdaq BULL S: 3221 DECLINE * R: 3456
S&P 500 BULL S: 1534 DECLINE R: 1644
Nikkei BULL S: 11860 DECLINE R: 13992
Bonds (TLT) BEAR R: 120.24 DECLINE R: 116.80
Gold (spot) BEAR R: 1555 DECLINE R: 1414
Euro/US$ BULL * S: 1.2921 RALLY S: 1.3024
Crude Oil(CL) BULL S: 90.95 RALLY S: 93.32

(Legend: W = weekly, D = daily, R = resistance, S = support, * = change from previous week/day)


The Nasdaq dropped below its daily key reversal level yesterday, and is now in DECLINE mode again.

The Nikkei is still in BULL status, and will remain so if it closes the week above 11860.


Good luck, Danny

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What parabolic peak?

Posted by Danny on June 2, 2013

The recent advances in the stock market have led to an explosion in articles contending that we are in a new stock market bubble or mania. Some analysts are seeing a parabolic peak already. Almost everyone seems to agree that some market decline should come any day now. The number of references to “bubble” on Twitter has also gone up significantly, as was pointed out in this article.
So, let’s have a look.

We all know how a parabolic peak, typical for speculative manias, looks like. The chart just shows a faster and faster appreciation, until it goes almost vertical.
The stock market in the 1980s and 90s shows a classic example (click for larger image):

S&P monthly

It’s easy to see how the rate of change accelerated twice, until it became unsustainable, and then the inevitable collapse after the year 2000.

Is that the kind of picture we see in the current S&P 500 chart? Here it is (click for larger image):

S$P 500 weekly

This is not a parabolic peak at all. If anything the rate of change has decelerated noticeably since 2011. In fact the S&P is still near the bottom of the trend channel it has occupied since 2009. That doesn’t mean it has to keep rising within this channel forever, but unless we get a drop below the support line (currently ~1500) it can keep going for quite a while. If it does so, then I would look for the market to reach the mid line by summer, which would be around 1800. The mid line is likely to put up serious resistance, so look for a meaningful correction if the S&P gets there.

Is there any precedent for this kind of scenario? Well yes, it’s the one scenario you never see mentioned anywhere in comparison with the current times: the roaring 1920s.
Some will consider that crazy, but there are more than a few parallels with now:
1) The market bottomed out in 1921, at the end of a sharp deflationary depression, not unlike 2009
2) Investors had suffered 50% losses twice within a decade, just like investors have burned their fingers twice in the 2000 – 2010 period. When investors have recent memory of painful losses they become very skeptical of any new market advance, and this sets the stage for a long bull market.
3) By 1923, two years after the bottom, the Dow Jones had recovered most of the depression losses, and by 1925, four years after the bottom, it was pushing into new highs. The current market playbook happens to be very similar, markets have pushed into new highs four years after the bottom.
4) What fueled the market? Well, besides ongoing innovation, the Fed also increased the money supply by 60% in the mid 1920s, with the aim of keeping interest rates low, not unlike the current QE programs. That money had to go somewhere, and apparently started flowing into stocks at some point.
5) We know what happened next. Most investors had probably remained scared, scarred and skeptical, even when the market was setting new highs every day. Then they started buying stocks in 1928 and 1929, and that made for the parabolic peak, almost eight years after the bottom. A similar scenario now would point to a peak in 2016/2017.

Here is the chart Dow Jones 1920-1940. (click for larger image):

Dow Jones 1920-1940

I have added the current years to line up the historic comparison. Notice how once the market moved into new record highs, there was only a brief correction and then the market kept grinding higher for almost a year without any serious pullback. Is the same happening again now? We will know by the end of the year.

Here is a chart comparing the current recovery with the post-1921 depression recovery, based on monthly Dow Jones index (click for larger image):

Dow Jones 2010vs1920

Up to now there has been a 0.81 correlation between them. We will see how it continues.

I think the current high levels of ongoing skepticism, and all the talk about bubbles, are actually lending credibility to this scenario. And the ongoing QE programs around the world are known to come with a high risk of igniting another stock bubble.
Bear in mind: history does not repeat, but it tends to rhyme.
The market action in the early 1920s rhymes well with what we see currently. The question becomes: when and where will the rhyming stop? Are we setting up for a great depression in the 2020s, or will the rhyming stop well before then?


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Is investors’ money where their mouth is?

Posted by Danny on April 2, 2013

It is well known that moods, fear and greed drive the markets. So a number of “sentiment” indicators have been developed over the years, in an attempt to measure the mood of the market.
There are indices like the VIX, which try to measure fear or greed on the basis of option premiums.
Other sentiment indicators are based on weekly or even daily polls.

But the problem with the latter is that we don’t know whether the polled investors have acted on their own feeling. An investor might feel mildly bearish, but that doesn’t mean he has sold already. Another investor might be bullish, but maybe he is still waiting for a pullback to do his buying..
Another problem is that not every investor is swinging an equal sized portfolio. A small retail investor might have $20,000 in his account, while a larger investor may have a few million to work with. Both will be getting one vote in the investor sentiment poll, but clearly their influence in the market is of a different magnitude.

It would be a lot better if we could measure whether investors are putting their money where their mouth is. But how to do that?

A few years ago I discovered that Interactive Brokers is publishing their brokerage metrics every month. See:
Every month they tell us how much equity and how much margin debt their customer have. So it’s easy to calculate margin debt as a % of equity. That’s what I did and this is the resulting chart (click for larger image):

brokerage metrics

What does this chart tell us? Well, we would expect to see investors take more risk (more margin debt) when they are bullish and optimistic, while reducing their risk when they are bearish. Indeed, we see that margin debt bottomed at 15% during the 2008 financial crisis. It was lowest in October, well before the market finally bottomed out in March 2009. This means that Interactive Brokers customers were buying at the bottom. We also see that margin debt peaked out at 40% in April 2011 and has since come down to more average levels, even though the market has continued to go to new highs.

Interactive Brokers typically serves more experienced investors who trade frequently and want access to a lot of different markets worldwide. Their average customer has about $170,000 in his account.
While it is good to see what the somewhat more sophisticated clients of IB are doing, it would be even more interesting if we could see the same data from brokers that serve the small retail investor.
While I haven’t found such data, TD Ameritrade took an interesting step last January when they introduced their “Investor Movement Index” (IMX). You can find it here:, and this is their current chart (click for larger image):

IMX by TD Ameritrade

(source: TD Ameritrade)

This index claims to be based on their customers market exposure and activity, but as we can see, the peaks and bottoms in their IMX (green line) seems to lag the highs and lows in the market (grey line) by one or two months. Which should not surprise, since TD Ameritrade is popular with small retail investor, who have an average $100,000 in their account. Small retail investors have a history of being late to the party, and this chart tells us that small investors are getting rather optimistic right now.
It also gets interesting when we see divergences between what IB clients are doing and what this IMX indicates.
For example, while the IMX made its largest one month gain in February, the IB clients have slightly reduced their exposure to the market since last January.
This suggests that distribution of stocks to the broader public is underway, and that’s a warning sign.
Distribution can go on for a while, but the longer it lasts the more painful it ends.

So, I am keeping an eye on both these indicators and will keep you up to date via this blog.


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