2014 – Page 2 – Adaptiv

Attention Slow Money (IRAs / 401ks) – Risk Ahead!

October 19, 2014April 13, 2022

Investing is all about risk management. Preventing loss is just as important as realizing gain. There are periods in the market where Return of Capital is the more appropriate approach than Return on Capital. Now is one of those times. Those retirement vehicles (401ks, IRAs, etc.) that have exposure to the US equity markets would be prudent to reduce that exposure at this time. You are an adult. You make your own decisions. You do not make investment decisions based on what you read here. You know the drill.

The last couple weeks have done some structural damage to the market. We identified the need to watch the S&P 500 closely back on October 8th. Those levels broke down and were a sign to look for lower prices. We got lower prices and even broke significant support at 1900 on the S&P (by the way, breaking significant support levels are a hallmark of a directionally shifting market – in this instance, from an up trending market to a down trending market). What did this breakdown mean? Something has changed. Specifically, the likelihood of lower prices ahead has increased. That means risk has increased. We don’t like to lose money if we don’t have to… So when the market tells us something has changed, we listen. You should too.

After a good deal of studying many markets and charts, I’ve identified some levels on three US major markets (Dow, S&P 500, and Russell 2000) that would need to be recaptured in order for any equity exposure to be increased or reestablished. Right now, the risk of loss is too high to consider hanging around to see what happens. If these levels are not recaptured soon, then lower prices are likely. If these levels are not recaptured, the best case scenario is sideways price action for a few weeks. One thing is for sure, the next few weeks have a high likelihood of volatility (large price swings), which is also a hallmark of trend change.

In summary, the current potential for reward it too low compared to the current exposure to downside risk. The body of evidence (including Intermarket behavior, cycles, internal breadth, seasonality) point to a dangerous week ahead. We even noticed that today marks the 27th anniversary of the 1987 stock market crash. Does that mean it will again this week? Absolutely not. But volatility and risk are upon us. Buyers beware. Risk ahead!

Here are our levels as annotated on the charts. Hopefully, we can recapture these levels and evaluate the next move. Be careful, curious investor.

10-19-2014 Important level on SPX — Need to recapture 1905

Candle Sticks

Next Week is a Big Week for the Market

October 17, 2014April 13, 2022

The major US markets have been structurally damaged, increasing the likelihood of a large correction beyond what we’ve already seen. That being said, we are keeping an open mind and searching for evidence that we could see a short term bounce in the US market (S&P 500, Dow, Russell 2K). Here are some signs that we’re getting ready for a relief rally:

Russell 2K (See chart below) | Positve candle formation and a daily close above previously broken support (1082). The Russell 2K tends to give early signs compared to the rest of the majors. The basing by this small cap index is a positive development. It is very close to reaching 1100 and closing our Russell 2K short trade. *NOTE: at publication time (close of trading, Friday), the positive candle development turned neutral if not bearish.
50 day Rate of Change (ROC) on the McClellen Summation Index (not shown) | This indicator looks at the 50-day rate of change (ROC) in the Summation Index. It simply compares today’s value to that of 50 trading days ago. Mathematically, it is another way of quantifying the total of the last 50 trading days’ McClellan Oscillator values. When it gets to a deeply negative value, it indicates a longer term oversold condition for the market, one which is difficult to sustain past a certain point. When this indicator turns back up again, the message is that the big oversold condition is waning, and a rebound period is getting started. That is the condition in which we find ourselves now.
The CBOE VIX Index (See chart below) needs a breather | The VIX gets its share of criticism, but in rapidly moving markets it has its place in the toolbox. Research by Nick Colas of Convergex shows that the long term VIX average – back to 1990 – is 20 and the standard deviation around that mean is 6. That means at 26 and 32 you have 2 reasonable levels where the VIX should top out. Now, if you think we are entering a period of real crisis, the numbers shift higher. Typically the VIX averages 28 when things are really bad (think back to the Financial Crisis) and the standard deviation rises to 8. That puts the target at 36 and 44. Bottom line: don’t try to pick a bottom until the VIX gets to at least 26. We reached 26.00 yesterday. *NOTE: at publication time (close of trading, Friday), the VIX closed at 21.99.

The evidence above points to a short term bounce. But as of this writing (close of trading), it appears the bounce may have already taken place intra-day on Friday. To say the least, the market is at a major inflection point. We’ll provide more research, analysis, and if/then game-planning over the weekend. Next week is a big week for the market. Time to do some homework…

RUT trying to recapture previous support now turned into resistance

Education

What We’re Watching

October 16, 2014April 13, 2022

JC Parets is one of the best Technical Analysts out there today. There are many good ones, but what separates JC from the crowd is his ability to communicate the most important and impactful aspects of Technical Analysis. He is a thought leader that sticks to the basics, incorporating Occam’s Razor when communicating his investment theses. And as always, his Intermarket analysis is strong. Enjoy his evidence on why lower stock prices are likely (Click below). Tomorrow, 360 Investment Research will take a crack at identifying some downside targets… or should we be looking for upside targets? Check back tomorrow.

Cycles

Important Cycle Marking Major Market Top?

October 14, 2014April 13, 2022

One of the many tools at our disposal at 360 Investment Research is the use of cycles. What are cycles? Cycles are recurring events that happen at such a frequency as to be reliable in identifying the same event in the future. Think of the seasons of the year: Spring, Summer, Fall, Winter. These are cycles. They happen over and over again with reliability. We know with certainty approximately when these events will take place. Believe it or not, and I don’t have an explanation for it (other than ebb and flow of liquidity)… but markets also have cycles. One such cycle, the 360 trading day cycle, was introduced to me by Raj Ian Thijm on his site, http://timeandcycles.blogspot.com/. This cycle marks, with approximate reliability, turns in the S&P 500 every 360 trading days (which is also the equivalent of 525 calendar days or 75 weeks). See the chart below (you can click it to embiggen). The gray lines mark a distance of 360 trading days. Note how consistently this cycle marks significant turns in the market. What I also found interesting about this cycle is the possible significance of a cycle within a cycle. Look at the chart. See the green lines? This is the 360 trading day cycle on its 5th instance. Five 360 trading day cycles equal 1,800 trading days. Nice round number. But, that’s not the point. The point is that this 1,800 trading day cycle (a parent of the 360 trading day cycle) marked the relative tops of the S&P 500 back in 2000 and 2007. This same cycle has come due recently. Will it mark the top of the S&P 500 again? I don’t know, but I will be watching this carefully. The significance of the 360 trading day cycle is evident. Stay curious, investor.

360 trading days mark important turns in the market. Could 1,800 trading days be marking this as a top?

Education

The Psychology Of Investing

October 14, 2014April 13, 2022

Equity

Lunch with Russell

October 10, 2014April 13, 2022

The Russell 2000 is an index containing – you guessed it – 2000 Small Cap stocks. It’s also an index that is breaking down sharply through resistance this week. The significance of this move is a higher probability of lower prices in the immediate future (over the next few weeks). Another impact is that most US markets are correlated to the Russell 2K. Capital preservation is a smart move. Cash is a position too.

The chart below may look complicated, but it’s actually very simple if we break it down. The index formed a double top with a negative momentum divergence (black lines). Support has now been broken (shaded area around 1100). The move from the highs through the shaded resistance marks equilibrium and our measured move to the downside (orange dashed lines). The measured move lines up great with a drawn parallel trend line (green dashed line) only touched back in October 2011. The aforementioned has also lined up well with a 50% Fibonacci retracement and the 200 week moving average. This confluence of resistance is a magnet and our downside target (a drop of 11%). The only other viable target I see is at the 38.2% retracement in confluence with the already established solid green trend line (drop of 6%). We’ll continue to evaluate this decline as it moves along.

How do we take advantage? Through an inverse ETF that goes up in value when the Russell 2K drops in value. A few choices:

RWM (1x leverage): in general, every point move in RUT is a one point move in the opposite direction for this ETF
TWM (2x leverage): in general, every point move in RUT is a two point move in the opposite direction for this ETF
SRTY (3x leverage): in general, every point move in RUT is a three point move in the opposite direction for this ETF

All of the above carry risk to varying degrees. Our risk is defined: If RUT recaptures 1100, we’re out. Classic risk management. We have our stop. We have our target. Trade safe, curious investor.

Equity

Watch the S&P 500 closely

October 8, 2014April 13, 2022

With Small Caps and Mid Caps looking increasingly weak, not to mention stock markets across the globe (FTSE, DAX, CAC), we’re keeping a close eye on the S&P 500’s price action. If this major US index does not hold/bounce from this level, the next area of support would be around 1900, a confluence of previous resistance (now turned support) and a parallel trend line running from the November 2012 low. Monitor this situation closely, curious investor. Price tells us everything.

S&P must hold or bounce from here. Otherwise, lower prices are immediate.

Breakout

Nike Revisited: Did you JUST DO IT?

September 28, 2014April 13, 2022

That was quick. Last week, our technical analysis pointed to a good probability of higher prices in NKE after identifying an ascending triangle on a weekly time frame. Maybe you got stopped out at 79.50. Or, maybe you enjoyed the 10% gain! One of the first questions I got from individuals who saw this analysis and subsequent gain was… Why? What happened? My answer: does it matter? Does the 10% gain not count if we don’t know exactly why. You see, every ounce of our body is programmed to ask this question. It could be curiosity. It could be our rebellious nature. We want to know why. In investing, this desire to know why is looming in the deep recesses of our analytical minds. But guess what? We cannot know everything. Do you want to know why NKE went to $89? Because that is what it’s worth. Price is the final arbiter of value. Why is NKE worth $89? Because enough money believes such that it created demand that outstripped supply to the tune of $89/share. That’s really what happened. Sure, fundamentalists will point to earnings. Ok, that’s fine. But how many times have you seen great earnings and see the price drop? That’s right. It happens a lot. Could it be that price forecast the earnings would be that good? Absolutely. We can think what we think, but we must trade what we see. What did we see? That the likelihood of higher prices in NKE were pretty good. Now what? Move your stops up to $84.50 (which is equal to 50% of this original move).

If you benefited from this information, you’re welcome. Share the wealth. Share 360 Investment Research with your friends. Trade safe, curious investor.

Breakout

JUST DO IT

September 21, 2014April 13, 2022

Nike has broken through overhead resistance to new highs on weekly and daily time frames. The move comes after the fourth knock on the 79-80 door. Corrections take place in one of two ways – through price (declines) or through time (sideways price consolidation). This bullish continuation pattern in NKE is a classic ascending triangle, meaning that price formed this pattern during a period of consolidation within an uptrend. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher (for NKE, 79-80), while the second trendline connects a series of increasing troughs (marked with a “360 green” line). What’s great about patterns is that our risk and rewards are well defined. In this case, our reward target is 96ish, a 17% gain. And we can choose one of two stop loss levels to manage risk – either 79.50 (below previous weekly resistance now turned support) or tighter at 80.75 (the ideal support level on a daily basis)

We have our entry (right now), our stop loss, and our target. We don’t enter a trade without an exit plan. So we have our game plan and will enter this trade because of the robust risk/reward opportunity. If we get stopped out, we don’t care. That means our risk management is solid. We’ve removed the emotion while identifying great potential gains. You’re welcome.

Equity

Keep Calm and Carry On?

July 9, 2014April 13, 2022

Of late, the FTSE (London Times Stock Exchange) has been struggling to make new highs. When looking to the left on the daily chart, we see that lower highs and lower lows (even though minimal) are beginning to accumulate. In addition, this level appears to bring out plenty of supply (sellers). The overall trend is up, but tightening within an ascending triangle. This price action makes us sit up and take notice. A substantial move could be in the works within the next three months. The FTSE has struggled since early 2013 to clear the 2008 highs. We’d like to see this index break upward (or at minimum, hold this level) to confirm all other current global equity bull markets. If FTSE breaks down, it will cause us to watch all other global equity markets (most notably, the US) with more scrutiny. Keep calm, curious investor.

Year: 2014