Archive for ‘investment theory’

Lets start the new year with pivots….

By , 2 January, 2009, No Comment

I am off and running and ready to start a profitable year. The topic of the day is pivot points which are, to some, the holy grail of investing. Generally speaking pivots are calculated in the following manner:

R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C) / 3
S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)

Where….”S” represents the support levels, “R” the resistance levels and “P” the pivot point. High, low and close are represented by the “H”, “L” and “C” respectively. Note that the high, low and close in 24-hour markets (such as forex) are often calculated using New York closing time (4pm EST) on a 24-hour cycle. Limited markets (such as the NYSE) simply use the high, low and close from the day’s standard trading hours.

As for my own opinion, I find pivot points of great value on certain days, and of zero value on others. So, if you are going to be a pivot point man or woman, you will need to develop a methodology for determining the accuracy of your own pivot point system.

As for me, I generally chart the pivot points each day, and see what relevance they may have to my own trading techniques.

Closely related to pivots are support and resistance, and this is where the rubber meets the road for me. As many of you are aware, I base most of my trading on chaos theory, which is to say that there are patterns within patterns, but the frequency of these patterns within patterns is random. Ah, that certainly is a mouthful and I am sure that many of you are shaking your heads and wondering I am actually saying. To put it quite simply, I believe trying to apply linear charting systems to a non-linear market is futile. There is nothing, absolutely nothing static about the method in which the market trades.

I am sure the random walkers are standing and applauding at this point, but you can all sit down. Because the most recent market meltdown pretty well puts to rest any notion that the markets are efficient, or that all possible information can be Incorporated into any priced equity. Of course, the standard argument would sound something like this, at least from the Random Walk Cabal….”those equity bubbles are anomalies that occur from time to time…” But if they were aberrations, every member of the risk arbitrage community would have resolved those market inconsistencies within hours. No these bubbles, or masses of mispriced assets suggest that random walking in a fine theory, but nearly useless in actual practice. The creation of bubbles in the market has occurred in a variety of conditions and markets for more than 400 years. Whether it has been tulips, or gold, or Internet stocks, we tend to overbuy and oversell, usually against all logic.

However, support and resistance are of great importance to me…but it is important to remember that support is not static either, and is constantly morphing into new support and resistance levels as the days progresses. What? Yes, I know that most traders strike a line here and a line there and establish there support and resistance based upon those initial highs and lows. Some then apply Fibbonacci retracements to further establish support and resistance. Ah…erm…well….Fibonacci analysis is certainly interesting at some level, but the actual levels of correlation, proven by hundreds of scientific studies, is sketchy at best especially when charting price reversals. Since many of the numbers in the Fibonacci sequence are quite close together, it isn’t hard to point out that the market turned just past a 50% retracement, or just short of a 61.8 retracement….but the fact of the matter remains that super accurate predictions with Fibbonacci numbers is not as accurate as some practitioners would have you believe.

At once point in my career I drew in dynamic support and resistance lines as I traded, but I have found that a program called Decision Bar does an excellent job of pin pointing the ever changing support and resistance lines and have learned to rely on it’s accuracy and save myself a wealth of time and effort….but that’s not the entire story…which we will discuss tomorrow.

So, for today….I have tried to point out the problems of charting non-linear systems with linear charting tools, and suggest that non linear charting systems can greatly enhance you trading success.

Subscribe in a reader

Some Random News that the Market doesn’t seem to think is too important

By , 12 December, 2008, No Comment

The Census Bureau reports that retail sales collapsed in October:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $355.7 billion, a decrease of 1.8 percent from the previous month and 7.4 percent below November 2007.

Total sales for the September through November 2008 period were down 4.5 percent from the same period a year ago. The September to October 2008 percent change was revised from -2.8 percent to -2.9 percent. Retail trade sales were down 2.0 percent from October 2008 and were 8.5 percent below last year. Motor vehicle and parts dealers sales were down 25.2 percent from November 2007 and gasoline stations sales were down 22.0 percent from last year.

The following graph shows the year-over-year change in nominal and real retail sales since 1993. Click on graph for larger image in new window.To calculate the real change, the monthly PCE price index from the BEA was used (November PCE prices was estimated as the same as October).

Although the Census Bureau reported that nominal retail sales decreased 8.4% year-over-year (retail and food services decreased 7.4%), real retail sales declined by 10.1% (on a YoY basis). This is the largest YoY decline since the Census Bureau started keeping data.Retail sales are a key portion of consumer spending and real retail sales have fallen off a cliff.

Courtesy of Calculated Risk

————————————————————————-
SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme
FOR IMMEDIATE RELEASE2008-293
Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today charged Bernard L. Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.
The SEC’s complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was “finished,” that he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme.” The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme
Subscribe in a reader

From Financial Armageddon Blog

By , 9 December, 2008, No Comment

Financial Armageddon

Less than Optimistic

Posted: 08 Dec 2008 07:29 PM CST

Analysts naturally factor in the number of people who are out of work when they try to figure out future consumption patterns. But there is more to it, of course. People who are afraid they might lose their job are just as likely to economize or clamp down on spending as those who have no real choice in the matter. In fact, some might say that changes in the attitudes and behavior of the 85-95 percent (depending on which statistics you believe) of those who are employed matter much more than the financial wherewithal of those who aren’t. Under the circumstances, the following Reuters report, “More Americans Worried About Jobs,”

offers little reason for optimism.

One-third of U.S. consumers are worried about their jobs, a growing number that should be the latest sign of concern for retailers during the key holiday shopping season, a consumer research firm said.

“Job security (concern) is the only thing that will shut a customer down from shopping,” Britt Beemer, founder and chief executive of America’s Research Group, said.

In questions asked for Reuters as part of a larger survey, 33.6 percent of respondents said they were concerned about job security. That number is up from about 24 percent a month ago when a similar question was asked, and up from about 3 percent last year, Beemer said.

The survey was conducted just after the Labor Department announced that U.S. employers cut 533,000 jobs in November, the most since 1974.

Retailers are in the midst of what some experts see as the worst holiday season in nearly two decades, as job losses, the credit crunch and falling home prices all push consumers to keep their wallets shut.

In the America’s Research survey, 25.4 percent said they had already completed their holiday shopping, compared with only about 18 percent to 19 percent who were finished at this point last year, Beemer said.

“That’s not good for retailers,” he said.

Also, 24.3 percent said that the stock market’s declines were impacting their ability to spend. That was up from 16 percent who answered a similar question a month ago, Beemer said.

U.S. retailers have already seen the impact of weak spending. Sales at stores open at least a year fell 2.1 percent on average in November, according to Thomson Reuters data. That number fell to a 7.8 percent decline when Wal-Mart Stores Inc was excluded.

Wal-Mart has been the winning retailer so far this season, attracting consumers with low prices on many items.

According to the survey, 9.3 percent said they shopped at Wal-Mart for the first time this year.

Of those, a whopping 98.9 percent said they would shop there again and the same number said they would continue to shop there once the recession ends.

“We’re now watching a retailer take over the Christmas shopping season,” Beemer said.

In other results, 41 percent said that they feel more guilty about spending money when others are struggling more this year and 38.6 percent said they were waiting until closer to Christmas to get better deals.

The survey included 1,000 people and had a margin of error of plus or minus 3.8 percent.

Subscribe in a reader

I’m back!

By , 6 December, 2008, No Comment

Again, I apologize for the inconvenience I may have caused in my absence, but my parents are not well and, from time to time, situations arise that require my attention. Thankfully, we have weathered the most recent bout with illness and my father is well on his way to full recovery.

Okay, now for the markets the last week. For those of you who think in a logical manner, this post will make no sense. As a matter of fact, the market action in the last two weeks has been as illogical as one can imagine. On the other hand, the market is under no constriction to act logically and frequently defies gravity, common sense and traditional investment knowledge. Yesterdays action was no exception, we had the worst jobs report in modern times and the market ended on a positive note. I have read a number of explanations for this unusual behavior and most sound like arm chair quarterbacking. The fact is this: the labor market shed 500,000+ jobs last month and has lost 1.9 million jobs in the last four quarters. This would obviously mean that less money is going to be spent, less good produced, and less profits earned.

But the market decided to focus instead on some news from The Hartford late in the day, which it felt was positive enough to drive the indexes unusually high. I have never pretended to understand traders, and of late my understanding has faded to minuscule levels.

From my point of view, there are very dark clouds on the horizon, and nothing short of a miracle will save us from a deep, protracted recession. The traders seem hell bent on putting off this inevitable result and rally on the most obscure of news.

Of course, as traders we are little concerned about overall market direction except as it concerns the welfare of our country. We trade up and down markets with the same ease. But it pains me to see our fellow citizens in such pain, and most of it has been produced by a greedy few. Let’s hope as a country we can effect a speedy recovery and get our fellow citizens back to work in a timely manner.

Subscribe in a reader

From Calculated Risk

By , 28 November, 2008, No Comment

CB Richard Ellis: CRE “Conditions have deteriorated” Rapidly
by CalculatedRisk on 11/28/2008 09:10:00 AM

“Conditions have deteriorated on a scale and with a speed that no one could have predicted just a few months ago. Market conditions of unprecedented strength are roiling the world’s financial markets. The global economy is either in, or close to, recession and 2009 is not likely to be a year of great recovery.”

Brett White, president and chief executive officer of CB Richard Ellis, recent letter to clients, from the LA Times: CB Richard Ellis feels industry’s painAnd a few months ago White wasn’t exactly optimistic:

“Decreased investment volumes have now become evident in all parts of the world. … I can best describe the current environment as being very challenging and still having a high probability of getting worse before we see improvement.” Brett White, president and chief executive officer of CB Richard Ellis, July 30, 2008

Subscribe in a reader

what an interesting week

By , 22 November, 2008, No Comment

From the onset, let me say that I sure wish the volatility in the market would subside. I find myself tracking at either 2(ATR) or sometimes 3(ATR), which gives me the willys, for lack of a better term. Of course, the volatility is a double edged sword, if you are on the right side of the trade and the market accelerates, as it so often does, you get the momentary feeling that you are a genius. That illusion can easily dispelled on the very next trade however, and you can end up feeling just as foolish as you felt smart…all within five minutes.

And some rationality in the market might be nice, too. Granted, a new Treasury Secretary might turn out to be a wonderful thing. but his options are as limited as the current Treasury Secretary’s. We have the accelerator on interests pushed nearly to the firewall, and the next step will surely be a Fed. Funds rate of 0%, ala Japan for a good part of the last decade. For all the worry about inflation we have heard, I find myself much more concerned with deflation and demand destruction, which causes all sorts of problems in balancing money supply, interest rates and a host of other more subtle problems. The point is, the problems that were sending the market downward Friday morning did not change with the potential appointment of a new Treasury Secretary, regardless of how talented the man is…we have some serious problems at hand and no real remedy in sight.

And the credit problems are really what has been giving the market indigestion, if not a downright ulcer. The numbers on the CSO’s and accompanying credit default swaps are just plain staggering, and solution is not apparent to even the most gifted economists. My favorite economist, Paul Krugman, has a number of suggestions, but I have yet to see a solution. We are in a situation of treating the symptoms of the disease but are, so far, unable to cure the root problem. And I’m not so sure throwing a pile of money at the problem is the answer….but maybe it is.

That being said, we also find outselves bailing out just about every industry that is in any way related to finances….the automakers being the most prominent. The most important question that has to be asked is fairly simple….”are we chasing bad money with good money?” I don’t have a credible answer to the question either. And then there is real estate, and mortgages, and taxes….the problems are manifold with all the participants lining up to get a piece of the government hand out programs. Where does it end? I don’t know, nor does anyone else….but the implications for the entire scenario appear to be grave, and the patient is very ill.

There is some beauty in it all, though. As traders, we always have the chance to earn money, we always have a job. Just the same, I worry about our country and the direction we have taken in the last eight years. I pray we can find our way back home and rest on solid footing. What do you think?

Subscribe in a reader

TED spreads

By , 9 October, 2008, 2 Comments

Here is the TED Spread from Bloomberg. The TED spread hit a record 4.13 this morning. This is far above the highs reached during the previous waves of the credit crisis.

Note: the TED spread is the difference between the LIBOR interest rate and the three month T-bill. Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to “risk free” treasuries).

From Bloomberg: Libor Dollar Rate Jumps to Highest in Year; Credit Stays Frozen

The cost of borrowing in dollars for three months in London soared to the highest level this year as coordinated interest-rate reductions worldwide failed to revive lending among banks for any longer than a day.
…
The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent today, the highest level since Dec. 28. The Libor-OIS spread, a measure of cash scarcity, widened to a record.

The credit markets are still in severe distress.

Courtesy of Calculated Risk

Subscribe in a reader

the last two futures trading days

By , 17 September, 2008, No Comment





From the onset I have to apologize for not posting for two days, but we a serious illness in the family and that event, along with the time I had to devote to trading, kept me from posting. But here are the charts.

The first thing you will probably notice is that on very volatile sessions I switch from trading the ESZ8 to the YMZ8…while this may be some psychological disorder brought on by years of trading, I have always switch to the YM because there is less black box and technical trading on the YM. Okay, that is what I think and I cannot for one second substantiate the fact. But psychological I always seem to trade the dow futures contract than the S&P contract on chaotic days.

I will not rehash the troubling events that have led to the unprecedented turbulence we have endured this week and in the past weeks,,,,,,Fannie Mae, Freddy Mac, Lehman Brothers, AIG, Bear Sterns….and a host of potential corporations that are bound to join this list before this unprecedented event comes to a close. In my opinion, the derivative issues are now just coming to light and the full extent of the pervasiveness of them is yet to be determined, let alone the level of leverage each individual contract assumed. It not going to be an easy or painless task and it is going to take a very deft touch to see us through this mess.

Subscribe in a reader
Page 5 of 6« First...«23456»
Easy AdSense by Unreal