LunaticTrader

Investing with the Moon

When the digesting is done

Posted by Danny on September 15, 2014

US markets seem to be in a sideways mode. That may set us up nicely for another push into record territory. Or is this market going to surprise us with a sudden drop? We have now started a new lunar green period, so we will find out soon if any fuel is left in the tank.
Let’s have a look at the S&P 500 chart (click for larger image):

S&P 500

The S&P has fallen back to the 1985 support level created by the July highs. A further drop would probably lead to a test of the 1950 level, where we have a long term trend line support.
Technically, the Earl indicator is in bottom territory but has not turned up yet. Meanwhile, the slower Earl2 appears to be forming a weak peak with a potential bearish divergence. The MoM indicator is close to zero, neutral. That’s not an unanimous chorus, offers us no clues. So, I would just watch the mentioned support levels for the coming week.
A major breakout, up or down, is probably coming. If it goes up then 2050-2070 becomes the next target. I am hedging my portfolio until there is more clarity about the next direction.

Good luck,
Danny

 

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Key reversal levels for week of September 15, 2014

Posted by Danny on September 15, 2014

Our key tables and comments for this week. Click the “Expand” button (bottom right) to watch in full screen mode.

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

Good luck, Danny

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Is margin debt too high?

Posted by Danny on September 8, 2014

The first week of September has been more or less flat in the US stock markets. Once again we see a lot of observers call for the next crash or bear market based on all kind of indications. Today we will join the dance and take a look at margin debt, but let’s start with the current chart for the Nasdaq (click for larger image):

Nasdaq

As expected, the market is consolidating its recent rally. As long as the Nasdaq stays above its July highs it will be well positioned for another push higher once the Earl and MoM indicators bottom out. That could take another week or so. On the upside, the 4700-4800 area is coming within reach. To the downside a drop to 4350 is possible if we get a deeper pullback. Both are possible, but this market has shrugged off a lot of “bad” news this summer, suggesting that the path of least resistance remains up.

Despite new record highs investors keep seeing plenty reasons why the market “should” go down: the Fed is tapering, the VIX is too low,… and this NYSE margin debt chart has popped up everywhere last week (click for larger image):

margin debt

Is this something to worry about? Let’s have a look. The data on which the chart was based can be found here. More complete FINRA data (combines Nasdaq and NYSE) can be found here. Based on the FINRA data there is currently a total $499 billion in margin debt versus $334 billion in free credit balances, making for a net margin debt of $165 billion. That’s about 1% of GDP and only 0.6% of the current $26 trillion market cap (Nasdaq + NYSE).

Comparing this with earlier market peaks:
* October 2007: margin debt $345 billion vs free credit balances of $343 billion (NYSE)
* March 2000: margin debt $279 billion vs free credit balances of $150 billion (NYSE)
* Aug 1987: margin debt $42 billion vs free credit balances of $4 billion (NYSE)
* 1929: gross margin debt reportedly reached 12% of GDP, almost 5 times higher than today (source)

We see no consistent pattern in these peaks. In 1929 gross margin debt was 5 times higher than it is now. In 1987 gross margin debt was 10 times higher than available free credit balances (which means there was very little cash to absorb any panic selling). And in October 2007 there was almost no net margin debt at the peak, there was actually more cash than there is now.

Also note that in 1984 gross margin debt was more than double the “normal” rate seen in 1970s. But stocks just kept going up for another 15 years.

It looks like margin debt is a very unreliable indication. This could be for a number of reasons:
* Current margin debt rates are extremely low, as low as 0.59% for large accounts (source). With many stocks/bonds yielding 2%, 5% or more it cannot be a surprise that margin debt is higher than average. Some investors are simply taking the free lunch that the central banks have been handing out.
* New instruments may make free credit balances look lower than they actually are. With transaction costs much lower than 10-20 years ago, an investor who sells stocks with the intention of buying them back after a few weeks, may now park the money into an ETF like $SHY rather than stay in cash for a few weeks. This can have the effect of making net margin debt look higher than it is.
* Inverse ETF make it possible to hedge a portfolio without going into cash. An investor can even use margin to hedge his portfolio with inverse ETFs. That throws a monkey wrench into the margin debt equation. Rising margin debt is no longer what it was 20 years ago.

We can always find good looking reasons and justifications for being bearish. Charts like margin debt look convincing, but are they? Margin debt could easily reach $1 trillion before this bull market dies. Nobody knows.

Good luck,
Danny

 

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

Key reversal levels for week of September 8, 2014

Posted by Danny on September 7, 2014

Our key tables and comments for this week, now in slideshow format. Click the “Expand” button (bottom right) to watch in full screen mode. Click on “Slideshare” (bottom left) if you want to save and print it.

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

Good luck, Danny

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

Outlook for September

Posted by Danny on September 1, 2014

Stock markets have reached new highs last week. The S&P 500 has climbed above 2000 for the first time and now sits right at our Top target at 2004. Further gains appear likely, but September and October are two months with a rather bad reputation and that may prompt investors to take some profits.

Let’s have a look at the current S&P chart (click for larger image):

S&P 500

The recent price action is very similar to what we got at the start of 2014. After a sell-off the market has swiftly climbed to new highs. Based on the trend channel a further climb to 2050 is feasible. But we have just entered a lunar red period and the Earl and MoM indicators appear to have turned down already. So, I think the market will first try to digest the recent gains.

A similar outlook is seen in the LT wave for September (click for larger image):

LT wave

The wave did fairly well in August, marking the low early in the month and then climbing into a high on the 29th. Expected weakness in the middle of the month did not materialize.
For September the LT wave projects a period of weakness until the 20th, and a high on the 25th or 26th.

I have also updated the 1920s comparison chart (click for larger image):

dow_vs_1920s

The Dow Jones Industrials continues to mimic the price action of the 1920s very closely. We are now approaching the point where the market took off after almost a year of sideways consolidation. So, it will be interesting to see what happens.

Stay tuned,
Danny

 

Posted in Market Commentary | Tagged: , , | 3 Comments »

Key reversal levels for week of September 1, 2014

Posted by Danny on August 31, 2014

Our key tables and comments for this week, now in slideshow format. Click the “Expand” button (bottom right) to watch in full screen mode. Click on “Slideshare” (bottom left) if you want to save and print it.

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

Good luck, Danny

 

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The case for Dow 32000 Updated

Posted by Danny on August 27, 2014

Here are some updates on a series of long term charts I posted last year. Interestingly the case for Dow 32000 is still alive and kicking. Who would have thought?

Let’s start with the Dow going back to 1928. This is a very large image, so click on it to see the full detail:

Dow monthly

The Dow has reached the long term overhead resistance line connecting it with the 2000 and 2007 peaks. It has also kept above the trend line that started from the 2009 lows. The market is increasingly squeezed between these two lines, not able to make up its mind where to go next. But we are going to find out soon.

Zooming in on the recent decades we can see the situation more clearly (click for larger image):

Dow monthly

The Dow has been sputtering near the 16500 resistance level all year. But now it appears to be breaking out above 17000. And that was the final criterion for my Dow 32000 scenario, as I wrote last summer:

A few conditions will need to be met for this very bullish scenario to remain in play:
1) The current correction has to be shallow and cannot venture too far below 14000 before recovering.
2) The green overhead resistance line, connecting the 2000 and 2007 highs, will have to be overcome and left behind. That’s not going to be an easy feat. But with all the ongoing QE, who knows?
3) This breakout above 17000 would have to come by summer 2014.

So, what next? The breakout above 17000 could still prove to be a false breakout, and that’s what more than a few market observers are calling/hoping for. But I would not rule out the case that this market will simply continue to climb to 20000+ by early next year. Few people are betting on it, the market “needs” a correction, isn’t it? I would rate chances for a further climb at 30%.
Another possibility is a drop to ~15000 this autumn, which would break the up trend line since 2009 and clean out “weak hands”, only to rebound and climb to 20000+ in 2015-16. I would rate this a 50% chance.
Third possibility is a drop to ~15000 with no buyers showing up and then a further decline to 10000-12000 or lower. I would rate this a 20% chance at the moment.

Good luck,
Danny

 

Posted in Market Commentary | Tagged: , | 5 Comments »

Garbage in garbage out

Posted by Danny on August 25, 2014

What ingredients go into our trading decisions? Opinions we hear in the financial media? Technical indicators that draw colorful lines on our screen? The latest forward “guidance” issued by the central bank? The next full moon or Jupiter in Leo? The AAII sentiment survey numbers? The stock picks we see on scutify.com? The Elliott wave count? Kayla Tausche’s smile? The geopolitical ebb and flow? Seasonal tendencies?
“Garbage in garbage out” is a saying that originates from computer programming, but it also applies to trading. More on that after our weekly look at the market.

Let’s jump right in with the latest Nasdaq chart (click for larger image):

Nasdaq

The markets have been kind to my latest forecasts for Nasdaq and have climbed straight to the 4530 target. See: Setting up for an August peak and Bending but not Breaking. But let’s not get carried away. Markets being markets: pat yourself on the back for good results and the next thing the market gives you is a good slap in the face. Last week’s results are of no help in the next. The confidence gathered in week 1 can become a trader’s undoing in week 2. That’s in the nature of the beast we call a stock market. But you knew that already, isn’t it?

So, here we are at 4530. The Nasdaq is bumping into an overhead trend line. The lunar Green period is set to end later this week. Sell quick? Hmmm, maybe.
Technically my Earl indicator is just turning down, suggesting some kind of pullback is up next. And the MoM is reaching a very optimistic +8 level, the kind of stuff that has made for peaks in the past.
But the slower Earl2 has just turned up from major bottom. What to make of that? I guess it means we are once more in a situation that can go either way: a further surge to 4660 or a drop to ~4000. Isn’t that always the case? Well, yes…

***

So, what’s with that garbage I mentioned earlier on? Well, more ingredients doesn’t necessarily mean we will cook better. Sometimes readers observe that my posts are rather minimalistic, just my lunar cycles stuff with a few indicators and my read on them. Why am I not mentioning VIX, margin debt or put/call ratio? What about the sunspots cycle, or Mercury retrograde? What about the Fed tapering? The reason is the “garbage in garbage out” principle:
* Broad market indicators like VIX, margin debt and put/call were found to be ineffective in a broad based study. See: Technical Market Indicators: An Overview
* Another big test of more than 5000 technical trading rules in a wide variety of market resulted in failure. See: Technical Analysis Around the World
* Sunspot cycles have not shown any consistent effect in the market, as you can see in my earlier article and in this study: Sunspot Cycle and Stock Returns. And because there are only 20 observed solar cycles, any results would suffer from the “law of small numbers” anyway.
* As for Mercury retrograde, it was found equally useless as you can read here: The myth of Mercury retrograde

Many traders tend to think that more tools, more news, more indicators or more newsletter subscriptions will make their trading more profitable. And there is a whole industry that banks on traders’ insatiable demand for more tools and advice. How about trying the opposite: throw out everything that is demonstrably garbage, and you may end up with something that works…

Good luck,
Danny

 

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Key reversal levels for week of August 24, 2014

Posted by Danny on August 24, 2014

Our key tables and comments for this week, now in slideshow format. Click the “Expand” button (bottom right) to watch in full screen mode. Click on “Slideshare” (bottom left) if you want to save and print it.

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

Good luck, Danny

 

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

Pendulum market

Posted by Danny on August 18, 2014

Fears rise on Friday, next they ease on Monday…, a pattern we have been seeing for weeks. Like a pendulum swinging. Will it continue that way? It is quite possible. Just like last week, I remain mildly positive about the market as long as each relief rally goes a little higher than the previous one. That’s how walls of worry get climbed.
Let’s have a look at the S&P 500 (click for larger image):

S&P 500

The rebound has taken the S&P to double overhead resistance. Earl and MoM indicators turned up from major bottoms a week ago, and now the slower Earl2 is at the point of turning up as well. Technically, a further rally to 2000+ is easily possible, but of course not guaranteed.
A failure to climb above 1970 would not bode well for the market and a decline below 1910 would confirm a second move to the downside.

Good luck,
Danny

 

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

 
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