Combining GB with spread trend

[pmward]

Missed it.
Godspeed PM.

Haha, just heard on Phil’s Gang that you are better off buying GDX and GLD now that the big institutions are getting in...”better buying it now at 33 than at 16/17”

Haha, well breakouts are a form of confirmation for the rally. Not all breakout succeed, which is why I have a stop loss in place and why I am keeping my size in check. But it certainly is less risky now than it was at 16/17. When it was down there the ETF was having liquidity issues and was trading away from NAV.

[pmward]

I hate to say it, but I think it's over. I was really hoping to deploy a bunch of cash into stocks lower, but it just doesn't seem likely that we will get anything more than a small pullback/consolidation at most. The bullish signals are piling up

Hey pm, have you changed your mind on what you said above or the investment in GDX is just a different kind of animal (based solely on technical indicators) ?

Yep, that's still my current view for the most part. Stocks are basically in a holding pattern at the moment, stuck between 2720 and 2850. I think the longer we sit still, the higher the odds of continuation to the upside. Fundamentally speaking, I think there are a lot of news items in the coming months to bull people up... states starting to reopen the economy, additional stimulus, unemployment claims trending down, then people going back to work, etc. It's really not going to be until June/July until we will start to really see the economic damage truly coming through in the data. I really wouldn't be surprised to see stocks rally, and then in the summer or fall finally have reality hit when people realize that there was some lasting damage. Also, the Trump PUT is good until November, after that though he has much less motivation to prop up the economy. Matter of fact, it's likely the virus has thrown more fuel on his desire to escalate the economic war with China.

So at the moment I'm looking for ways to participate in the rally if it continues, but I'm being very strategic in only investing in areas that are showing strength (tech, gold miners, health care, biotech, and momentum are the areas specifically that I see opportunity) and keeping all of these trades on a tighter leash than I normally like to. Hence why I chose GDX. Gold miners are showing so much strength right now. And if the stock market does drop in the short term, gold miners may not follow. In 08 gold miners went down with stocks until November, then from there they started going up while the S&P continued to go down for 4 more months. So there is a bit of strategy here in that I think GDX will out perform if stocks have bottomed, and that it may still go up even if stocks have another leg down. FWIW, if stocks do have another leg down I do not expect it to be the cliff jump that we had in March. I think it's most likely we have a slower lower volatility grind down for a few months.

I also always sit down every weekend and do a really deep dive into the charts. I'll update here if anything jumps off the page at me. But for the moment, we really are just treading water and waiting for the market to choose a direction.

[pmward]

Just to kind of expound on that a bit more visually, here is a chart I created of the SPY for the last 2 weeks. See how the price is just stuck there between 272 and 285? It poked it's head above that 285 briefly, even closing above it last Friday, but was rejected again. As of the moment it may feel like the market is going up, but it really isn't. We are in a trendless holding pattern at the moment.

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Now let's zoom out a bit more to a two month chart and you can see how from the low on March 23, we were in a very cleanly defined trend up. Yet, this week something changed. We broke below that trend. We also went back up to try to get back into that trend, and we were rejected. You can also see momentum and relative strength decreasing the whole way up. Are these divergences trying to tell us something?

sc-2.png (158.95 KiB) Viewed 6447 times

Now if we zoom out one more time to the 1 year chart, you can see more of these puzzle pieces coming together. Notice once again how we have that trend channel that we broken down below, retested, and got rejected. Notice the orange line I placed on there at the volume markers, see how volume is trending down? How as this rally has went on there has been less and less buying behind it. That's also an interesting divergence. Also, it's worth noting that this whole week the S&P was really struggling with it's 50 day moving average. Lots of sector ETF's were also struggling with their 50 day moving average this week. We did close above that today though, so that's one point for the bulls. If they can hold us above that 50 day moving average for a few days it would increase the odds of the bull case greatly.

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Lastly, I'll leave you with a chart of GDX. See how different of a picture this is? At the top two panes you can see the ratio of GDX to SPY and to GLD. Look at how strong it's been performing relative to both. Look at how we have a clearly defined up trend that it is above. Look how it is above upward sloping 20, 50, and 200 day moving averages. Look how RSI and PPO are screaming up and to the right. The only divergence I see here is the same volume divergence you see in SPY. Volume has picked up in the last couple days since the breakout, but I would still like to see a bit more.

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Now with this picture painted, if someone wanted to have some right tail hedging in case this rally is for real and stock continue up, can you see why I would choose GDX as opposed to SPY?

[Vil]

can you see why I would choose GDX as opposed to SPY?

Yes, I can. And thanks for the thourough walk-through. Actually, I had more or less the same thoughts in mind. Since I bought the analogue_of_SLV on the very bottom (with it I am around some good 22-27% of profit), I can only watch this zig-zaggy market that's well above my trading skills. I've almost done nothing, was waiting for the next round of drops, but that did not happen.

Regarding GDX (we have it here on Xetra as G2X, less liquid but still trade-able), I can clearly see your point. Only worrying point is in the day of breakout (that appears to be 22) and the next day the volume has increased 40-50% (on average) to its pre-corona times, which as you say is still something, but not the ideal setup. Still the increase is evident compared to the days after 14th April. Since more than a week, SMA20 is already on top of the rest, too. Maybe in the next couple of days the breakout level will get checked as the new support, who knows.. And by the way, if you haven't seen it yet - from 'The Unfolding' article, shared by ochotona, on p.85 there is interesting graphic about gold miners :

GoldMiners.jpg (136.23 KiB) Viewed 6422 times

Yet on another note - I am used with some of the swing trading terminology and techniques, though I still do not feel confident enough to apply those in practice. Maybe I do not believe enough in them yet. Even basic stuff as trend lines often appears to me as a sort of well chosen way to draw lines around (well, with horizontal supports/resistance I am fine and do firmly believe in). Fibonacci retracements, for example, are also a sort of voodoo magic for me. It might be that still the different mentalities are fighting inside me - think of 'a random walk down wall street' vs 'technical analysis'

[pmward]

Interesting chart. Yes 2008 had a similar effect like I mentioned, where in the initial panic selloff miners got dragged down, but then went up while stocks as a whole continued to fall.

The pitching being thrown by markets right now is indeed really hard to hit. Whenever volatility creeps up like this it has to get difficult, because with the volatility if it were easy and did what everyone expected everyone could easily make a fortune. The market has to do what nobody expects it to do long enough and strong enough to keep both the bulls and bears honest. If your going to trade in this environment, good stock/ETF pickers will be rewarded. Also, those that keep their timeframes short, those that stay agile and listen to the charts instead of their logic/emotions/desires, and those that plan their stops for both if they are right and wrong in advance will be rewarded. The trick with stops though is that with increased volatility and trading range, you have to have a bit wider stop than in a low volatility regime. Something like chandelier exits that sets a trailing stop at 3x the average true range over the last month is a pretty good way to do a trailing stop in this environment, and is something I am tracking for all my VP investments at the moment. You need to know in advance at what price targets you are proven right, and what price points you are proven wrong... and be flexible enough to get out with a profit if you start off right and the tides turn. It's all about risk management. Technicals on a chart are simply clues. They are not fool proof. You're just using them to come up with some decent probability bets, then using risk management to make sure you put the trade on in a way that has a good risk reward. I'm not risking more than 1% of my portfolio on any one trade in my VP right now. So, for GDX I took a 10% position, so the maximum loss I could take on that one position is 10% (10% OF A 10% position is a 1% loss). I would likely hit the ripcord long before I got a 10% loss, but still, my potential upside gain is way above 1%. I also may add to the position later if it starts to go my way as I'm still sitting on way more cash than I like. So my trade is put on in a way that skews into my favor by keeping my potential reward far greater than my potential loss.

As far as Fibonacci is concerned. I do watch the retracement levels. I don't think there is anything magical about a 31%, 50% or 61% retracement per say. But in a trending market your pullback phase by definition have to be less than your trending phase. Also, Fib retracement levels, just like trend lines and support and resistance, are things that big institutions watch and trade around. Big institutions buy in the general area of support and sell in the general area of resistance. Since these big institutions are the bulk of the trading volume, these levels become a self-fulfilling prophecy. 50 day and 200 day moving average are another example. Every chartist on the planet looks at the 50 day and 200 day moving average. It's because of this that they become points of contention.

[pmward]

Also worth keeping an eye on small caps. This is the spread between IWM and SPY. Notice how while the spread was in a free fall, but found support there three times. We are still getting lower highs, but no longer getting lower lows. Then look down at RSI which is trending up and trying to test that midline. This is a divergence worth paying attention to in the coming weeks, as at some point, small caps are going to take the lead, as they always do coming out of a bear market. This chart tells me that small cap relative strength is starting to coil up. If we start setting some higher highs, if RSI can get up above 60 here, and obviously if stocks in general start trending up, it would likely be a good time to start tilting towards small caps.

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[buddtholomew]

In GDX @33.60

[pmward]

In GDX @33.60

It's holding that $33 support level nicely, the bears keep trying but can't close that breakout gap. That's a good sign of constructive consolidation. If/when my trailing stop in GDX gets in the green, I am debating on trading my 10% VP allocation to gold into GDX as well if the chart continues to show strength.

Also, some bullish signals are really getting thrown today for the general markets. I took on a position in IWM on a breakout of the 5 minute chart this morning that I'm already up ~1.5% on. I'm watching how we get into the close, and I may be going risk on and turning tilting my portfolio to be cautiously bullish. I'll update more later when I have the time to fully compose my thoughts and moves.

[pmward]

Ok, so lots of green signals flashing on my timeframe. S&P confirming the breakout above 50 day moving average, S&P confirmed it's break above 2850 resistance, Russell 2000 setting a new higher high, small-caps and transports (the 2 things I look to as a canary in the coal mine) have both been out performing the broader market the last few days, the IWM:SPY spread charts RSI went into positive territory today, The QQQ 12/26 EMA had a golden cross last week that is confirmed by starting the week above it, and a volatility based trend signal I'm following also flipped green today. Basically, until today signals on the short term time frame were green, intermediate (my preferred timeframe) were mixed, and long term were red. Today, intermediate signals are flipping from mixed to green.

So how am I going to play this?

The last few weeks since I broke away from GB my portfolio has been 40% PP, 60% actively managed VP. 60% is more than I want to keep trading with discretion alone. I've had a lot of private conversations with Ocho over the last few weeks as I knew when the smoke was clear I wanted to put a slice of my portfolio in a more hands-off trend model. So I'm basically going to split that 60% in half, 30% in trend and 30% in discretionary active trading. As I mentioned above there's a volatility trend signal that flipped green today. I'm going to use that to trend follow on my 30% trend allocation. So, if that whipsaws and flips red again in the coming days, I'll sell. This is the signal I will use on this 30% as to whether I'll be in stocks or in bonds. I think it is possible that the Fed bought us out of the stock bear market. If that is the case, I expect the volatility pattern we have seen since Q1 2018 where once every 10-15 months we have these market temper tantrums until the market is finally allowed to correct. So basically, massive swings up and down are expected going forward. I think the volatility trend is a perfect way to participate in most of the swings up and miss most of the swings down.

As far as where I am going to allocate that stock portion... I've already initiated a position in IWM this morning off of a breakout on the 5 min chart that is already up ~2.5%. I am going to split my general stock bets 50/50 between following the strength in large cap growth and a short term mean reversion play in small caps. I'll keep monitoring all sectors, factors, countries, etc for places of intermediate term relative strength or good mean reversion plays. In other words, my allocation in stocks will be actively managed to follow intermarket trends instead of just passively buying SPY.

That leaves my portfolio with 30% for my fun active trading allocation where I can hunt and chase for multi-baggers. Currently this 30% is in 10% each IAU, SLV, GDX.

Of course, these changes all depend on how the market closes. If we get a massive selloff into the close and my indicators shift red I'll sell my IWM and sit on my hands a bit more. If we close green however, I'll put in the orders to do the full swap. For TLDR purposes, my total portfolio with my PP, trend, and active trading buckets combined after the swap will be approx as follows:

Large cap growth: 20%
Russell 2000: 20%
Gold: 20%
LTT: 10%
Cash: 10%
SLV: 10%
GDX: 10%

So since I have a 40% PP, that means I have a 10% minimum in stocks. So if my trend signal whipsaws red again and I have to sell I would basically be selling 30% of the stocks that make up my trend allocation placing those into bonds. Whew, what a crazy market. I'm at least happy to have another 30% of my portfolio in a rules based system. Keeping my active trading down to 30% is a figure I'm more comfortable with. I also finally have my cash put to work. I was sitting on 40% cash the last couple weeks and I was definitely getting antsy. Building portfolio rules are kind of an iterative process, and I feel I've come a long way in a the last few weeks. I think I'm in a much better position going forward than just a buy and rebalance GB.

[Vil]

On another note - do you think USO will revert its trend and recover anytime soon (the billion $ question) ? Or as there are huge enough supplies from the already stored quantities of oil those will still keep the price low for months to come (even though stock markets are showing signs of mild recovery )

[Vil]

Speaking of mild recovery, seems shift to risk-on is ongoing and together with Gold, the miners are suffering a bit too (on hourly basis ) :

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[pmward]

On another note - do you think USO will revert its trend and recover anytime soon (the billion $ question) ? Or as there are huge enough supplies from the already stored quantities of oil those will still keep the price low for months to come (even though stock markets are showing signs of mild recovery )

No. The problem with USO, and oil in general, is you cannot invest in actual oil. All you can invest in are the futures contracts. Currently, those contracts are in a historical super contango which means that USO has to pay money every month right now to roll one contract to the next. Last month they sold a $10 contract and bought a $20 contract... losing 50% on the roll... and then that $20 contract lost 50% as of this morning. Even if oil goes up, USO will go down until backwardation is restored to the markets. The long contracts are all still up around $30, so there is no cheap oil if you go out just a couple months. There is no real way to play the rebound in oil itself, other than maybe energy stocks.

Speaking of mild recovery, seems shift to risk-on is ongoing and together with Gold, the miners are suffering a bit too (on hourly basis ) :

I see nothing worrying. It's just a consolidation at this point. GDX has yet to even break below $33, which was the gap up of the breakout last week. Gold is consolidating as well. Nothing concerning as of yet. They are just digesting gains and preparing for the next push in the coming weeks. I think it's possible metals are being held down a bit by oil in the near term. I also don't think gold consolidating has anything to do with "risk-on", as I think gold is a risk-on asset at this point. Matter of fact, I think it likely that coming out of this, whenever the new bull market starts (if it has not already) I think gold and stocks are going to rally strongly together. I think it most likely bonds will be the odd man out. Think a similar scenario to 2009-2011. I could be wrong, but that's the scenario I find most likely, and where my bets are placed.

[Vil]

Even if oil goes up, USO will go down until backwardation is restored to the markets.

True, my question was just stupid as obviously nobody knows when the backwardation will come back in place. And IMHO indeed one of the biggest problems of USO is that it uses the contract for the nearest month. I heard of some plans that they will start investing in multiple futures contracts at some point to avoid such disturbances.

[pmward]

Even if oil goes up, USO will go down until backwardation is restored to the markets.

True, my question was just stupid as obviously nobody knows when the backwardation will come back in place. And IMHO indeed one of the biggest problems of USO is that it uses the contract for the nearest month. I heard of some plans that they will start investing in multiple futures contracts at some point to avoid such disturbances.

Yeah, there's a tradeoff there though in that the longer term contracts are not as volatile. USO is primarily a vehicle for short term trades, not for long term holds, and traders love volatility. But at the same time, USO very well could go to 0 this month.

[pmward]

I also was not able to get all my stuff over to the allocation listed yesterday. My 10% in long bonds was in FNBGX in my IRA and I sold that yesterday to put that in to stock ETF's this morning. I wasn't expecting as big of a rally as we are having today. I see resistance a bit too close overhead for my comfort. So I placed that 10% back into TLT for the time being. So I only have 15% each in large cap growth and small caps. I'll see how we handle resistance or the next pullback before pulling the trigger there. My right tail at least isn't completely unguarded anymore.

VIX is continuing to drop, which is a really promising sign going forward. Historically speaking, whenever we have had a volatility spike like that, on the backside of it the market has almost always performed REALLY good. See this video from a few weeks back (prior to the actual volatility peak) doing a historical review of all past similar volatility spikes and how the market performed going forward: https://www.youtube.com/watch?v=ddTRrc0A7Vo

[Vil]

See this video from a few weeks back (prior to the actual volatility peak) doing a historical review of all past similar volatility spikes and how the market performed going forward: https://www.youtube.com/watch?v=ddTRrc0A7Vo

Thanks for sharing. Interesting stuff, if we do not get some downside correction this 'earnings' week, indeed it might be we're heading upwards as VIX calms as well.

PS. if one start to count the number of word 'very' being pronounced in the video, he/she would need at least int16 to store that number ..

[pmward]

An update here to the small/large spread chart from this weekend. Notice how the spread has now not only set a higher high, but also busted above it's 50 day moving average. Also see how RSI is now up at 60 and still increasing. The small cap mean reversion trade has been going well for me so far.

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I'm curious to see how the markets handle the Fed release today. Stocks don't seem to be too interested in it, but bond and gold have both been consolidating and waiting for the Fed. So far though, small caps are rallying, transports are rallying, and large cap tech woke back up this morning as well. Bar any black swan news (or at least another Powell fumble) I think we are bound to at least test 3,000. Given the strong breadth I'm seeing, I think it may just make it through. If we do make it through, there's really nothing stopping us from retesting the all-time highs. A couple small technical pivots, but those are weak sauce compared to 2850 and 3k. All eyes on 3k at this point. That is the last barrier I see that could potentially be a turning point in the market until we test all-time highs.

[Vil]

until we test all-time highs.

It's really weird for me how quick the market has changed its sentiment.

[pmward]

until we test all-time highs.

It's really weird for me how quick the market has changed its sentiment.

It's simply how markets work. The same thing happened back in Feb. Sentiment was great even though everyone knew the risks. Then one day it flipped on a dime. The market going up doesn't mean all is well and good. It just means that sentiment is positive at the moment. There may be another opportunity to sell later this year or next. But for now the market is willing to do the same thing it was doing in early Feb, go up until something proves to it that it has to go down. I expect a lot of volatility going forward over the next year or two, *especially* if we go straight back up to new highs. The faster and more complete the stock recovery, the more the volatility will be going forward. And this is not even a new trend. Matter of fact, this pattern of volatile up and down swings started in Q1 2018. Check out this monthly chart and the blue lines denoting it. This is called a megaphone pattern. A broadening trend of higher highs and lower lows. I wouldn't be surprised to see this trend continue. In other words, the next time we tag the top of this pattern, I'll be looking for signs to sell, and if we do sell back down to the bottom (which will be a lower low a year or two from now) I'll be looking to go aggressively long. This is a long term pattern on the monthly chart (the longer the timeframe the more weight behind the signal) and as such it is something that should be respected until one of the lines have been breached in either direction with a monthly close (and when we break out of the pattern in either direction, it's likely to be a very strong event).

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[Vil]

This is called a megaphone pattern.

Was not aware of it, looks like some extremely expanded Bollinger Bands with huge period..

[pmward]

This is called a megaphone pattern.

Was not aware of it, looks like some extremely expanded Bollinger Bands with huge period..

https://www.investopedia.com/terms/b/br ... mation.asp

The real interesting thing here is that it's on a monthly chart. Megaphones are extremely rare on the monthly chart. They're quite common intraday though.

[Vil]

https://www.investopedia.com/terms/b/br ... mation.asp

Thanks, pm. Indeed, looks like the end of calm buy-and-hold days (guess there are some buy-and-hold strategies like PP that will suffer less, but still..). Now reading "Trading: Technical Analysis Masterclass: Master the financial markets" from Rolf Schlotmann in order to be better prepared haha.

[pmward]

https://www.investopedia.com/terms/b/br ... mation.asp

Thanks, pm. Indeed, looks like the end of calm buy-and-hold days (guess there are some buy-and-hold strategies like PP that will suffer less, but still..). Now reading "Trading: Technical Analysis Masterclass: Master the financial markets" from Rolf Schlotmann in order to be better prepared haha.

Yeah, for a buy and hold portfolio, the PP is actually setup to take advantage of this... at least so long as people rebalance as they should to profit from the swings. Stocks, bonds, and gold are all bound to be volatile and give great rebalancing opportunities if this megaphone continues to play out over the coming years.

Looks like stocks made it through the Powell show unscathed today. Also, it looks like I caught myself some lightening in a bottle with that small-cap trade I put on. Love it when that happens. Now I just need GDX to break out again. It just been chilling out forming a bull flag the last few days. It's very promising that the bears have not been able to close the gap of the breakout, even if it hasn't gotten follow through just yet.

[buddtholomew]

My SCV fund was up 6.06% today so under-performers are finally closing the gap on the SP500 albeit they have some more work to do.

It will be interesting to watch Gold’s reaction to the latest earnings beat(s).

[pmward]

My SCV fund was up 6.06% today so under-performers are finally closing the gap on the SP500 albeit they have some more work to do.

It will be interesting to watch Gold’s reaction to the latest earnings beat(s).

To me gold looks like it's just consolidating it's gains in a pennant like formation between like 1700-1790. Once get gets above 1800 it's going to go retest the all-time highs. But in order to stand a chance it had to kind of take a pause. The short term traders will lose patience and move on. Meanwhile, the patient holders keep buying anytime the price dips below 1700 like they should to support the price (hint: ~1700 is a great entry price for anyone looking to buy gold). Eventually we will break that 1800 level, and the short term money will flood back in and take us to test those all-time highs. It could break out tomorrow, or it could consolidate for a couple more weeks. Either way, the action I see in the consolidation for both gold and GDX is constructive and has a definite bullish bias. I think it especially apt that both kind of rotate to the sidelines a bit while lagging sectors in the market play catch up, as you mentioned. This leg of the stock rally is likely to hit the pause button around 3k. I would be surprised if we just ripped right through 3k with no consolidation. It took 2 weeks of consolidation to finally break above 2850. When stocks go back into consolidation mode, maybe then would be an opportune time for gold to make it's next move? We will see. In the meantime, I see nothing wrong with the charts at all.