Slope Of Hope with Tim Knight

Three Goals For This Week (by AllAboutTrends)

Friday's sell off was to be expected as the market had come a long way in a short period of time. What we'll want to see is the market either resume its advance early next week or if it stalls right here as we have multiple short term resistance levels that we are touching or near touching.





While the Nasdaq has been the top performer, the S&P 500 has found resistance at its 200-day the past two days. You can also see the RSI indicator at the top of each index chart shows the RSI having a hard time going over the 70 level ever since this correction started. Even with the big up days we've had it still can't get over the red lines.

In addition to that we have the 38.2% Fibonacci level just above. And finally, you can see we are tagging, or are close to tagging multiple red resistance lines.

All of this puts us on the defensive as our number one goal this month is to extend our gains in a manner that is in tandem with the market.

A move back down to retest the recent lows would not surprise us. Should it occur we have a lot of names on the short sell watch list for just such an event. In fact there is a good possibility next week we lock down more gains on the long side and start allocating assets to the short side for trades as well as buying inverse ETFs.

Another item of concern is that the markets have not staged an accumulation day for all of May -- yes, not one day this month did the markets close higher than the day before with volume heavier than the previous day. On the flip side, there were many days where the market closed lower than the previous day on volume heavier than the prior day.

Big Picture

For weeks we've been saying:

Make no mistake the damage done to stocks out there will not repair itself overnight and a lot of names are going to take months if at all to build all new bases. There is also a real good possibility that we will not see the April Highs again for a VERY VERY LONG TIME. Keep that in mind.

This all makes for a range bound trade and swing trading long and short being the order of the summer.

Going into next week we want to focus on a few things:

1. Lock down our gains on the long side

2. Focus upon opportunities as they present themselves long or short -- Odds favor we retest the lows yet again in the coming days/weeks which sets up the short side and inverse ETFs for us.

3. Focus upon our monthly goal of "How Am I Going To Get My $500 per week ($2,000 per month) REGARDLESS OF WHAT THE MARKET THROWS OUR WAY

Weekly Sector Report | 05/28/10 (by Leisa)

(click on all graphics to make larger/clearer)

Last week was quite a rebound in the market with the broad market index advancing .52%.  There was a notable rebound in many of the sectors. Here are the top/bottom 10 industries for last week.  This information is available to non-subscribers at the WSJ Industry Page, which you can find here.

 

There is always a bull/bear market somewhere...just make sure that you are looking in the right places. I've prepared for the the detail chart book which you can find here.  Because it is month end, I also included the monthly charts.  IN ADDITION, I created performance charts for all 24 Sectors! I think that you'll find them interesting because I started with March 1, 2009 through May 28.  I've also included bookmarks to make this report more navigable. If you are not familiar with performance charts, they measure the price performance relative to a starting place. Here's an example of a performance chart for the Total Stock Market Index from 03/01/09 through 05/31/10:

 

Note the volume by price bars.  If we break down through the yellow area, I believe that we could quickly cut through the blue area where there is little "price memory" in the market.   The market did manage to gird it's loins and hurdle above its moving averages.  I use the 13 + 34 exponential moving averages combined with the 89 day simple moving average.  I have Osso to thank for the suggestion of taking the 89 day moving average from an exponential to a simple basis.

Cranes (Translated from the Russian by George Rahal)

Cranes

It seems to me sometimes, that the soldiers who
From bloody fields did not return
Long ago, fell not to the earth, 
But had transformed into white cranes. 

Since ages past, they still fly overhead 
And lend to us their voices. 
Is that not why, so often and so sadly,
We fall silent, gazing at the sky? 

Flying, flying in a tired V
Flying through the mist as the day descends; 
And in that formation I see a small space— 
Perhaps that place is meant for me! 

The day will come when, with a flock of cranes, 
I will swim through the same gray fog
And from the sky, in bird-language, call 
To all of you who I left behind on earth.

Instant Market Reaction. Not.

Some folks believe that the market reacts to news within milliseconds. Let's take a look at the daily price chart of British Petroleum (BP) to test this theory. I've put an arrow marking the day the fatal explosion occurred:

Over the course of over a month, yes, BP has lost about a third of its value. But instead of taking milliseconds to react, almost an entire trading week transpired before there was any meaningful reaction. The same can be said of TransOcean (RIG) which has suffered even more greatly.

Incredible, isn't it?

The Rich Tax

I have been following with great "interest" (heh. heh-heh.) the developing legislation to tax so-called carried interest at a higher tax rate. There's a good article on the passage of this bill in the house on Friday.

Let me start by saying that the political swing from the left to the right, which began in 2007, will go on for another 10-15 years. There are many changes we'll see, but there are a couple of changes you can, as my mama used to say, put in the Bible - - (1) higher and higher taxes for everything under the sun as governments stave off death by starvation; (2) an increasingly anti-rich, anti-business, pro-union environment. Bank on it.

One might think that I, as a former small businessman and a hedge fund manager myself now, would be very much against the change in carried interest taxation, but I'm not. For one thing, the whole notion of "carried interest" is a complete obfuscation. The tax is relevant to many industries, including venture capital, real estate, and hedge fund managers, but my main beef is with hedge fund managers.

The idea that the richest of the rich get a special Rich Man's Tax Rate of 15% is plutocracy at its worst. Let us once again consider the utterly ignorant average American. Let's stop him in the street for a moment.

SOH: "Excuse me, sir, may I ask you a couple of questions?"

Man On The Street: "You......you're from Slope of Hope!?! Of course!"

SOH: "Do you know what a hedge fund manager is?"

MOTS: "I guess so. They manage money for rich people."

SOH: "Yes, that's right. Do you know how much the most successful hedge fund managers made last year, during the Great Recession?"

MOTS: "I dunno. Millions, I guess."

SOH: "Oh, lots more. The top five all made way more than a billion dollars for themselves, just in that one year, each. The top guy made $4 billion personally in 2009 alone. Amazing, huh?"

MOTS: "Damn! Yeah, that's incredible!"

SOH: "Of course, these guys have to pay taxes. And you know what? Because of what they do, they have to pay a special tax rate!"

MOTS: "That's good. The country could really use the money. I'm just a regular working guy, and I pay almost 40%. These guys must really have an incredible rate."

SOH: "They sure do! 15%"

MOTS: "{multiple expletives redacted}"

I do believe that those, for instance, in the world of venture capital are entitled to special capital gains treatment, but it sounds like the very broad brush of higher taxation is going to paint both deserving and undeserving alike.

But all the bleating I'm hearing from the world of private investment about how this will kill jobs is complete rubbish. People who run hedge funds don't create jobs, except for a handful of administrative positions. They run money. Period. They're professional gamblers, and those that are good at it are richly rewarded. There's no reason under the sun that the income they draw from their efforts should be taxed any more beneficially than the income other people draw from their efforts. It's the same damned thing.

Let's hope the Senate doesn't succumb to the pressures of the treacly lobbyists from private equity-land and water things down any more than they are already. Hedge fund managers avoided billions upon billions of dollars of taxes they should have paid during the past decade. If there were any justice, they actually would have a special 70% tax for the next ten years, but let's at least pretend to be a little fair and have them join the rest of the working world. God knows Big Jim Simons can spare the cash.

What will /ES Do Next?: Volume Profile (by TradeFlight.com)

First, we express our gratitude to all the heroes that made unimaginable sacrifices for us and our country, and to defenders of liberty and freedom.

Now, those who follow our blog know that we do not like to make forecasts on the future price direction of the instruments we trade.  Huh?  How can any trader generate revenue without forecasting price direction?

To clarify, obviously, we do make forecasts each day when we trade.  But, we don't remain stuck on a long term view.  In other words, we truly confess we have no idea what /ES will do in the next 30 days.  We are quite content observing Tim and others make their startlingly bold and accurate predictions!

However, what we do know is that /ES follows supply and demand areas.  When /ES breaks through a level, and then retests to prove it's legit, the odds are good it will migrate to the next support or resistance level.  Then, we try to trade a bounce that can turn into something bigger.  To that end, we find volume profile analysis useful in our trades.

Here's our latest snapshot.  If you were /ES, what would you do?

We see two possibilities, 50/50 odds from our perspective, but a nice move either way.  The best part is that /ES will tell us what it wants to do through its price behavior on smaller, intraday chart timeframes.

On Friday, the relentless bulls took /ES right to a 50% retracement at 1105s, just below the prior resistance at the 1110 level.

If /ES can break above 1110s, we see the next potential resistance level up at 1150s, a nice 40 point move.  Mind you, if it breaks 1110s, it's not an automatic entry for us - we'll probably wait for a retracement, watch /ES starting trending North, and then buy a pullback.

On the other hand, if /ES can break below prior support at 1075s, then it's possible we can see a Southbound run all the way to targets down at 1004s/1005s.  Again, we would wait for a pullback after breaking below 1075s and then sell if /ES starts to develop Southerly tendencies.

Of course, it's Summer and always possible that /ES will just remain stuck right here between 1060s and 1110s.  Therefore, proper risk management and scaling out techniques that book partial profits are essential.

Asian Gas Market Starting to Heat Up

Asia is one of the more interesting gas markets in the world.

Places like Thailand and its southeast Asian neighbors have seen phenomenal demand growth over the last several years. Total has said they're in Thailand for gas. (Part of the reason I believe Thai shale gas may become an interesting play over the coming years.)

Asian LNG demand has also been strong. Japan, China and Korea have helped pick up (a little of) the slack in the LNG market created by booming U.S. shale gas production displacing LNG imports.

But a developing gas market brings challenges. Especially when it comes to pricing.

In parts of the world where gas demand is low, any company discovering natural gas is usually forced to sell on long-term contracts, often at relatively low prices. (Leading to the old oilman's joke that the only thing in frontier exploration worse than a dry hole is a gas discovery. A dry hole you can plug and abandon. If you find gas, the host government usually wants you to foot the bill and test it. Even if there's no hope of selling the gas profitably.)

But in areas where significant amounts of gas are discovered, increased demand usually follows. Gas-fired power plants are built. Industrial facilities spring up.

And as demand ramps up, pricing gets more complex. With more users vying for supply, prices become a key control on rationing and allocating supplies. Those who need the gas most are generally willing to pay more. Supply goes to the highest bidder. If people need it really badly, prices spike and exploration activity increases. Hopefully growing output.

Today, we're seeing signs of maturing in the Asian gas market. Pricing is becoming more complex as demand grows and different users jockey for supply.

Just this week, the Asia-Pacific Economic Cooperation Business Advisory Council has urged Asian energy ministers to look at implementing an Asian gas futures market. APEC ministers are meeting next month in Japan.

Futures are needed in complex markets. The introduction of such a system would allow Asian gas users to queue up for supplies months in advance, allowing for proper planning and coordination.

Pricing evolution is also happening in India. Last week, the Indian government announced an unprecedented increase in the domestic sale price of gas. To around $4.20 per thousand cubic feet, up from a previous $2 per mcf.

India has been struggling with pricing for some time. The government doesn't want to upset consumers who've grown used to $2 gas. But at the same time, the nation needs new supply. Higher prices are necessary to encourage exploration.

(As a side note, the government appears to be trying to play both sides of this coin. Although gas producers will now receive a higher price, it looks as if gas distribution companies will be barred from passing on the entire cost increase to end consumers. In effect, the government is simply shifting losses from one part of the supply chain to another.)

Countries like Argentina are facing similar issues. Price controls have killed domestic gas exploration. Turning the nation from a gas exporter to an importer. Something will have to give here, sooner or later.

These evolving markets can be great for investors. Using a little foresight, it's easy to see areas ripe for price appreciation and liberalization. Buying in before the price increases makes for good returns. India's Oil & Natural Gas Corp, for example, jumped 10% on news of the gas price hike.

Keep an eye on Asia. This is a gas market just getting started.

Source: http://oilprice.com/Energy/Natural-Gas/Asian-Gas-Market-Starting-to-Heat-Up.html

U.S., Canada, Germany Japan Back to Pre-2003 Production Levels

An interesting chart from the Bank of Japan's latest monthly economic report.

Japanese capacity utilization is way down. Around 20% of manufacturing facilities are standing idle.

This is an improvement from the beginning of 2009, when 35% of capacity was shut down. But a marked decrease from pre-financial-crisis levels, when there was almost no excess capacity to be found.

Indices of Capacity Utilization and Production Capacity - Chart

The story is much the same throughout the rest of the developed world. Capacity utilization across the OECD countries is down 10 to 15% since the onset of the financial crisis.

Part of the problem is we had a big build-out in industrial production between 2003 and 2008. During those years, OECD industrial production jumped by over 15%.

The global economic downturn has brought nations like the U.S., Canada, Germany and Japan back to pre-2003 industrial production levels. In other countries the situation is worse. Industrial production in Britain, France and Italy is currently the lowest since the early 1990s.

The upshot is we built a lot of factories during the supercharged economic times up until the crash in 2008. Consumers were happy, everyone was buying. The global economy could support this increased output.

Now consumers have re-trenched. American consumer savings are up $700 billion over the past year alone. This is a lot of money no longer being used to purchase stuff.

The question now is, what to do with all the capacity we built? Shutting it down permanently means loss of jobs, changes in trade balances and large dislocations in places that grew used to having these facilities as economic drivers.

But keeping excess capacity operating is deflationary. Too much output drives down prices, making it hard for businesses to turn a profit.

Practically, there may simply be no way to keep excess capacity running. If nobody's buying, there's no point making things.

This is going to be a bitter pill to swallow for developed economies and their workers who have built their budgets and lifestyles expecting to have these centers of industry to rely on. Some painful adjustments are going to be necessary.

Source: http://oilprice.com/Finance/the-markets/U.S.-Canada-Germany-and-Japan-Back-to-Pre-2003-Industrial-Production-Levels.html

This Weekend's Magazine Cover Indicator (by Osbourne Cox)

Angry Wet Cat! (by Biffermas)

Biff - Thanks for agreeing to this interview, Angry Wet Cat!  You are a good friend of the Slope community and consistently help others become better traders.  Can you tell us a little bit about yourself?

AWC - Howdy Biff!  Great to be here.  Let's see...I'm 50 (ish), been registered since 1984, started out with J.C. Bradford out of Nashville, did the big firm thing (didn't like it), and quit wearing a suit in 2000.  Best move I ever made.  I'm nekkid right now.  Married, divorced and almost married again, but not quite sure about the legal thing again.  The Mrs., as I call her, has been around forever it seems, and we're comfortable with the deal.  2 grown children and both parents still around.  They are in their 90's and loving life.  I hope to be so lucky, if I make it that long.  

Biff - Was there a realization or event that caused you to leave the big firm?  I assume you were prepared to support yourself through trading from day one?

 AWC - The big firms all talked a great game in interviewing, but the reality of the corporate mentality was nowhere near their pitch.  I'm a folksy type of person, and I always treat my customers as I expect to be treated.  The final straw that broke this camel's back was another takeover by a bank, whose corporate climate was about as anti-broker as I'd ever seen.  We were seen as the red-headed step children.  This environment didn't jive with my personal approach.  I discussed my displeasure with my core group of customers, and they all agreed with me;  find a place to do this on my own, and leave.   It wasn't a difficult decision, as I found out very early in my career that 99.9% of all recommendations from the firms "experts" had hidden agendas.  Plus these recommendations were based on fundamental analysis, and without offending some, I found that about as reliable as EW; too much room for interpretation.  I've always been a "black or white" type of person;  it either is or it isn't.  And I never placed a customer in a position I didn't personally take, so I did my own research and relied on technicals as opposed to fundamentals.  It has worked out quite well, and I still have in my core group customers I acquired going back to 1985.

Biff - Given your affinity for technicals and objectivity I assume you have pretty well defined criteria for entering and exiting trades?  Will you give us some insight into your trading protocol?

AWC - Be glad to.  I've found that the simpler I keep things the easier it becomes to make a good decision.  I've watched excellent traders over the years get buried in so many indicators they start to conflict with each other, and they wind up like a deer in the headlights.  When buying for my customers that aren't into high risk assets (non day traders), I rely on PnF.  I was extremely lucky to have Tommy Dorsey of DWA as a mentor very early on in my career.  He took me in when I was still in sponge form, and I learned a great deal from him.  Going back to my black or white philosophy, PnF fits in perfectly.  It either is or it isn't, and the charts leave little room for debate.  While PnF can get as deep as you would ever care to go, the simplicity of a picture of nothing but the constant fight between supply and demand makes life a lot easier, and keeps my customers happy.  

My first high risk customer traded the big S&P contracts.  I'll never forget the first ticket I dropped for him.  My hands were shaking!  And since you had to fill out the ticket by hand, it was barely legible.  For my traders and my own account, I gravitated to MACD, after learning about and applying stochs, MA's, RSI and just about every other indicator possible.   Understanding the relationship between the histogram and the 2 line tell me about all I need to know.  I add the Williams %R to it because of its ability to identify where a price is on a very short-term basis inside the current move.  Learning to trust your indicators is extremely important.  I remember back when I was getting my pilot's license, and the day my instructor told me it was time to go "under the hood".  I freaked out.  Beautiful day, no wind, not a cloud in the sky and after I got the plane centered on the runway, down came the hood and all I could see were my instruments.  Perfectly good windows were useless.  Take off, fly around and land without seeing anything but the dials in front of me.  As a trader, these same rules apply; you must have conviction in your charts.  Start second guessing yourself and you'll wind up with a bad entry in a trade that has less probability of getting better.  Your first feeling is usually the correct one.

I watch four separate time frames when I trade: a 30, 15, 5 and either a 1 or a tick depending upon the days velocity.  I do look at the daily and weekly charts, but never while trading.  That is weekend work.  The 30 gives me the day's trend and overview, and the 15 is my trading anchor.  It dictates which direction I look for next.  The 5 confirms that I am either on the same page as the 15, or it tells me that I am contra to it.  The 1 or tick chart is what I use for my trigger.  Contra trades are kept on a short leash, especially when they disagree with both the 15 and the 30.  Needless to say, these are most always skinny rabbits if I'm lucky.  Once in the trade, I watch for wash-outs on the indicators, and I also keep pivots and SAR on my price charts.  Trend lines aren't that important to me, but I do find regression channels to be of some help.  Its like making soup;  by themselves the ingredients aren't much, but when combined in the right proportions, good things come from it.

I've spent years reading these indicators and how they relate to price movement, and I seem to have the ability to tell where they are going.  I guess this is a product of experience.  Like flying under the hood, I think I could successfully trade using only the 2 MACD indicators and the Williams %R.  But just because I could possibly do this, I still like to be able to look out the window!

Like everyone here says, and there are some of the best traders here I've had the pleasure to run across, entry is the key.  A week or so ago I had 3 bad entries in a row.  I was on the right side, but patience wasn't with me that morning.  Stopped out on each trade.  I got up and walked away to clear my head.  I went back over my rules and identified the mistakes I had made.  I came back an hour later and started hitting them right.  They say patience is a virtue, and in the business of day trading, it is paramount.  I've sat on a trade for hours before executing the buy.  Once in, the indicators again tell me when to exit.  I've traded the big S&P, e-minis and have been in the crude markets for about a month now.  Crude really suits me, as I'm a better momentum trader than I am a top/bottom caller or stock picker.  The one thing that has been the most difficult to adapt to is to take the biggest chunk of the move I can within reason and let the rest pass on by.  Trading a 10 contract size, 30tks two to three times a day adds up.

To sum all this up, know your indicators, trust your charts and be patient!

Biff - You've given us much to explore there, AWC.  Being systematic and sticking to the trading plan are struggles many go through.  Since you've been through the early challenges and survived to tell the story, is there any advice you would offer to the new traders here?

 AWC - I'm full of it Biff.  Advice that is!  First, make sure you are comfortable with your trading setup.  Indicators, MA's, time frames, etc..  Don't adopt someone else's system and expect it to work for you just because it does for them (See Elliott Wave).  Find the system that works for you.  Trial and error is the only way to do this.  Keep it simple and don't over analyze a trade.  Either you see it or you don't.  Once you have your indicators in place, stick with them.  Adding another MA or indicator isn't going to make the trade any easier.  Using the system you like, if you are consistently fraught with bad entries, one of two things is wrong.  You're trying to make your indicators fit where they obviously don't (scrap everything and start over) or you aren't being patient and waiting for the trade to come to you.  The latter is the biggest issue most new traders have to deal with.  Its a PITA to sit in front of 6 monitors for 5 hours before the right set up appears.  There are always too many opportunities to jump the gun.  I know as I've done it before.  The last thought that runs thru my mind is "I think I can make this one work".   These will be losing trades 99.9% of the time.  And this brings up losses.  Everyone has them, so get used to it.  Cut them loose and move on to the next set up.  Don't let a small loss become a major blow up.  I keep a written log of each bad trade containing the set up, my entry and why I chose it, when I exited, and then what happened to the price after my exit.  The vast majority went on to be bigger losses. 

Becoming a successful trader is 50% discipline and 50% experience.  Either one can keep you out of trouble.  Until you have the second part, rely on the first part.  Again, be patient.  If you miss a set up, don't kick yourself.  Make a note of it.  Trades are like buses.  If you miss one, eventually another one will come along.

Biff - Sadly it really is that easy, provided one has the discipline to become a trade execution machine and leave the drama behind.  You've given us some great trading information, and I'm curious about other aspects of your life.  What are your passions in life beyond trading?  Are there any great hobbies or pastimes you enjoy?  Fun weekend activities?

AWC - You brought up a good point about drama.  One thing that will ruin a good trader is emotion.  Don't dismiss what your gut is telling you, but don't let emotions (read money) dictate your trade.

 My passion in life is life itself.  A few years back I came extremely close to seeing the other side, and I'm glad I didn't make the trip.  Very thankful for each new day, regardless of the outlook and the outcome.  We both enjoy poker and tinkering around the land.  I also have a little streak of grease monkey/construction worker in me.  I like to mess with machinery, tools and lumber.  Perhaps it would be more accurate to say something around here is always breaking, and I like to play Mr. Fix-It Man.  I collect custom knives, vintage audio gear and dabble in red wines.  With all the kids grown and gone, we have a blast with our girls, Cami, Roz and Lucy, (they're dogs, but don't tell them that).  Of course living in the mountains we both hunt and love firearms.  Lots of firearms.  If I were forced to describe myself, I would have to say I'm just a plain ol' country boy, and live my life in that manner; one day at a time and don't get in a big hurry over anything.  Wow.  After thinking about it, I do believe I could have been on Green Acres or The Beverly Hillbillies.  

Biff:  Thanks AWC!