Legacy Funds

Liquid – Transparent – Alt Investment Strategies

Trading the SPY range

The SPY representing the S&P 500 index has been trading in a range for the past month.

You can trade the range:  low risk long entries can be made at the bottom of the range around 1085 on index with stops below, and low risk short entries can be taken at the top of the range around 1115 to 1119 with stops above.  Those stops must be honored as when we break either up through resistance, or down through support, the move will likely be a significant one.  So really watch the way we break out of this range.  Breaking through resistance will give us a nice Christmas rally.  Breaking support could lead to a dramatic decline.  We are eventually going to break out of this range, and the move is going to be large.  Follow the market’s lead and trade the direction of the break.

You can also draw a trendline from July which is currently around the 1095 area for the S&P 500.  This may hold as support and the market can rally higher through resistance so it can be a low risk buy entry as well.  Market is a bit tricky here, but the support and resistance lines are well-known, so manage your positions.  Keep trading this simple and react to the market, not what you want the market to do.


December 17, 2009 Posted by | Legacy Funds | , , | Leave a comment

Time to Analyze the Russell 2000

As the DOW and S&P have been setting highs for the year, the small caps have not. This is another sign to be cautious, especially with the DOW and S&P in close proximity of the 50% Fibonacci retracement. Many times in previous posts we have noted how the S&P is coming up on its downtrend line from October 2007 and pointing out the 50% retrace at 1120 (see seekingalpha.com/instablog/405677-suzanne-h/27897-don-t-try-to-pick-a-top-in-this-market). As traders we have to honor the short and intermediate term technicals, but not forget that the long term trend which has been in place for 2 yrs is still bearish. So far that means this rally since March, as enticing as it is for most investors, is still a bear market rally. Again as traders, we don’t trade off the long term trend and need to follow the short and intermediate term technicals. We have been successful picking quick short trades when turning down from resistance so that stops are very close in case the market goes higher.

However, back to the small caps index that has been lagging, lets take a closer look and translate that to actionable trades. Let’s look at the Russell 2000 $RUT since before March of this year:


























For an actionable trade we can look into trading RWM, Short Russell 2000. These are best traded on a short term moving average. We did a trade in our separately managed client accounts back on 10/26, buying RWM in the vicinity of the 7 dma at $46.08 with a stop set slightly below the moving average (taking the ATR on the chart and subtracting that from the moving average) — so the risk/reward was highly favorable. As long as RWM closed above the 7 dma, we stayed in the trade. We decided to sell when RWM hit resistance of the 80 ema, getting out at $50.10 on 11/3 instead of waiting until it closed below the 7 dma, which it did a few days later.  Since then it has now crossed the 7 dma once more and we are looking for another favorable entry.  The stop is roughly around $47.12 (7 dma) – $1.04 (ATR) which equals $46.08.  Obviously, the closer our entry to the stop price, the more favorable the risk/reward.

November 22, 2009 Posted by | Legacy Funds | , , | Leave a comment

The Almighty US Dollar

Looks like the dollar is breaking the downtrend line from March of this year. Needless to say, that is not a positive for the equity markets nor commodities.


Let’s work on a simple trading strategy for trading the dollar either up or down. I will use the PowerShares UDN for bearish dollar and UUP for bullish dollar bets. I am going to use a 50 dma to indicate whether I want to be in the short or the long fund. Very simply, if it is trading above the 50 dma, then I want to buy it, if it is trading below then I want to sell it and switch to the other pair that should be trading above the 50 dma. Again, will show you a chart to demonstrate how simple this strategy is:


OK, easy enough, the dollar has been declining and the bearish dollar ETF UDN has been rising. It doesn’t take much of an imagination to figure out that UUP must have been declining:


In terms of setting a stop, you can use a multiple of the average true range or ATR (visible on the chart) and subtract this from the 50 dma. ATR isn’t simply the difference between the day’s low and high, but an average of the range of the stock. For example, if ETF X closed at 25, and the next day it traded with a low of 26 to a high of 28, the ATR isn’t 2, but 3 because it ranged from 25 to 28. Most charting sites or software will calculate this for you. I like to use an ATR of 7 (7 is a Fibonacci number as well), to get the average over 7 trading days. So to give a concrete example, when UUP crosses above the 50d, we can go long and set a stop slightly below the 50d. From the UUP chart we can see that the ATR is currently at 0.16. We want to allow it some fraction of the ATR before we get stopped out. You can use a calculation similar to this:

stop = MA – ATR*.85

This is very easy to write with Excel (feel free to e-mail me and I will send you one that will do the calculation for you provided you input the ATR and MA). Back to our example, to calculate our stop we need to know the ATR which is 0.16 and the MA, using the 50dma on Friday happens to be 22.81 giving us

stop = 22.81 – 0.16*.85
stop = 22.674 or round up to 22.68

Ideally, you want to be long a stock when the moving average is sloping upwards, that way the stop moves up with your stock and your risk decreases until eventually you have a profit locked in. Clearly since UUP has been in a downtrend for so long, the 50 dma is still sloping downwards so the stop will move lower if volatility as measured by ATR remains the same. Moving averages of shorter duration will follow the price of the stock faster, but also lead to more whipsaws or false signals.

Take for example UUP using a 8 ema:

uup 7

A good bit of whipsaws on the shorter term moving average, but an earlier buy signal than the 50 dma.

November 1, 2009 Posted by | Legacy Funds | , , , | Leave a comment

Going back in time…

Here is a daily chart of the Dow from 1920 to 1940 to get a historical feel of what happened 80 yrs ago.


It is hard to get the true feel for the size of the rallies and the declines, so referring back to the chart from previous post http://seekingalpha.com/instablog/405677-suzanne-h/30970-does-a-huge-rally-always-mean-the-bear-market-is-over will provide the percentage moves and dates.

October 15, 2009 Posted by | Legacy Funds | , | Leave a comment

Still waiting on confirmation — very close to getting our answer

The SPX did end up breaking the uptrend line from the March lows on a log chart. It is still holding on a linear chart. Disclaimer, I give more credence to log charts as they show a percentage move more adequately than a linear chart. So on a log chart the SPX broke the uptrend line, bounced off the 50 dma, and now we are retesting the broken uptrend line.


This is an ideal area to scale into shorts with a stop above the uptrend line. Failing to get back above the broken uptrend line tells us the momentum is starting to be lost, and declining volume is another red flag providing confirmation that a correction has begun. However, getting back above this uptrend line and clearing 1090 can give us a run to 1120, and clearing that can give us a very quick spike to 1200. So as always, risk management is crucial especially at potential turning points.

Remember, and let’s not kid ourselves, we are trying to pick a top here — something that only the best traders can pull off successfully very few times in their careers. Even then, there will be a few tiny losses when the top turns out to not be the top. Playing this without risk management in place is never advisable, and will result in losses even if not in this particular instance. Sometimes that is the worst thing that can happen to a trader — the market rewards a trader for taking foolish risk without any management in place, the trader becomes complacent and throws caution to the wind only to get whacked later with a much bigger loss. Never abandon risk management, no matter what the technicals or even fundamentals say.

October 12, 2009 Posted by | Legacy Funds | , , , , | Leave a comment

Does a huge rally always mean the bear market is over?

Almost everyone is aware that the stock market crashed in the 1930’s during the Great Depression. What most people may not be aware of is that it didn’t crash straight down but rather had multiple strong rallies followed by several declines.

There are many reasons that our current rally is still only a bear market rally, but in the interest of time will just show a table from the decline back in 1929-1932. True the market lost 89%, but it was not in one big decline as many possibly envision. There were big rallies before moving on to lower lows:

29 to 32 chart

Courtesy sovereignsociety.com

However, looking at the rallies and declines in the above chart should get one to at least consider we may have some unfinished business on the downside ahead of us. Time to be careful, we are very close to the end of this rally, most likely 1100 to 1120 as maximum upside — though not a guarantee and we have to manage risk and play the hand the market deals.

October 9, 2009 Posted by | Legacy Funds | , , | 2 Comments

Top may be in, waiting on confirmation

We have a 66% chance that SPX at 1080.15 we hit on Wednesday is the top. I arrive at this percentage in a straightforward manner, as we have 3 possible scenarios:
1. SPX topped at 1080 and is going to break below 1039.
2. SPX topped at 1080 and is going to find support near 1039, bounce to lower highs and then break 1039.
3. SPX made new high of 1080, is going to find support at 1039, and is then headed for higher highs.

So from that we formulate our game plan. We can wait for a break of 1039 which allows us to have a low risk short, with stops slightly above 1039. If 1039 holds we can go long with stops slightly below 1039. Regardless 1039 is key, just like holding $76 support for $USD is important.


A close below 1039.47 (which was the high on 8/24/09) would signal the top is in and prepare for reversal by either moving to cash or playing the short side. Like I said in earlier post, we don’t need to pick tops other than to wait for market to confirm a top is in.

September 25, 2009 Posted by | Legacy Funds | 8 Comments

Don’t Try to Pick a Top in this Market

OK, now that I have your undivided attention, let’s get to work, we have a top to try to pick. What, did you think I was going to let you down? I will let you be the judge of that. Besides it wouldn’t be any fun if we didn’t at least give it a shot or two or three — but, and that is a very big BUT, only if we manage our risk while doing so.

So what do we have so far. The SPY still hasn’t filled its gap from Oct 6 of last year at 106 to 108, but is getting closer almost by the day. Again, no guarantee it will do so but it has come too far for too long (or depending on who you ask too fast) to just ignore it and tank here — though it is always a possibility. If that target is met then possibly after a brief pullback the SPX makes a run for 1100 to 1120 which coincides with the 50% retracement I have covered in previous posts. That will likely be it, but never any guarantees. This is why we will have scenarios along with predetermined risk points to get out before we even take a position. As always I will be lazy and let the charts do most of the talking for me — and if you don’t speak chart, then stick around here long enough and you will surprise yourself when even a traffic light starts to resemble candlesticks and moving averages. Let’s check the SPX on a weekly with the 50% retracement:


You can see the 50% retracement at around 1120, and the 89 week moving average which corresponds roughly to the 20 month moving average. Many resistance levels above. OK, let’s see how the dollar is holding onto $76 support:


It is hanging for dear life, but $76 should be good support, and odds are the bottom for now, which means we are very close to the top on SPX — 1080 to 1120. Now a lower risk way to position short is to wait until the SPX breaks the uptrend line from the March bottom. You won’t catch the top (yeah I know you won’t have bragging rights, but the risk doesn’t make it worthwhile) but you will have a better risk profile and avoid most of the decline:


If nothing else, this is not a time to be complacent in the market. Keep your eye on the uptrend line.

September 17, 2009 Posted by | Legacy Funds | , , | 2 Comments

Let’s analyze the dollar on a weekly chart…

Not only commodities, but most all asset classes have been trading inverse to the $USD. The dollar holds the key as to when the correction will begin. It has been holding $78 lately. There is a small likelihood that it will correct to $76, corresponding with the market rallying and SPY filling its gap. Again the charts can do this analysis much more justice than any words.


Either the dollar is going to break up through the downtrend line, hence a rally for the $ and a correction for the market, or the $ is going to break support at $78 and head down to $76 area. That would correspond with a higher push in the markets and commodities. The important thing here is to watch the move in the $ over the next week or so.

You can also watch UUP , which is looking good on a daily chart today if it can get through the 50 dma slightly above:


September 1, 2009 Posted by | Legacy Funds | , , , | 3 Comments

Are we nearing the end of this rally?

Last week had all the characteristics of an options expiration week. Weakness begins week before, and early part of the week, and then a run up in prices so that options that were purchased for pennies on the dollar earlier in the week end up profitable. That would set next week up to be a negative week if the pattern continues, and it has high odds.

However, the bigger question remains is this rally ever going to end? Obviously, the answer is yes, but then it becomes a question of when. So let’s go to the charts and see what they have to say beginning with a weekly chart:


If a picture is worth a thousand words, would a chart be worth a thousand dollars, maybe more. There is a gap slightly above that I can’t see being left unfilled before resuming business to the downside. How can I be sure we have downside business left? Well obviously nothing is for certain in the market, but if the recession did end, and that is a very big IF as I put a very low probability on that being the case. Stocks are currently overvalued and this would be an outlier on the charts just based on PE ratios after recessions. Furthermore, at best we would be looking at below average multi-year returns. Technically, there are a number of resistance areas above. As you can see on the chart above, I plotted a few and in trying to keep the chart clearer didn’t bother with the 50% fib retracement discussed in previous posts at around 1120. We have the 89 week moving average, close to the 80 wma covered in other posts, but I prefer the 89 week since it is a Fibonacci number. In either case, they are close enough: the 80 wma is at 1065 for the SPX whereas the 89 wma is at 1099, near the upper end of the gap, so pretty much all contained near the 1100 area.

Let’s look at some shorter term charts for some clarity of short term direction:


Now this also doesn’t mean that we have clear sailing in filling the gap to 1100 or so, as in the short term we may be due for a slight pullback even though it may not be the end of the rally, another bear trap possibly. Of course we may not get that short term pullback, increasing the odds that a gap fill would be the top. Clearly in both cases the ultimate risk is to the downside, with the exception and very low odds of a rally piercing through all these resistance levels and holding. In that case I will concede that this is a new bull, but only in that case.

August 24, 2009 Posted by | Legacy Funds, Uncategorized | , , , | Leave a comment