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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.

spxline

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.

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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

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:

sc

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:

sc2

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

What a rally since my last post mentioned a run to 1k on S&P

Little did I know at the time that the S&P will be getting that close to the 1k mark before my next post.  In my last blog (Market Signs) I said:

“Technically, the odds are that the S&P will correct to 810 to 820 area over the next month or so.  At that point careful analysis will be crucial along with risk management to cover shorts and position long for a potential rally to the 1000 or so area.  At that point bullishness will be at high levels and raising the odds for a drop to retest and most likely new lows on the S&P and commodities along with a rally in the dollar, later this year or early next year.”

Did I have a crystal ball.  No.  The market didn’t get down to the 820 area, but the short positions were quickly stopped out.  Does this mean the bear market is over.  Again, not so fast.  We are going by the 20 month or 80 week moving averages for that one — slightly different numbers, e.g., the 20 month for the S&P is currently at  1104 whereas the 80 week is at 1082, but close enough that you are free to follow a monthly or a weekly trigger.  Obviously the shorter the time frame, the better the precision over a larger sample of trades.

Again we are faced with a scenario where the S&P can pullback in the short term before hitting the 1k target or it can make a run for it first and then correct.  We won’t know which one will occur first, but can keep zooming in with a shorter time frame to get a better trigger and manage trades accordingly.  Since we have yet to hit 1k, the weekly charts haven’t changed, so left the weekly chart out this time.  The daily chart shows Fibonacci support levels for any corrections in the near term, along with a 100 dma or if you are a shorter term trader the 21 dma:

sc

However, even if we reach 1k or 1100, the odds are very high that the market will retest the March lows at a minimum.  Make sure you have your seatbelts fastened.  By that I mean utilize some sort of timing indicator to keep you in and to get you out before a decline, even if the decline doesn’t materialize and you end up having to get back in again at a higher price — that is the cost of protection.

July 26, 2009 Posted by | Legacy Funds | , , , | Leave a comment

Market Signs

The market is always giving hints to those that are astute students of history.  What has the market been trying to tell us lately?  The biggest sign has been the correlation of traditionally uncorrelated assets.  There has been an unusually high correlation between global equity market indices and commodities.  Surprisingly this has also included gold.  During the rally from March and the correction over the past few weeks, most asset classes — US equities, international equities, commodities including oil and gold, real estate, and many others — have moved in tandem both on the upside and downside in all time frames.  The moves have been inverse the US dollar.   The charts are currently placing high odds on a correction in these asset classes and a rally in the dollar.  Technically, the odds are that the S&P will correct to 810 to 820 area over the next month or so.  At that point careful analysis will be crucial along with risk management to cover shorts and position long for a potential rally to the 1000 or so area.  At that point bullishness will be at high levels and raising the odds for a drop to retest and most likely new lows on the S&P and commodities along with a rally in the dollar, later this year or early next year.  Sounds like I just let you peek into a crystal ball?  Not so fast.  Although this analysis is based on numerous charts, models, cycles, pattern recognition, number crunching, macroeconomic factors, and the list goes on, a change in certain variables will change sometimes drastically the future roadmap.  That is where risk management comes in place — one plays the mathematical odds but is prepared to quickly cut losses when the variables change.  For example, fibonacci calculations (Fibonacci was a brilliant Italian mathematician) are used to determine the retracement for the S&P in the following weekly chart which shows although we have had a great rally off the low, the S&P hasn’t even retraced 38% of the decline:

sc

That is where we place odds that even though the S&P is correcting now possibly down to 810, we are likely to rally to 1015 or so afterwards.  We can zoom into a daily chart using the last high and March low to see likelihoods of targets for this pullback, and this is how we get around 810:

sc

Then we see that if 810 fails, our last line of support is about 780 after which a retest of the lows at a minimum would almost be a given.  Let’s not worry about that for now but manage our trades and risk in accordance to the highest probability set-ups.  Remember this is for informational purposes only and not a recommendation to buy or sell any securities.

July 9, 2009 Posted by | Legacy Funds | , , | 11 Comments

New bull or just a bear market rally?

The rally off the March lows can at times feel like the start of a powerful new bull market.  That is what bear market rallies do, fool the masses.  Last March marked an extreme in bearishness, people started to believe the end was near, the market can only go in one direction and that is down.  Odd that in general investors look at the market as only capable of a single direction and not really think in terms of cycles.  We don’t seem to have that problem in other areas.  When it is night, we don’t have this foolish belief that it is going to be dark forever, we know that daylight will follow.  Same with the change of seasons, the cold days of winter don’t last forever anymore than do the hot, humid days of summer.  But in the market, when the market is down, we have difficulty accepting that this isn’t going to be the way things are from now on.  Same thing on the upside, we start to think downtrends are a relic of the past.  In fact, when everyone believes that the market is only going to go up is very close to the worst time to be invested.  Same on the downside as many that were caught short in March and remained short (yes there are plenty of fundamental reasons, but still it won’t always matter in the short run) ended up adding fuel to the upside when they had to cover their shorts at higher prices.

Anyway, I realize I have not answered the question as to what kind of rally this is.  If you recall from a previous blog explaining how to differentiate between bull and bear markets, we based it off a 20 month MA.

sp monthly

Clearly we are still in bear market territory.  We are enjoying a nice rally, but until it gets back above the 20 month MA, we must treat it as just a bear market rally.

June 13, 2009 Posted by | Legacy Funds | , | Leave a comment

Long term indicators delineating bull and bear markets

Sometimes distinguishing between a bull or bear market is as easy as a quick glance at a long term chart.  A very straightforward moving average is an 80 week moving average (roughly corresponds to a 20 month moving average).  You can go to stockcharts.com and plot this yourself using their free service.  Basically for starters, you want to plot an 80 week moving average for the S&P 500.  It would look something like this:

SPX 80wma

Can it be that simple, or was this just a coincidence?  OK, let’s try the last bear market to see if it would have saved you from most of the downside and managed to get you back in to participate close to the start of the bull market that followed:

SPX 80wma 00-03

Feel free to experiment with other time periods on your own.  Let’s try 1998-2001:

sp 80wma 98-01

Hopefully by now you are starting to get convinced that something this straightforward can help reveal the long term picture.  There is no forecasting involved, just simply following the market.  Obviously, there are times when getting out and getting back in is going to result in lagging the security if it continues to rise, but that is a small price to pay to avoid the large declines.   For example, in this chart covering 1990-93, you do avoid the drop but may have to get re-invested at a slightly higher price.

SPX 80wma 90-93

Anyway, hopefully by now you are getting the picture(!) and can see that technical analysis does not have to be overly complicated.  Here is a chart going all the way back to the early 1980’s, again same thing:

.SPX 80wma 1980s

Obviously, for better trading results, one can continue to decrease the time frame to get better precision.

Shorter time frames will be covered in future blogs.

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