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

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:

spx

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:

usd

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:

spxd

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

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

Investing by time frame

I like to think of the market, as do numerous other market technicians, in terms of long term, intermediate term, and short term time frames.  What I consider to be long term is a monthly chart, intermediate term a weekly chart, short term a daily chart, and then I go down to real time using an intraday chart (and even intraday charts can be hourly or 60 min, 30 min, 15 min, 10 min, 5 min, all the way down to 1 min for those that don’t believe in bathroom breaks — for me I use 15 min charts).

Furthermore, I believe that ideally one should track all time frames to give a power rating for a buy or sell signal, but that gets more complicated.  I will delve into more detail in future blogs, once we cover simple strategies for each time frame.  For now the best thing to do is to pick a time frame and make a commitment to always monitor it to that frequency.  I prefer to start from the longest time frame and continue to zoom in to get a total picture.  The long term time frame also works best if you only want to be bothered to check on your portfolio holdings once a month.  Remember it only takes a few minutes to check, and you may or may not have to make any changes.  Let me show you a real live example using SPY.  At the end of the month, you pull up a chart like this and see if SPY is above or below the 20 month moving average or MA as we covered in previous blogs.  You should be out if it is below, and you should be in if it is above.  It really is that simple.  Let’s see what we have currently:

sc

Pretty straightforward.  After exiting in Jan 2008, you would still be out of the market, and saved yourself from a large decline.  Not bad for taking just a few minutes a month to check on your portfolio.  We can also get more fancy when we have holdings in the market by keeping a stop that is slightly below the 20 month MA to provide protection “intra-month” in case the price violates the MA.  You would readjust the stop each month to reflect the changing value of the MA.  That’s it.  The strategy is not perfect, there will be times that you get out and then get a signal the following month to get in at a higher price.  This is like all the years you pay for fire insurance but your house doesn’t burn down.  It only takes 1 fire.  Same thing here — over the years the protection from large declines will more than cover the slight losses or lag in performance.  No trading strategy is perfect.  However, trading or even investing without a strategy carries the highest risk.  If you want to be more active, next time I will cover a strategy that checks at the end of each week.

June 27, 2009 Posted by | Legacy Funds | , , | Leave a comment