Great Depression 2.0 to be Released Soon

Paul Farrell, writing for Marketwatch, has been stirring around that festering brew that is our financial system and with every ladle he picks up more toil and more trouble. But as so many financial news outlets seem unable to deprogramme themselves from their bullish delusion, it is good to see the occasional doom-monger express the same views as so many of the general public, or at least those that post on news forums. The really depressing thing is that stacking all the problems up in one big pile shows how completely rudderless this current financial ship is - it could be argued that a sinking ship has no need of a rudder, just lots and lots of life-boats. Anybody who is still naive enough to think that the big boys at the top know what they are doing is likely to be sold a cut price life jacket that has been slipped through quality control and which won't work when you need it.

With two major crashes in quick succession there is little to be hopeful about. Farrell lays the blame fairly and squarely at the doors of those free-market ideologues who publicly pushed their "liberal" laissez faire propaganda whilst in private being fully aware of what could go wrong... and of how horrific it could be. The big shocker came from the new Treasury secretary two years before the meltdown: Bloomberg News reports that shortly after leaving Wall Street as Goldman Sachs' CEO, Henry Paulson was at Camp David warning the president and his staff of "over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy." Not surprisingly Paulson wants to quit before he can be prosecuted.

But as these people have no regard whatsoever for the wider population, why are people so feeble in their response, so powerless to somehow return the disdain. These free market magicians are of a very black hue, and as we can witness every day they will do whatever it takes to keep your money flowing in their direction. Even if it isn't your money, it will be soon as taxes will go up and jobs will be lost.

The doomsday list has 30 items on it - and probably rising. You can read the full article at Marketwatch, I just wanted to highlight a few of the more nefarious deeds.

America's credit rating may soon be downgraded below AAA. I have been waiting for this but the huge political threats emanating from the USA have, for the time being, saved it from the ignominy of being downgraded. The idea that Treasuries are a "flight to safety" seems laughable given the pathetic interest rates on offer. Indeed the Japanese Yen has continued to climb with respect to the US Dollar at a time when Sterling and Euro are getting clattered. The theory that this recent Dollar rise is due to repatriation of wealth by American companies sounds far more plausible. At some point, the family silver will all have been sold off and the dreaded thought of having to sell all the land and homes comes starkly into view. Also, as unemployment rises so tax returns to government fall off. At some point, the mechanism of paying off credit with more credit will fail at the government level, just as it is failing at the corporate and personal one.

Fed refusal to disclose $2 trillion loans, now the new "shadow banking system". Although listed as a separate item, this actually goes hand in hand with Congress has no oversight of $700 billion, and Paulson's Wall Street Trojan Horse. Taken together, they are further proof that the Federal Reserve is following its own agenda that may, or may not, have anything to do with the public interest, not even for Americans. To see who really benefits from government one just has to look at how Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists. Elections are just inconvenient exercises to preserve the facade of democracy. The media enjoys whipping up partisan feelings so as to avoid real debate. It is quite astonishing how little informed debate has been taking place within the corporate media. The internet has played an important role in this last US election but the power it can wield is still in the testing phase. Many forum discussions are actually led by the corporate media agenda, rather than leading it.

The article ends on an even gloomier note, "At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan's Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America's problems will take years and will burn trillions.

He sees "nothing but large increases in the deficit ... I think it would be worse than the depression. ... Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." It'll get worse because "the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.""

So what can the individual do? This blog is not really about political activism or lifestyle management, but it is about trying to take responsibility for one's own finances, and especially one's investments. If there is one lesson from these two recent bubbles, is that there is absolutely nobody you can trust to tell you what to do. Learning to look at the numbers and ignore the media is a valuable step forward.

Are we in the middle of a 20-year flat market?

We all love to have our opinions - or prejudices - confirmed by others. The latest Mark Hulbert commentary on Marketwatch does just that. Irrational exuberance redux, or how stocks now lag Treasury bills for the past dozen years, puts some flesh on what I have been saying that stocks have seriously underperformed. Of course, we can all see the disasters that are global stock markets. The important question is whether the pundit mantra that stocks are better in the long run still holds true, and what does "in the long run" actually mean?

"Consider data compiled by Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania. In his famous book "Stocks For The Long Run," Siegel reports the percentage of time from 1802 through 2001 in which stocks failed to beat T-Bills. Not surprisingly, this percentage falls as holding period increases.

But what is perhaps even more surprising: This holding period has to grow to well more than a decade in order for the percentage to drop to below 10%."

After 10 years there is still about a 20% chance that treasuries will beat stocks, whereas at 20 years this drops to just 5.5%. So only after 20 years does the buy stocks mantra come true with any certainty - that's a long time to be chanting.

Actually, if you look at a long term chart of, say, the Dow back to 1920 you can clearly see what appear to be 20-year cycles. There are 20 years of rapid growth followed by 20 years of going nowhere. The periods from about 1940 to 1960 and then 1980 to 2000 saw huge stock bull markets. What we are seeing now, scaled in percentage levels, looks horribly similar to the market of the 1970's which saw its 1975 value being lower than its 1965 one. Good to see that someone has done the number crunching to back up this purely visual feel.

What this means is that we could well be in the middle of the current 20-year flat cycle. In such a market the buy-and-hold investor is going to be treated very poorly. The only options are either to adopt a market timing strategy, or to change the stocks to bonds weighting dramatically, or both. This also means that in spite of all the bullish media talk, investors may have to keep chanting for a long time to come.

Don't Believe The Pundits - Leave Stocks Alone For Now

Don't you get a touch irritated when you see pundits trying desperately to talk up stocks as you watch their prices sink ever lower? At what point do you just stop believing them? There are many situations in life where it pays to look at what people do, not what they say. Investments are a perfect example.

The FTSE recently failed to even bang its head on the 100-day moving average, never mind reaching for the stratospheric 200DMA. It has since come down to break the SAR and MACD looking red.

S&P 500 looks even worse. If anything, this is time for another round of shorts.

For the stock investor, this is absolutely not the time to do anything other than gamble. If you find a company chart that looks positive, then go for it, but remember not to buy anything from broker recommendations - before you even read the review or hear the interview the price will have moved already.

This is why my aim here is to show how some fairly simple indicators can be your friend, even for people who see themselves as investors rather than traders. I will not be giving daily advice but slowly going through how to apply indicators to investment strategies. The last 10 years have seen virtually no returns from the world's stock markets. Compare this to holding bonds, or even compounding a deposit account.

The really big indicator that we are very much in a bear market is the 200DMA. For the FTSE this is around 5200 and for the S&P at about 1250, and we are well below both of these. We've just gone through a few weeks in which markets have desperately tried to bounce off the last lows, but looks as if we are going to retest them.

Don't believe those people who keep calling "bottom" every time we hit a new low. Of course, they will be right, eventually, just that nobody knows when, which is as useless as not having read the advice in the first place. Trying to call a bottom is often seen as trying to catch a falling knife. A better strategy is trying to catch it off the first bounce. I haven't written much recently but am coming back on stream, so to speak, so let's watch closely what happens this time.

Bloomberg Files Lawsuit Against Federal Reserve Over Failure To Disclose Loans

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
(Bloomberg)

This is precisely what many feared. Firstly, that $700 bn was nowhere near enough, and secondly, that without a precise protocol about what transparency means the Fed will hide behind smokescreens of its own making. In September, both Bernanke and Paulson testified that they wanted the whole process to be transparent, like children promising they could look after the party food without eating it.

Now, the Federal Reserve, with what seems like the obvious complicity of the Treasury, are defaulting on their promises. These are not just promises to Congress, they are also promises to the American people and, because of the scale of the problem, to the world at large. This is yet another indication that people should never trust bankers and governments. The primary aim of governments is to keep control, with the supposed will of the people being a subsidiary concern once the electoral begging season is over. The primary aim of central banks is to keep control of money and to make profits for their owners. The US government is a client of the Federal Reserve. If that government either does not or cannot extract the information they need, or they can and do but are just not telling anybody else, then they are negligent in their office. Remember that Congress was bounced into the bailout bill be apocalyptic visions from both Bernanke and Paulson. Because of all the arm-twisting that was necessary just to get the bill passed, the oversight rules were big on words and small on specifics.

The corporate media is also complicit in this propaganda. However, occasionally one hears the odd independent analyst make some good points. Yesterday there was one talking head trying to talk up Goldman Sachs stock, for no good reason other than that the price is now so low. But as we are seeing, stock prices can quickly go to zero. Anyway, our bullish advisor was then contradicted by a fund manager who said in his opinion Goldman Sachs was vulnerable to changes in staff at the Treasury and Fed. It is well-known that Henry Paulson and many others are all fully signed up members of Goldmans and that more than a helping hand has been given to this bank compared to others that were fed to the lions. Nobody yet knows what changes the new president will make and whether he too has been brought into the fold, but such uncertainty is precisely what worries investors.

The defenders of secrecy - as the Fed are not answering the phone - claim that disclosing every loan or agreement could signal to the markets that the companies involved may have greater problems than anticipated and could lead to further market volatility. But the main reason for all this largesse was precisely to bring back market confidence. The fact that professional investors and fund managers are worried means that everybody else should be too. This slow motion crash is nowhere near over and any pundit seen talking up stocks is doing it for their own interest rather than the investor's.

As is often the case with these big decisions taken with public money, the individual feels powerless to do anything. The huge public outcry at the bailout bill was fended away and after all the emails and phonecalls and huffing and puffing the house of fiat money is still standing. I still think there is one protest that the public can still do. Take your money out of the banks and put it into credit unions. They operate under different rules to commercial banks and are not exposed to the credit crisis because their rules stopped them from ever participating in either fractional banking or leveraged financial products.

Banks Demand Fantasy Fair Value

Investors locked horns with the banking industry on Wednesday on whether U.S. regulators should suspend or change accounting rules used to value assets such as mortgage-backed securities.

Fair value accounting, which requires assets to be valued at market prices, has been blamed for billions of dollars in writedowns by some U.S. banks and policymakers. But investors and accountants say the approach gives investors a clearer window into banks' balance sheets.

The U.S. Securities and Exchange Commission was charged by Congress to produce a study by early 2009 analyzing the effects of fair value accounting rules on financial firms' balance sheets and examining alternative accounting standards. The SEC held a public meeting on Wednesday to gather information on the accounting rules, also known as mark to market or FAS 157.

Charles Maimbourg, senior vice president of KeyCorp bank, told the SEC that what management intends to do with an asset should help determine the fair value of the asset.

"You have to include management intent. They have opinions, they are in the best position to do that," Maimbourg said.

Under the fair value rules, assets can be valued based on a simple price quote in an active market. But hard to value assets rely on management's best estimate derived from computer models.

Given that there is no market for certain securities such as those linked to mortgages, banks say they have been forced to value assets at fire sale prices they could fetch in the current market. That is misleading, they contend, because the banks do not plan to sell the assets immediately and their value could rise in the future.

"There are loans that banks hold and intend to hold," said Maimbourg. "The fact that the market will only pay us 20 cents ... (is not) a reason to mark it down to 20 cents on the dollar."

Patrick Finnegan, a director at CFA Institute, disagreed and said allowing management intent to influence the value of an asset was an "insidious" idea.

Reuters

==

This is quite astonishing. The idea is that by sleight of hand companies can massage their balance sheets to make themselves look better. Indeed, I heard one senior commentator on Bloomberg some days ago openly say that as far as he was concerned banks should value these "assets" at whatever level is necessary to make their balance sheets look good! A blatant public plea to companies to swindle their investors.

And as for the pathetic quote above, that just because an asset is now worth 20% of its "value" as it might be worth more in the future companies should be allowed to reprice it, they should call it "unfair value accounting" or "fantasy book value". That is the whole point of fair value accounting - by booking it to 20% now, if the value should rise to say 50% then that's a profit compared to the present valuation. By creating a fantasy valuation companies are not only misrepresenting their liabilities to shareholders they are also going to be presenting losses for years to come as they chip away at these "liability assets".

As an example, if I have an account with a broker I need to place a deposit for every trade. The beauty of leveraging is that I can place a fraction of the real value of the trade. This increases profits in percentage terms. However, if suddenly the market for an instrument evaporates and the price drops to zero, my broker is going to phone me and ask me to either put up the money for the whole trade or close that trade. If I say to him that surely this is just temporary and that once markets stabilize the value will look less distressed, the broker is going to turn round and say to me,"Sure, you may be right, but that's your risk! At the moment it is worthless - put up the money on the assumption it remains worthless."

Surely if a market in a particular instrument just disappears, that is telling us something important. The problem with leveraged trades is that one can lose more money than one has put in. If I buy a stock at $100 but only need to deposit 10% of the price, my liability is just $10. If the price rises to $110 I have made $10 profit. Notice that the asset price has risen 10% but my profit is 100% - that's the nature of leveraged positions. However, if the price drops to $50 I am $50 down with only $10 deposit. I have to find the money to cover that extra $40 loss. As far as my leveraged trade is concerned my asset, the stock, is actually a liability, and will remain so until the price goes back to $100. Perhaps these bank "assets" are worth negative amounts of money. Perhaps these assets should be moved to the liabilities column. Then we can see their fair value.

Fed Cuts Rate to 1% - So What Now For Your Investments?

Yesterday the Fed's FOMC cut US rates by half a percent to 1%. As predicted, the dollar has weakened, losing about 10% in two days. The corporate media loves to talk up stocks (especially their own) but the effervescence went flat pretty quickly, with the Dow index doing its now legendary nose-dive in the last 10 minutes. The Dow plunged some 400 points in those closing minutes. There's confidence for you!

The resistance level it is trying to break through is around 9350, which was last week's high. It did peer above it yesterday but then suffered altitude sickness and collapsed. The level above that is around 9800, but if it fails at 9500 we continue to be in a downward trend. Nobody knows what will happen and anybody that says they do is just guessing. As I've said before, shouting "bottom!" every time we hit a new low will be correct one day, we just don't know when.

However, US interest rates cannot go much lower. They could fall to Japanese levels but that is absolutely no guarantee that it will help stock prices recover. It is a sobering thought that the Nikkei peaked at about 39,000 in 1989 - it is now, 20 years later, at about 9,000. It has lost some 75% in 20 years. Beware of the broker mantra that stocks always outperform bonds.

Treasury 10-year bonds are still yielding 3.8% in spite of the discount rate dropping to 1%. In 10 years, compounded, that comes to a 45% profit - after 20 years the profit would be 110%. Many people have now been through two serious bear markets. The promise of retirement wealth may ring hollow to many of them. All pundits repeat their sacred mantra, mainly because they cannot breathe without their broker fees, but investing in Japan may be a warning that things do not always get better. I think many individuals need to carefully rethink their retirement investments. Holding a majority in sovereign bonds and having the stock markets and commodities as the froth on top would have been the wisest thing to do 20 years ago. It may well be the wisest thing to do for the next 20 years.


This article also appears at Xomba

FOMC Meeting - Time for a Dollar Collapse?

Later today the Federal Reserve's Open Market Committee will announce its decision on US interest rates. Many are expecting another half a percentage point cut, bringing the discount rate down to 1%. What effect will this have on the dollar?

We have seen the dollar rally spectacularly in the last couple of months from an all-time low of the dollar index. However, this has been largely due to the fall in the Euro and Sterling, which account for a majority of the dollar index. The dollar has actually fallen against the yen.

Now, the media pundits are nothing if not cliche-merchants, and the mantra has been that the resurgent dollar is due to a "flight to quality". Quality!? With so much dollar wealth being destroyed it seems a flight of fancy to see the remaining dollars as quality. And at potentially just a 1% yield that seems very poor value - OK 30-year treasuries are still around 3%, an indication that the market doesn't see such low rates lasting for long.

But that is partly the point, at 1% there is very little lower it can go. What this also means is that bond prices - treasuries - cannot go much higher (unless the US has a credit downgrade). So by the end of today we could see treasury yields at their lowest and their bond prices at their near-term highest. If I was a foreigner holding billions of dollars worth of treasuries, this looks like a good time to get rid of them.

One thing that seems to be being forgotten is that a huge amount of US debt is in the hands of foreigners, both corporations and foreign government sovereign funds. This rise in the dollar seems to me to have little to do with quality and everything to do with corporations needing to liquidate assets in order to buy dollars so they can keep afloat as credit is expensive or non-existent. As has been noted elsewhere, this is not a flight to quality but a concerted repatriation of global dollar assets. This is a flight to self-security! However, what happens when other governments, dragged down by the US mess, decide that it is in their own self-interest to repatriate their own foreign investments?

The decisions of the inner sanctum of central bankers may well be a mystery to most of us. The manipulations are evident but in whose interest is often less so. However, if Americans are being bounced into repatriating assets, then everybody else in the world can do the same. Once treasury bonds have maxed out, what is the point in holding them? Indeed, with the combination of the dollar rally and bonds rising, many foreigners are holding onto very large profits from the last couple of months. What will happen when those profits are taken? What will happen when other countries start doing the same as the USA?

The markets are currently predictably unpredictable. But I for one will be keeping one eye on currencies, one eye on treasuries and the other on the stock markets. I know, it's not easy!


Also posted at Xomba

Trading Signal: short FTSE

Damn! I'm going to sound like all the others, giving trading signals after they've already happened. Well, sadly, that's how it is going to be this time. The reason was that I'd started writing on the use of IG Index's charting software, and one serious bug in it.

The signal was to short the FTSE. This I actually did at 5440, a few days ago, only to discover the faulty signal generated by the chart I was using. The SAR on a standard daily chart was to be triggered at about 5410; which has now happened. So, in this case I was lucky to get a few extra points, but did also have to suffer the FTSE climbing back up to 5500.

I write this as the FTSE is sitting at 5340 and itching to take another dive. As we are potentially looking down the same well as a month ago it perhaps isn't too late to short here.

Anyway, I'll write about the chart bug later.

Back Again!

Have had a month's break from this blog. This has been a time to think of how to carry on writing, and how to structure it. Basically, the idea of looking at live short-term trades is being abandoned for now. I'm not sure how many people are reading this - probably very few from the comments - so the work involved in trying to write as quickly as possible just doesn't seem worth it. Also, as there is always a delay between trading and posting, most trades are likely to have disappeared by the time my comment gets online. All of which has made me think that I will have a different focus from now on.

The Trading Day pages will look at current trends and look forward to levels at which indicators give trading signals. I will start a new section entitled Trading Signals, which is when the market is very close to a trading signal. The point here is that as a reader, I hope it will be more useful knowing when a signal is about to appear, rather than just knowing that it has already been and gone. The latter just seems to me fairly useless and just states the obvious.

I will also continue to look in detail at technical indicators and at the different types of contracts available to spread betters. Also, my occasional series of The Clouded View will remain occasional as I myself tire of reading newsletters that actually don't have anything to say but feel obliged to fill space every week.

So... lets see how round two goes!

Spread Betting Quoted Prices

Spread betting companies such as IG Index will be losing money this week. They always do when the market is so obviously moving in one direction. It is one of those strange industry facts that spread trading companies do not hedge their positions, instead relying on their spreads and market volatility to do the job of losing money for clients. Only a small percentage of traders make regular profits. However, when a market makes a decisive move in on direction - down in this case - everybody jumps in with the same trades and everyone is making money. Everyone, that is, apart from the spread betting company.

There are always tell-tale signs when this happens. In extreme cases you will see the prices indicating telephone dealing only. In cases like the last two days you will see prices being manipulated to reflect not just the underlying market but also the profile of bets on the trading company's book. Remember that spread betting companies are not market brokers but bookmakers. They may look and smell like brokerages but the taste is as much casino as it is stock exchange. Contracts such as binary bets and daily options are not covered by the FSA, and it was with the daily options that I finally saw the most flagrant price fixing.

I was trading Wall St daily options and had made good profits on put options but also had a call option hedge. Late in the session the Dow rallied bringing that call option into profit too, which was nice. However, as I stared at the Dow index price and my option price I was getting worried. The option was being priced at below its market value. At one point the market was 45 points above the option strike price and yet the option was being priced at 35 points - a huge 10 points below its value with no time value, or indeed negative time value, to speak of. I was tempted to wait for the market to close and then the option would have closed at a fair price. However, the indicators were pointing to another turn around so I sold it with a pathetic profit. It seems obvious that the calls were all hugely under-priced and the puts over-priced, no doubt reflecting the profile of the positions taken. But in my case this was a raw deal as I was already holding a position. This is the first time I have actually seen such a blatant mis-pricing. The only lesson is to be aware that these things happen and allow for it. During a "normal" day this rarely happens but you will see small price spikes as they are either adjusting the volatility setting in the options formula or, yet again, just trying to balance their books so they are not over-exposed and in the hope people will close early if they see the price start to go against them. The other option is not to use daily options, but sometimes they are useful, especially in a highly volatile market. Just be careful.

Trading Day

If June was depressing for stocks then July has so far been indecisive. The FTSE has traded in a narrow 200 point range. The wise thing would have been to just stay out and do nothing, as the intra-day volatility has increased so the indicators so useful in a trending market have been failing. A lesson for the future. The last time the FTSE did nothing for so long was last October, which just goes to show, if any more proof was needed, that we are at a decisive level. As bad news just piles on top of more bad news the support at this level seems to be purely technical. That doesn't mean the support is not real, just that historically the oversold indicators have predicted a reversal, even if temporary. For example, on 11 June the daily RSI showed an oversold market and the FTSE went up for 4 straight days before continuing its downward spiral. It could be as little as that or it could be much larger. The RSI gives no indication of the size of the reversal. As I've said before, it could be just enough to switch off the oversold red light. Fridays are usually volatile days, although if nothing much happens will hang on to the options till Monday as the Dow has been making significant moves in the last hour.

Trading Day

Nothing quite like a sucker's rally to brighten my morning! The Dow took a nosedive last night after Europe tried to rise. Perhaps time to decouple a little as the US and Europe are in slightly different economic cycles. Today will be the eighth trading day with indices stuck in this narrow range. We may end up with a similarly shaped day to Tuesday, with the FTSE and DAX having been pushed down overnight and slowly regaining their losses until the Dow opens. Nobody really knows! To short the FTSE again I want to see 5350.

Trading Day

A look at today's daily charts shows that some indexes have a bullish air about them. Perhaps all this talk of bottoms will stop being a fetish for a while. Also, I said before that the oversold indicator was likely to put a brake on the fall. Not because the market cannot fall further but just that technical analysts would expect some kind of rebound. The most telling moment was when the Dow hit 11150 bang on the nail and spiked up in what had all the hallmarks of automated computer trades.

So, the FTSE has hit the SAR and MACD is positive. One can never tell how far markets will move but the first test is the 30DMA at 5643, then the 5700 level. The whole thing could sink like a lead balloon if oil starts to rise again. There is one small crumb of comfort here in that the Chinese authorities have ordered all industry around Beijing to close during the Olympics, for fear of showing the world what a polluted capital they live in. So putting aside woeful corporate earnings, on just an energy point of view it is possible to have a month upwards.

TRADE
FTSE AUG 5750 CALL
BUY @ 60.3

The DAX has the same shape as the FTSE, the MACD is slightly positive but the SAR has not yet been taken out and stands at 6418.

The Dow also has the MACD positive but has hit the SAR on both the up and the downside in the last couple of days and I really would like to see it at 11400 before committing to more than excessive froth.

All three indices have come off their oversold indicators. The signs of an upswing are there in all three cases. However, I have only taken one call option out of the three. We should know this week if this is more than noise. Looking for FTSE above 5500, DAX above 6400 and Dow over 11400.

Trading Day

Half an hour ago IG Index was quoting the FTSE as opening 105 pts down, sitting at 5400. This seems to have more to do with the Asian collapse as the Dow is also quoted lower than last night's close. Now, we often see that the cash market needs to catch up with its out of hours prices, so with such a big drop I'm sticking my neck out.

TRADE
FTSE Daily
BUY 5420 call @ 26.6

Yesterday the FTSE was just 10 pts away from breaking the SAR indicator, which today stands at 5518. This is the first indicator to be flagged for any upward movement. The last few hours have shown it was wise it didn't touch it! The 30DMA is somewhat further away at 5645.

Trading Day

Another week, another bear market. A bright and sunny morning has quickly clouded over as FTSE heads for 5400 and the DAX 6300. Dow finally comes back into play later, and we shall see if it gives up on 11331. Talking of bears, the FTSE enters bear territory at 5400, hence has been flirting around this level for a week. The investment banks have been issuing conflicting advice of late. On the one hand we hear attempts at bullishness stating that equities are historically cheap and that much of the bad news has been factored in, and yet at the same time we see stocks downgraded on a daily basis. A case of watch what they do, not what they say.

From now on I will also be looking at the DAX. The FTSE and DAX have fairly similar shapes in the long term, but intra-day can behave somewhat differently. The DAX is largely composed of industrials and financials, without the heavy weighting in commodities. Hence, the DAX reactions to commodity and currency movements seems more clear cut than with the FTSE. We shall see if this continues to be the case.

Trading Day

Yesterday was another roller-coaster ride but today is the 4th of July and usually the FTSE is fairly quiet. The last couple of years have seen a small 40-50 pt range. But today is also a Friday, so I think will give a chance for the UK and Europe to think about their own economies. The paroxysms of the last few days are signs that this market will move sharply again - in which direction is a matter of speculation. The FTSE has fallen over 1000 points in six weeks - well oversold. The daily FTSE SAR is down to 5598 so within touching distance. Ironically, we may need to wait for the oversold warning light to switch off before a further leg down - this just requires a bit of sideways movement for a week.

Useful Trading Websites

I will update this as and when I find anything interesting. To suggest a site just leave a comment.

Economic Calendars

So you know when market sensitive data and announcements are released.

Bloomberg Economic Calendar
Pretty good, although heavily US leaning. Powered by Econoday, who have a personal subscriber version.

IG Index Monday Morning Briefing
Good on company announcements and economic data but strangely never mention central bank interest rate decisions - no idea why they miss these important events.

Trading Day

Last night we officially entered a bear market for the Dow - 20% down from its peak. Such labels may be merely cosmetic, but must have some psychological effect in that the bears can now look smug. The whole bulls and bears narrative sounds more like some forgotten mythology than a description of financial markets. I don't really give a damn about which way the market moves so long as I can find signals that catch those moves early enough to make a profit. But in the big wide world with lots more money to lose than me, many people have a vested interest in giving their unbiased advice. I really don't trust broker and bank recommendations as they just smell of self interest - there should be more independent monitoring services. Just take General Motors as an example. Two days ago the news was saying that the Dow's 200 point late rally was due to GM's better than expected sales. Their sales figures still sucked big time, but not as much as expected. Actually, that rally looked more like a reaction to oil coming sharply off its highs. Anyway, 24 hours later GM gets downgraded and its shares crumble - no new announcements, just another pump-and-dump play from the oh-so-wise big boys.

Well, last night was interesting in that oil did not retreat late in the day but remained stubbornly high, prompting the Dow to finally give up its bull dream. I expect this is in anticipation of the ECB hiking rates today, which will further weaken the Dollar against the Euro and thereby increase dollar denominated commodities such as oil and gold. Looks too easy a play so we shall see what will happen. I imagine much of the moves have already happened this week.

FTSE

Not so many support levels left to break. Looks like 5300 and 5100. The 5100 level may prove a bouncing off point as was the Feb 2005 high (5080) and then the Oct 2005 low (5130).

The ECB interest rate announcement is at 12:45 BST with a news conference later at 13:30 BST.

Trading Day

FTSE

Well, last night we seem to have had the customary pump-and-dump in crude oil. It closed higher but nearly $3 off its high. This gave the opportunity to the Dow to rally 200 points and save itself from a technical bear market at 11331.

All this froth just goes to show that these are important levels and one best be careful not to end up in the market the wrong way round. FTSE SAR down to 5689 and the MACD weakly negative. Yesterday the FTSE touched the same March low and only thanks to the Dow's overnight rally is it back to 5500. I think at the moment best use the 1-hour or 30-mins chart for daily trades. Seem to be working fairly well with just one or two trades a day.

Gold

Gold, oil and the dollar have been playing out their merry dance on a daily basis. This makes it difficult to keep hold of long-term trades as the last hour often sees a turnaround in fortunes. Having said that, gold is up some $60 in just 5 sessions. The 1-hour chart currently showing downward pressure.

Trading Day

FTSE

The FTSE has bounced off 5500, just as it did at 5700. The daily SAR sits at 5725, so won't call a rally until it hits that. It could, of course, be back below 5500 by the end of the week. For today, it currently sits at 5620 at pre-market and the 1-hour chart shows possible downward movement but am waiting for the SAR at 5615 to be touched. The market still seems fixated with oil as the fuel for inflation and a general economic slowdown, and not surprising as it hits record prices every couple of days.

Dow

Wall St has fallen further than the FTSE, due to its lower weighting in commodities. It is now almost at its January low. The first upward trigger is the SAR at 11625. On a daily basis the 1-hour chart still looks positive but very early for the Dow.

Gold

Gold has reached its May high of $935 then came off sharply to now sit at $923. Both the 30DMA and 100DMA are at about $900. Apart from a general weakness in its demand from jewellers gold's fate has been back in the hands of oil and the dollar.

IG Index has reduced its minimum bet size from £10 a point to £1. This means a $1 move in gold could be a £1 move in a trade - not a huge amount of money to be made with such small bets but useful to practise with real trades without breaking the bank.

Trading Day

Back online now! I know, nobody has missed me, hence am changing slightly the way I write these Trading Days. If I see some comments posted and the development of a readership I may change again. As there is an obvious delay between my trades and my comments, and a further delay for when the comments get posted, I don't think it necessary to try to make comments as 'live' as possible. This also means I can concentrate on the dealing screen and write comments at idle moments. I will experiment with this format and see how it goes.

What is ultimately important is developing trading tools and strategies that work and make money. Once those are in place then my trading comments become superfluous. We can all see the same data and use the same indicators, so will concentrate on longer articles.

Anyway... back to our programming.

FTSE

Yesterday touched 5580, which was also the low on 31 March. The Dow overshot its crucial 11750 by ten points then rallied. Today sees the Fed announcement on interest rates but as always this is after London closes, at about 19:15 BST. Depending on where you are in the world, this is often worth being awake for, as otherwise you will see the movement reflected in the FTSE's open the following day. The Dow's 11750 level is its March lowest close. The FTSE is still some way away from its March low at about 5460. Now, for the Dow this is more than just a local support - it is about the high of the 2000 tech bubble. A drop lower means that anybody invested in the Dow has been wasting their money for nearly 10 years. In contrast, the FTSE has been moving sideways for 10 years.

Just look at, say, a 20-year chart of the two indices. The tech bubble took the Dow to just short of 12,000, folowed by a credit bubble taking it up to over 14,000. However, the FTSE's twin peaks are at the same level, just shy of 7,000. From a purely technical perspective, this looks ominously like a double-top and there is no good reason why we can't see the FTSE back into the subterranean 4,000's.

I am reminded of the often quoted statistic that in the long term stocks have outperformed bonds, but only if you reinvest dividends. In a sideways market this last little proviso makes a huge difference.

Anyway, coming close to such important levels will no doubt see another bout of increased volatility, so I wouldn't be surprised if the market rises again to meet the 30DMA at about 5840 before falling further. It could, of course, just sink to 5500. I think it too late to take any long-term short positions, using the daily chart, but the 1-hour chart continues to be profitable, with the 100EMA line showing good trends over a 4 to 5 day period.

Bottom? Who knows!


GOLD

Gold has been twisting around faster than a dog chasing its tail. With the dollar on a weak upward trend and oil trading sideways it is hard to gauge the short-term future. The 200DMA at $868 is holding but gold fell away very sharply from trying to reach $910. After a period of what looked like nicely tradeable signals it now looks unclear until it makes a move outside this narrow $30 range.

Trading Day

FTSE

Dow sits a slither above 12000. FTSE around 5760 in pre-market. Last support at 5700. Came sharply down from the 30DMA, now sitting at 5930.

GOLD

At the top of its current range, just shy of the 100DMA at $896, with the 200DMA at $867. Seems to be following oil but gold's peak was back in March, showing some demand weakness since then, although propped up by its hedge status.

Just as a reminder that what are considered traditional relationships between markets may break down some days as sentiment flips.

Trading Day

No time for a preamble...

TRADE
FTSE
SELL @ 5842.8
1-min chart premarket

TRADE
Gold
Buy @ 844.4
30-min chart

Trading Day

On Gold: in one session gold went from its 200DMA up to its 100DMA. This morning it sits more or less in the middle of this range. Yesterday was boosted by falling dollar and oil spiking to a new record just shy of $140. Still needs to break through $900 to call a new rally.

On FTSE: yesterday was a poor trading day. Was probably just my not reading the script, but was very choppy and ended just below 5800. After a relentless fall from 6400 to 5700 the FTSE is taking a breather. The daily chart is still giving mixed messages, with a possible upswing but also just as likely to be a pause before 5500. The same thing happened in April when the SAR signalled a sell but the MACD remained weakly positive. Under those conditions it is a wait-and-see signal! Indeed, in April was wise to do nothing as the market turned upwards again within a few days.

Trading Day

Back to another see-saw week on the markets. The FTSE daily chart has finally broken the SAR and so we are now looking for further upward movement. The only caution is that the MACD is still in the red. However, as we've seen over the past few weeks, the FTSE has tested and re-tested every support and resistance, so perhaps no surprise that it will now test its resistances. The first one coming up is the 30DMA at about 5965. It needs first to move up convincingly from its current pre-market 5820, which was the April support. This could now herald a period of holding on to upward movements rather than downward. I would still look to a positive MACD before committing myself.

Gold looks less healthy, just $3 away from hitting the SAR to indicate going short. Continues to sit just above its 200DMA. No great entry point to buy, although if it were to get to $875 then that could signal a lurch up to at least challenge $900.

Waiting for the right trading signals.

The Clouded View: On Gold

There are enough gold newsletters to fill a bullion vault, so why bother writing about it? Well, ever since a brief stint at a commodity broker, it has been one of my favourite markets. And since starting to write this blog have come back to it; initially as an important factor in the movements of the FTSE but recently as a market in its own right. It has more potential for medium-term trends and is a truly global market (unlike the stock indices).

As an example of the current state of technical analysis on gold, here is a recent article from Reuters. As usual, headlines seem designed to deceive, as the article seems to champion a rally back up to $1,000 an ounce. However, a closer read shows that there are numerous dissenting voices, usually citing weak global demand. Now, I don't run any econometric models, I don't have a stash of gold bought at $900 to flog, and I don't have any private clients who hang on my every word. I have no vested interest in the future price of gold. I do have a vested interest in trying to read the charts correctly and finding signals for profitable trades. Whether you are day trading, spread betting or hoarding little gold bars, it is important to get the timing right. The article quotes Goldman Sachs as lowering their 3-month projection to $860 (which is no great insight as that's where we are now) and their 12-month projection down to $800. To give them a little credit, in January 2008 the same broker predicted gold at $1,000, although at that point (in the middle of January) it was already at $900. They also predicted an average price for 2008 of $915. I know, predictions change in the light of changing markets. But in November 2007 the same Goldman Sachs advised clients to sell gold, contradicting a research note from one of their own analysts. This didn't start off as an inquiry into broker recommendations, but it just shows you how wrong (and how self-interested) they can be. For all their big offices, expensive suits and computer power, they are no better than a laptop, charts and a brain.

So what do the charts tell me? The only gold charts I have found of any use are the daily and the 1-hour time periods. As of today gold is trading at $870, a whisker above its 200-day moving average. This 200DMA has held solid since the recent gold rally starting in August 2007. On the 1st and 2nd May 2008 it tested it then rose to $935, only to fall back to re-test it now. The 200DMA sits at $866. The 100DMA is at $897. The last 3 weeks have seen the gold price squeezed between these two levels. This suggests to me a break-out coming pretty soon. The pressure at the moment is undoubtedly downwards, with this 200DMA being the last critical support. The market has already tested $845 on 2 May, which was also the November 2007 high. A break down through this and we are looking at $775 as the next support, this being the low during Nov-Dec 2007. But why the doom and gloom? Surely gold will leap up to $1000 again on the back of rising inflation, bullish oil prices and falling stockmarkets? Well, I am a poor lonely trader without the resources to simulate my own global economy and, given the results of those who do, I feel better just looking at the numbers. All the pushes and pulls on the gold price are reflected in... the gold price. So why look elsewhere? So, to complete my down-side view, the last two days have seen the gold price dip below $866 but on both days has closed above. There may be a pocket of resistance at $850 but below this it's a long way down.

What about the up-side? Well, before we can call a new rally it really needs to get out of this trough. Even going up to the 100DMA at $897 won't be enough, but would obviously be a start. The daily chart shows a string of lower highs, which is hardly bullish, so we really need to see one higher high at $910 and then $935 and then $950. Whatever happens, it looks to me like it will happen within the next month. So how do we trade this?

The daily chart is good for trends and support/resistance levels but doesn't inspire me with great-looking trading signals. For these I switch to the 1-hour chart - but keeping in mind what we've learnt from the daily chart. A look at the 1-hour chart shows almost an identical image for the last 6 days as for the last 4 months - a fractal if ever I saw one! Pure coincidence, but proves why different timescales (different magnifications) can reveal interesting information. One crucial difference, however, is that the 1-hour chart seems to give pretty good trading signals. Over the last week we have seen lower highs and lower lows and have now just come off $860 with a buy signal at about $868. These are short-term signals that can last from 6 to 48 hours and should be taken within the context of the daily trend. The range between the 200DMA and 100DMA is just $30, so I don't expect it to stay here for very long. Using the combined SAR and MACD indicators has yielded some very good trades recently. What the 1-hour chart allows you to do is to catch the new trend before it shows up on the daily chart. At the moment it has signalled a weak buy, but I don't like holding on to trades over the weekend. The markets may be asleep but the world certainly isn't. A move down to $865 will probably trigger a sell signal. As always, I don't make predictions. You can look at the same charts as I do and make your own conclusions. All I really want to do is look at markets with trading signals that work.

One brief note on trading gold on spread betting platforms. As usual, will take IG Index for my example. There are not too many instruments available for gold, which I find slightly surprising. The only binary spread bet available is a simple up/down bet. There are no futures options available, merely daily options - which I generally find poorly priced. Perhaps more importantly, gold is one of the few truly global markets, traded round the clock, and as can be seen from the 1-hour trading signals it is totally ignorant of human sleeping hours. This means many trades will need to be left open overnight and using the daily options one will have to close one option then open a new one, with loss of the spread. As I have written elsewhere, the bungee bets are identical to the daily options, so no more need be said about them. So we are just left with a pure play on either the daily spot price or futures price. The minimum stop on IG is $2 but that seems overly tight and I prefer a $4 to $5 stop loss.

Enjoy the ride.

Trading Day

TRADE
FTSE Daily
BUY @ 5762

pre-open so spread wider than within market hours. Take quickly at any sign of a loss.

Game on!

Trading Day

Where are we going today? The FTSE daily chart shows absolutely no signs of recovery, with 5500 and below looking likely. The resistances are so far away that they are as likely to be touched as a cathedral vault. Oil, banks, housing and retail are our four horsemen of the apocalypse - all we need now is another dumb war as a parting shot from a lame US administration. Of course, the reason to manufacture a war is to manufacture arms and thereby help a large but selective part of the economy - the General Electrics and Westinghouses of this world.

Resistances

6000
5800

Supports

5680
5500
5415

Trading Day

TRADE
FTSE Daily
SELL @ 5837.5
3-min chart

Still have a Jun 5700 put which has been losing in time what it has been gaining as the FTSE has dropped.

As I said, 5800 was the obvious first support, and I still don't see much support other than 5500 after that. Possibly 5700, which was a support mid-Jan to mid-Feb.

oh yeah...
TRADE
BUY @ 5822
Profit = 15.5 pts
not a bad start!

Trading Day

The Bank of England announces its decision on interest rates at noon.
Brace yourself.
Could be a boring morning. Any sign of it just treading water and I'm taking a break and coming back later.

The mood seems to be of gloomy resignation of interest rates staying at 5%. The BoE obsession with inflation above and beyond anything else has painted it into a corner. Even more of joke is that real personal inflation is closer to 10% than 2%, but the authorities now love to take out of their official inflation figures anything that might actually be inflationary. Data Corrupted.

Is Gordon Brown likely to be the only prime minister never to win an election?

OK, time to watch the numbers...

Far Out Trades

Been ignoring these lately, so here's a spread betting wet dream!

FTSE down 100 pts
40 mins to close
Dow rising
FTSE to finish down > 50 pts
SELL @ 96
Cost 4 pts

Go baby! Go!

Trading Day

Another of those mornings when the spread betters have pushed the FTSE down to ape the Dow. Expect it to rise to meet last night's close. There is probably a strategy lurking in these movements but the profit potential seems so slight compared to the risks. What it does mean is that even if it is a down day this isn't the right time to go short.

FTSE closed above its 90DMA, although as of writing sitting some 30 points lower. Long term daily trend still bearish but has been putting on a good fight for 6000. The next level up (if that's not too wildly optimistic) is 6095. On the down side it still looks to me like fresh air down to 5800.

Waiting for the bell...

Trading Day

Resistances

6105 (30DMA)
6095 (200DMA)
6043 (90DMA)

Supports

6000 (barely a support but did close a nose above this)
5800

In terms of day trading, the 1-hour chart needs to go above 6000 to confirm a positive trend, as does the 30-min chart. It would be worrying if the charts didn't tell us the blindingly obvious! A drop below 5970 to confirm bearish session.

Trading Day

Was feeling good about having taken my put option at 91 pts on Friday, seeing it at about 75 before the open. Now am not so sure! Oh well, one that got away.

Missed the big leg down but grabbed it at the 30-min chart entry.

TRADE
SELL @ 6032.5
FTSE Daily

Been watching it creep back up but have now managed to move my stop down to 6030 so safe for this first trade of the week!

Now decidedly below all 3 daily moving averages. A break below 6000 and I think we're staring at 5800, the mid-April low, then 5700 and 5500... but surely those are for another day!

The Clouded View: Commodities and Stockmarkets in Sync?

We are so accustomed to seeing headlines such as "Markets tumble as oil hits new highs" that we are also prone to believe them. The traditional view is that high crude oil prices feed into inflation, erode profits and hence lower stockmarkets. The traditional view is that gold is an inflationary hedge and hence will rise and fall in tandem with oil. The traditional view is that as both oil and gold are priced in US Dollars then a fall in the currency will lift these two commodity prices so that for the non-dollar world their value remains more or less even. the traditional view has been completely and utterly wrong in recent months.

From its mid-March low of 5416 the FTSE then rallied to 6360 only to recently fall back to this morning's 6045 (-5.5%). In the same period the Dow has gone from 11670 to 13139 and then fell back to a recent low of 12441 (-5.4%). At the same time crude oil has gone from $98.60 to $134.20 a barrel, only to soften to $126.40 (-7.2%). Gold has shown a slightly different trend, peaking at $1032 just when the other three were at their recent lows. However, from mid-May it has shown the same 7% drop as oil. It is this short-term drop in both indices and commodities that I initially found puzzling, then noticed the longer-term trend between oil and the indices. From mid-May the gainers have been Sterling versus the Dollar (up 2.3%) and the Dollar against the Euro (up 2.5%).

So what about this supposedly negative correlation between crude oil and stockmarkets? The FTSE charts show all the signs of it being a commodity-based index and ignoring the broader market. If you look at the FTSE sectors (all traded on IG Index) you will see some very different markets going on. The Mining, Oil and Gas, Oil Equipment and Engineering sectors are all on a high. The rest are either in decline or treading water. The FTSE has some serious players in this area and, on its own, the rise in these sectors looks like stating the obvious. The Dow has less of a commodity weighting yet has shown a similar pattern recently. The thing that I find puzzling is that the rest of the FTSE market sectors seem to be unsure how to respond.

I hate making predictions, but rather just look out for the signals that herald major moves. In this case the key issue is the negative correlation between commodities and stockmarkets. The recent positive correlation must surely break down at some point. To which side is a matter for tipsters. But if inflation fears return, coupled with falling real estate prices, then the other FTSE market sectors are heading south dragging the broader index with it. The commodity sectors will merely cushion the fall. On the upside there seem to be few good signs for the UK economy so that in the short term we may continue to see these resource sectors leading the way. A real unalloyed rally will have to wait until the UK consumer feels wealthier again. There is, of course, a third option, and that is that raw materials and resources will continue to grow in importance and that the FTSE will increasingly resemble something like the Australian market. In this case, the disconnect may be between the FTSE and the Dow. One of these days I'll believe those headlines again.

Trading Day

Well, we're sitting pretty much where we were this time yesterday. The score is 3-3 in terms of hitting the upper and lower moving averages this week. And so we enter the extra-time known as Friday (or the 4th quarter if you think football is played with the hands). But I don't expect the killer trade till the second half, with three pieces of data coming out of the US between 13:30 and 15:00. Rather late in the day for the FTSE but still enough time for a dramatic finale. The worst case would be a stalemate at the whistle, with the out-of-hours FTSE waiting for the Dow penalty shoot-out.

The only really important levels are

Resistances

6129 (30DMA)
6099 (200DMA)

Supports

6047 (90DMA)
6000

beyond these you can take a guess.
The struggle is for the 200DMA level, with the other two MAs squeezing the FTSE into making a decision either way.

Run Profits and Cut Losses

Well, how many times have we heard that one? This must be the number one piece of useless advice trotted out repeatedly on trading websites, newsletters and courses. What does it really mean? The trading world is so full of quantitative data - stock prices, indices, moving averages, indicators - that the above advice seems not only such a platitude, but is also rarely backed up with any hard and fast rules.

The opposite of this rule, "Cut Profits and Run Losses" is obviously insane (and yet how many of us have been guilty of doing just that?) The delusional hope that the market will turn in your favour. The look of horror as your profit dwindles to nothing. Praying to your indicators will not appease the market demons. To our knowledge, Dante was no day trader, but his admonishment to "abandon all hope" as he stepped into the darkness should be plastered above the entrance of every stock market. Not much of a unique selling proposition, but nevertheless true. Dante was lucky in having a guided tour, but you're on your own.

As I write this I am increasingly aware that this could get very long, so will break it down into digestible pieces. I first want to look at the idea of running your profits. As I said, all rather obvious, but what does it mean? You sit there, your trade is, say, 50 pts in profit. Your exit indicators (whatever they might be) are nowhere in sight, but the market starts to move against you. You see your profit shrink to 40... to 35... to 30 pts. Your exit indicator tells you to stay calm; the trend is not broken. Your profit keeps dwindling, now standing at 20 pts. Is this noise or a signal? Take your diminished profit or wait for the trend to return in your favour? After all, you were right, weren't you? But were you 50 pts correct, or just 20 pts? We've all been here, and this is exactly where many will "cut their profit". You really don't want to see a winning trade go into the red so take a deep breath and take the 20 pts on the table. Damn! It's just 10 pts now! Take it! Now!

So what does the wise trader do in such a situation? Some courses suggest that before opening a trade you write down not only your stop loss but your exit point. But doesn't that go against the advice of running your profits? Well, yes, however, I'd suggest writing down the exit point just to remind yourself of your original expectation. You may have an overly optimistic expectation but trading should have beaten that out of you by now. The crucial point here is, I think, what instrument you used to initiate the trade. What was the timeframe of the chart you used? This is what I tend to do. Let's look at some numbers.

A 3-minute FTSE chart (using my combined SAR and MACD indicators) will give about 20 signals during a day. Some of these will be mixed signals and I personally would not trade, but that's another article. The average trend on a 3-min chart is about 20 pts. A 30-min chart will give 2 or 3 signals during a day with an average trend of some 50 pts. Already you can see that your expectation - your tentative exit point - should be (indeed must be) different depending on which signal on which chart you were using to trade. To wait for a 50 pt profit on a 3-min signal will doom you to lose most trades. So what should we have done in the above fictional trade?

Firstly, at +50 pts, we would have already moved our stop. Using a 3-min chart, remember that the average trend, and hence average profit is just 20 pts. I would have moved the stop down to +30 pts by this stage, already locking in a more than healthy profit. If the 50 pt trend was very quick the exit indicators on the 3-min chart will lag a bit but will probably be somewhere about the +10 to +20 mark. If the trend was slow those same indicators should be fairly close to +40. On a 3-min chart the strategy seems crystal clear. You have already run your profits as they are well above the average. You have already followed the golden rule. The chances of there being more profit using the same 3-min chart is very very small. Take the +40 pts and pat yourself on the back - save the sweat for another time.

But what if we had used the 30-min chart for the same trade. As I said, depending on how the day goes there may be just one signal, or possibly 2 or 3 - very rare that there are more than 5 signals. Your average expectation is about 50 pts. You've hit that but have in the back of your mind this running your profits rule. You're sure that if you take it now it will go another 50 pts in your favour and you'll regret it. At this point I would have moved my stop to either +10 or even +20. You won't lose anything. So now we watch the market reverse and see our profits dwindle. I think this situation is less clear. I personally like to switch between timeframes as they give different views as to what's going on. Indeed in this 30-min example I will usually flip to the 3-min chart just to micro-manage the trade. The 30-min chart is good to show the trend for a session (or half a session) but is too coarse to find a really good entry (or exit) point. In our example, we will reach the point where the 30-min chart is still showing an unbroken trend, but the 3-min chart has already signalled an exit. What to do?

There is, in my mind, one crucial question behind these judgments that we have not as yet explicitly stated. How can we tell a valid signal from background noise? We use all kinds of analytical tools to somehow smooth out the noise but only with hindsight can we tell which reversals were genuine signals and which were the noise of a complex system. However, we can use statistical methods to give us an edge. In the above examples, such statistical data will save us a great deal of sweat. Although, like anything, it will not be 100% right, it will provide a benchmark for us to distinguish a signal from noise.

So let me introduce two quantites that we have actually already been discussing but haven't as yet defined: our Expectation; and our Signal Strength. We have already met our Expectation values - for the 3-min chart it is 20 points and for the 30-min chart it is 50 points. These are our average maximum profits using the open signals from the given charts but closing at hghest possible profit before the close signal. These values will be different for different chart timescales and for different indicators. You will have to calculate your own. The Signal Strength I calculate as the difference between your average profits (I hope they are profits, otherwise change indicators) and your Expectation value. This gives us a statistical number that defines how much a market pulls back from potentially maximum profits before it hits your close indicator. I find this helpful in precisely the above scenario, where the close indicator is still a long way from being triggered but the market moves quickly. For the 3-min chart the SS=10 points and for the 30-min chart SS=25 points. I am not sure if it is significant that these are half the expectation, but perhaps you can save yourself a lot of calculations and take half the expectation as the signal strength.

So what use are these new numbers? To me, they give me an indication as to when any market reversal is a signal rather than noise. It also gives me a new exit point if my usual indicators have not yet been triggered. There is a case to possibly change exit indicators but that's for another time. The other option is to adjust the parameters of the indicators to be more effective as market volatility changes, and yet again this is another topic for discussion. What I have set myself in this article is what to do in the scenario where the market starts going against you, your profit is dwindling, and there is nothing in your trading armoury to tell you to bail out. Remember, we were trying to define what "run your profits" actually means, apart from being a platitude.

So what would we have done, using our new tools? In the 3-min example, we had reached a profit of 50 points. With a Signal Strength of 10 points, I would have closed at +40, which is exactly what we did. Using the 30-min chart the situation was less clear; we were sitting at our Expectation value so would have been a good trade but it was possible for the market to move in either direction. Even if the market retraced 20 points, on a 30-min chart this could still just be noise. With our new parameter of SS=25 we would set our exit point at 50-25=25 points. We would thus close the trade at +25 points profit. It is unusual for a 3-min trade to yield a higher profit than a 30-min trade, but the latter signal is much slower to respond to rapid changes, hence the need for a profit-taking signal. The SS value can also be used to set your initial stop loss, indeed you can remove yourself from the close altogether by setting a trailing stop at these values. Sometimes the market will then resume in your favour and you will have stopped-out with only a modest profit. As always, hindsight is really of no use whatsoever in deciding what to do in the here and now. With just fairly modest statistics we now have a handle of how large a movement can be counted as a real signal rather than random noise. If your closing indicator is already ahead of your trailing stop then use your indicator - you have already run your profits. If your new trailing stop gets hit then it is done with the knowledge that the retracement was large enough to be considered a signal - yet again, I think you have done your best to run your profits - nobody is going to tell you the precise turning points.

Just some closing comments. I have developed these numbers myself and have no idea if they already have a name or if they are quoted elsewhere. I really can't be bothered to search this out as I find them useful and that's all that matters. If anybody cares to enlighten me on such links then feel free to leave a comment. I may refine these in the light of further data. For example, when I started analysing the data I thought the standard deviation of profits would prove useful, but then found that it was too large a number; mainly because there are a small number of very profitable trades that skew the distribution. Those of you who wish to do your own analysis, it is very simple. You just need to input three numbers for each trade: the opening value, the closing value and the best possible closing value (the mythical turning point that we can only see in the rear-view mirror). Then calculate your average profit/loss using just your signals and your maximum average profit/loss using your entry point and the best possible close. The more data you have, the more realistic your averages will be. Even if you don't use my ideas above, these really are the minimum requirements to test whether your indicators are useful or not. Once you have back-tested everything and you are happy with your profit expectations it is then time to forward-test your system in real time doing paper trades. If you're still feeling happy, then it's time to open your wallet.

Trading Day

Overnight move sees the FTSE poised to rise and sitting bang on 6100. Already at about +35 pts all the usual indicators have already been hit, so a matter of waiting to see a reasonable entry point, and to see if this holds.

TRADE
FTSE Daily
SELL @ 6103.3
using 1-min chart

Far Out Trades

24 mins to close.
oil going up. FTSE going down.

FTSE to close down > 30 points @ 4.3

Trading Day

In contrast to yesterday, this morning is very very early. The Dow recovered last night, so the expectation is of a similar move from the FTSE. The spread betting companies seem pretty good at estimating the opening levels (and pretty quick at adjusting their quotes) but I often feel that the actual cash market needs to feel the new index level on paper rather than just on the futures market. The FTSE is currently quoted about 25 points above yesterday's close. The price of crude oil dropped sharply yesterday to close below $129. The two largest companies in the FTSE are Shell and BP. The FTSE is calculated using a market cap weighting. It would not surprise me to see a dip before we see a rally.

Resistances and Supports as yesterday.

I may, or may not, be here at the open as need to go out. However, see previous Trading Days for strategies.

Trading Day

Kicking off the morning a little late as have been watching the market predictably rally at the open. Am always wary of the "relief rally" tag, so just take note that at 6144 sits the 30DMA.

Resistances
6300
6250
6200
6144 (30DMA)

Supports
6100 (200DMA)
6045 (90DMA)
6000
5800

Far Out Trades

This is very early in the morning but take your pick from one of these:

FTSE to close down > 30 pts @ 7.5
FTSE to close down > 50 pts @ 4.0

Long day...

Trading Day

Rather late in the day, but just to show that I haven't been asleep on the job, today is a public holiday in both the UK and US and is therefore a non-trading day.

Back to sleep now ...

Far Out Trades

This is on the cusp of craziness but here goes.

FTSEto finish Down > 50 pts
BUY @ 9.8

I just think those Friday night blues will set in before the close!

Trading Day

I write this very early today as need to go out. I will keep an eye on the market on my mobile, but probably will not be able to post comments till I come back.

Anyway, the Dow had a very similar day to the FTSE, arresting the slide... for now. Oil and gold have also come off their recent highs. The 1-hour chart just needs to drop to 6175 for a downward trend. The 30-min chart needs a break above 6185 for an upward trend. And as of writing the FTSE is at 6180 - so couldn't be more symmetrical. Given how close the indicators are to the market price just be careful of any opening froth.

Actually, given that the FTSE is sat there at par, and given it is a Friday before a 3-day weekend, I am going to take what was one of my favourite plays last summer and take essentially a "double option" using the 50pt ranges.

BUY FTSE to close up over 50 pts @ 14.8 pts
BUY FTSE to close down over 50 pts @ 18.4 pts
Total cost of 33.2 pts
If it just touches +/- 50 pts then one of the two contracts will be worth about 50. At that point take a close look not only at the market chart but also the contract chart to find the best exit point. It could go all the way to 100.

Resistances and supports as yesterday.

Have a good day!

Far Out Trades

FTSE to keep in range -80 to +80
SELL @ 95 pts
COST 5 pts

FTSE currently at -10 pts. Has an hour and a half to make a move!

Trading Day

Arrived late to the party today and missed a nice 40 pt rally as indicated on the 3-min chart. Overnight the plunging Dow dragged the FTSE to 6150 but has now recovered to be pretty much flat from last night's close. I am sometimes puzzled by the FTSE's slavishness at following the Dow. There are certain economic similarities between the two countries but the profiles of the indices look very different. However, one back-of-an-envelope statistic sticks in my mind; that half the UK's trade is with Europe, but half of UK foreign investments are in the USA. What appears as slavishness is thus merely a reflection of the changing value of a large chunk of UK multinationals' portfolio. However, we are currently seeing the Dow and FTSE diverge somewhat. This seems wholly due to the differing weighting of commodity stocks in the two indices. With oil at $135 and rising, and gold peering up at $1000 again, on their own these rises are good for the FTSE's petrochemical and mining sectors. With the dollar also losing ground to sterling the consumer cost of these price rises is more limited in the UK than the US. IG Index have a FTSE-Wall St Differential market, which as the name suggests is just the difference between the two indices. Yesterday saw a huge drop and it now sits at the very bottom of its recent range. A slight structural decoupling will see this drop further.



Resistances
6500
6400
6300
6250

Supports
6150 (30DMA)
6100 (200DMA)
6040 (90DMA)
6000

30DMA was hit out of hours and held. Both 1-hour and 30-mins chart showing positive trends for this session. Buy signals were at about 6175.

Far Out Trades

OK, I don't think the first one is going to come in, so here's another one for our addicts.

FTSE to finish down > 50 pts
BUY @ 4.5
If FTSE drops to 2140 this will rise to about 50 pts.

Far Out Trades

Now, I'm sure there are lots of punters out there who see spread betting as... well, betting! Those of you who like the long odds trades and the thrill of seeing a 5 point trade come in at 100. So, just for you, here's a series of Far Out Trades.

Now, I don't much like taking completely stupid bets, but there's no harm at looking at unlikely but possible events.

So here's the first one!

SELL FTSE to keep in range -100 to +100 @ 95.9
COST 4.1 pts

If FTSE touches this it will go to zero. I would probably take it at 50-60 depending on the trend.

Good luck!

Are Bungee Bets Worth a Plunge?

The spread betting company IG Index recently introduced a new instrument: Bungee Bets. Their own site describes them as a way of profiting from market moves without the annoyance of being stopped out. If the market goes against you the bet remains open (if temporarily worthless), so that if later it comes back in your favour you can be smug, claim you were correct all along, and take a profit. But... well... isn't that what options do already? So I investigated the relationship between the new Bungee Bets and the Daily Options on IG.

Bungee Bets are quoted with a Floor or Ceiling. A Floor is a level below which the bet will not fall, and a Ceiling is a level above which it will not rise. So essentially they work the same way as Call and Put Options respectively. If you think the market is going up you could either buy a Call Option or a Bungee Bet with a Floor. If you think the market is going down you would buy either a Put Option or a Bungee Bet with a Ceiling.
If you thought the market would rise and bought a Call Option at the money, if the market were to fall then your option would slowly decrease in value. If the market closed below your strike price then your option would close at zero. If you made the same play with a Bungee Bet rather than an option, what would happen? Well, if you bought a Bungee Bet with a Floor at the money, and the market went against you then you would slowly lose money. If the market were to close below your Floor then your bet would close at zero. So at the qualitative level, Bungee Bets and Daily Options seem to work in identical ways. But are they priced the same way?

If you look at a Bungee Bet at or around the current market price you will see that the 'market price' quoted for that bet is very different to the real underlying market. I took a snapshot yesterday when the FTSE was bang on 6300 to make the numbers nice and easy.

Let us assume you think the market will rise. You start by looking at the FTSE Bungee Bets with a Floor below which your bet cannot fall. The 6300 Floor is priced at 6318/6324. Immediately you can see that the Bungee 'market price' is already way above the underlying market price. If you were to buy this contract then your liability would be the Buy price minus the Floor, in this case 6324-6300=24 points. Also note that the spread is 6 points and the mid-price is 6321, or 21 points. Now what about the equivalent option?

Look at the FTSE Daily Options and find the 6300 Call. This was priced at 19/22, meaning that to Buy this option would cost you 22 points, with a mid-price of 20.5. Note that the option spread at this price is just 3 points compared to the Bungee's 6 point spread. Apart from these small differences, your liability - how much you actually deposit from your account - is almost the same. If anything, Bungees are slightly worse in terms of spread and hence the amount you need to make up just to get even.

Let me give you two other examples just to show that this is not accidental. Rather than taking a punt at the market price you want a slightly cheaper contract so look at prices slightly out of the money, say at 6320. Now, the 6320 Call is priced at 10/13, so to buy it will cost you 13 points. As it is out of the money the value of the option is 13+20=33. Yes, you are only paying 13 points, but in order to close even the market must rise 33 points just to cover your deposit. Now the Bungee with a 6320 Floor is priced at 6329/35, so to buy this contract will cost you 6335-6320=15 points. As the market is currently at 6300 the Bungee Bet (just like the option) needs to make up 35 points just for you to break even. Note that the two mid-prices are 11.5 and 12 - identical save for a bit of noise. So yet again, the Options and Bungee Bets have virtually the same prices, with Options actually being marginally cheaper because of their tighter spreads.

The same thing happens for in-the-money contracts; I don't need to go through the maths of it! Well OK, I promised I would! A 6280 Call is priced at 29/33 with a mid-price of 31. A 6280 Floor is priced at 6308/14 with a mid-price of 31. To buy the Call will cost you 33 points, and to buy the Floor will cost you 34 points. Both are 20 points out of the money. Same difference!

So what have we discovered? That Bungee Bets are nothing more than Options in disguise, being priced in terms of their underlying market rather than merely the difference between the market and the contract strike price. They are the same thing, except Bungees wear a suit and tie whereas Options walk around naked. If anything, Options are a few points cheaper. So, the question strikes me,"Why has IG Index bothered to introduce a 'new' contract that is nothing more than an existing contract?" You may wish to ask IG that question. I rarely use IG's options as I think they are usually poor value compared to their Binary Bets (but that's another article). The only thing I can think of is that their options contracts are under-used and probably also misunderstood, so they decided to remarket them as Bungees. Well, we've seen through that one!

RM

Trading Day

Well, yesterday was fun! The news services seem unanymous in blaming rising commodity prices and the fear of inflation for the falls across the globe. That doesn't quite explain why the FTSE took such a hammering, although as it already opened some 40 pts down it was partly playing catch-up with the Dow's previous session fall. Assuming, however, that the gentlefolk in the City are just self-serving money-mongers the small matter of a UK tax on offshore earnings may have tipped the bulls over the precipice.

Resistances
6500
6400
6300
6240

Supports
6150 (30DMA)
6099 (200 DMA)
6035 (90DMA)
6000
5800

Let's see what today brings - probably a relief rally but I'm sticking with my recent clouded view.

Enjoy the ride.

Trading Day

FTSE had a good day yesterday with a high of 6390 and closing at 6376 with a gain of nearly 2%. However, this morning we find it has been dragged down some 40 pts before opening, yet again by the Dow. Both the 1-hour and 30-mins charts already giving bearish signals. Will wait for the open as often the cash market retraces the changes in the futures ad then we will see.

Resistances
6500
6400

Supports
6300
6280
6260
6240
6230 Daily SAR
6200

The Clouded View: How Much Steam Left In The FTSE?

In January the FTSE fell to a low of 5315 - not seen for over 2 years - but closed just above 5500. In March it made a revisit to this level, with a low of 5415 and closing below 5500 for a couple of days. Since then we have seen a slow but relentless drive upwards, with only a slight pause to break through the 6000 level. So is there much further to go?

In terms of day-trading this is a fairly academic question. I just look at the numbers and the indicators and, hopefully, hold my nerve. But there are people who like to hold on to at least one long-term (or medium-term) position and this gives me a chance to look at the daily chart in some detail. I also don't much care for predictions. The present is turbulent, the future cloudy - none of which makes for a clear strategy. However, just as in the case of ignoring the news but being aware of when it happens, this is a case of being prepared for the next bout of high altitude turbulence.

So as of writing the FTSE sits at 6350 and getting ready to open in a couple of hours. The Dow is struggling to keep its head above 13000 for the second time in a couple of weeks, but for the FTSE this is the first attack on the 6500 level, not seen since January when it greeted the new year by tumbling 1000 points in 3 weeks. Now 6500 is the obvious major resistance level but there is a bit of hard work needed to get there. Around 6400 we find the October 2007 low as well as the August high. On the downside the FTSE has not broken below its 30-day moving average since it rose above it nearly 2 months ago. That sits at 6160, with the 200DMA at 6100. Before hitting either of those the SAR is at 6225. The MACD is looking very flat despite the rally as the FTSE has been checking every support level before moving on to the next.

So, if you want a prediction, go ask a remote viewer. My own view is that we will see increased turbulence, whether we hit 6500 or not. A break downwards hitting the SAR may see the 200DMA tested. Depending on when this happens that gap between the SAR and 200DMA could be about 200 points. Not a bad profit for such a clouded view.

RM

Custom Search Results

Trading Day

Last week the FTSE bounced around a narrow range of 6150-6250 until Friday, when it lurched upwards to 6350 and closed just above 6300. Wall St failed to respond in kind as oil and gold rallied. We thus need to see if 6300 will hold.

Resistances
6500
6350


Supports
6300
6280
6260
6240
6200



On the 1-hour chart the FTSE has touched the SAR on the upside, so is bullish. However, the MACD is still negative, and indeed in the first minutes the FTSE has dropped. The 30-mins chart still bearish. No trade for the moment.

Rising prices of crude oil and gold have a complex effect on the FTSE as it has important petrochemical and mining companies listed. It is also worth keeping an eye on currencies at the same time. Friday's commodities surge was quickly followed by a drop in the dollar, so that in Euro and Sterling terms the rise was limited.

I am always cautious of indicators on Monday mornings. On IG the charts run continuously and the obvious lack of action during the weekends means that the graphs have flattened and indicators can give false signals. This is not so big a problem during the rest of the week as the FTSE prices are adjusted for the Dow and then Asian markets whilst London is closed.

Sitting on my hands for the moment...

The Start

This blog is about spread trading (or spread betting). Spread trading platforms offer certain advantages for the small and medium trader over having an account with a broker to trade futures or options. The first is obviously size - you can open a modest account and trade small quantities without losing your shirt. This is crucial if you are just starting or are less than hyper-confident about what you're doing. The second advantage is that the spread betting industry has developed numerous contracts that just do not exist in the main futures markets. These generally have fallen under the name of binary bets and I'll discuss these in more detail elsewhere. These have meant that even professional brokers will sometimes have spread betting accounts on the side to make some extra money as binary bets can be very profitable.

In the UK, platforms such as IG Index and CMC are covered by both the Financial Services Act and the Gambling Commission. Currently any profits you make are free of either personal or capital tax. The FSA regulates the standard futures and options contracts, whereas the GC regulates the binary bets. Actually, the picture seems less than crystal clear as the FSA website gives a football binary bet example on their spread betting page. Anyway, if you're not a UK citizen then it is up to you to check your national legislation on this matter. The companies themselves have regulatory fees and taxes to pay and these will be included in your buy/sell spread.

All of which means that you can either trade the standard futures and options contracts, as you would with a broker, or you can use the various exotic binary bettting instruments, or, of course, a mixture of the two. I will mainly be looking at the binary bets as there is less written about them and, despite their apparent simplicity, there is the need for just as much analytical muscle as any trading instrument. A misunderstanding of how some of these instruments work can easily result in having a correct view of the underlying market and yet mysteriously losing money on the deal.

I will mainly focus on IG Index as a trading platform. Mainly because it is my primary account but also because they have developed the broadest range of binary betting instruments. There are other platforms and I may in the future broaden my comments to include these.

I will also be including trading strategies and only the future will tell whether these will do well. I am obviously opening myself up to potential ridicule but, well, if the analytical articles prove useful then my job has been half done and you can safely ignore my pitiful attempts at actually trading. But one of the most important trading tools is your own personal trading diary. Unless you are blessed with divine foresight, you are otherwise likely to forever be chasing the market's tail. Your diary will be a stark reminder of the walls you have banged your head against and all the Scyllas and Charybdises that have sunk your deposits. This is my version of a trading diary.

Abbandonate ogni speranza!

RM