After concluding an excellent 2017 and starting the new year on a positive note, Wall Street confirms its strong momentum and the bulls are still controlling the market. Prices move into unexplored territory, there is a plenty of bulls around, the chart pattern of the major indexes reflects a typical sustained trend. As always happens in similar cases, concerns are mounting about the risk of an exhaustion driven market meltdown.
This summer I wrote an article about the suggestion of stalking the small cap stocks Russel 2000 Index (1). Just like a cat stalks its prey looking for the best possible moment to pounce, so a trader can stalk an entry to get the best price for entry. The reason was because on this Index it is present a not so common pattern: the “orthodox broadening formation” (2). This kind of pattern was present also on the Dow Jones Industrial Index, but it was luckily negated (3). Last week we had a potential and positive sign that also on this Index the pattern could be negated. We have several signs of strength, but we are still in the early stages of potential medium-term growth.
Wieland Arlt places great emphasis on three criteria in his trading setups: a high probability of entry, a long distance to the targeted goal, and a clear message when the market is different. How these criteria can be combined in one strategy, please read below. With his three criteria for a good strategy, Wieland Arlt sets the bar high for the selection of his trades. Let us look more closely at the three criteria: a high probability of occurrence is the basis for successful trading. That proper potential to the goal is desired, should be a matter of course for all traders and needs no further explanation. The desire for a clear message of the market makes sense since traders have to decide again and again whether they should open or close a position. A clear message makes decision-making easier and helps to reduce misinterpretation. With the expander strategy, Wieland Arlt depicts these three criteria in his trading. The basic idea is to identify situations in which the movement dynamics of a market already have a certain maturity and is not only flattened, but is transformed into a correction. The expander serves as a symbol for this, which can only be stretched to a certain extent before it springs back. The expander strategy is intended to identify market situations where the price is just at the point of the spring-back. An entry is made when the price begins to correct the previous movement and has already taken the first steps. The expander strategy can be applied not only as an anticyclic countertrend strategy, but also as a procyclical trend-following strategy.
Stocks have rallied about 15% at Wall Street since the presidential election of the last November. The Standard & Poor’s 500 hit the 2400 mark at the beginning of March, after four month featured by extremely low volatility, as shown by the VIX index (see Figure 1), a popular measure of the implied volatility of S&P 500 index options, published by the Chicago Board Options Exchange. Such measure is colloquially defined as the fear index since, generally, the VIX has an inverse relationship to the stock market. It tends to increase when stocks decline and vice-versa. A rising stock market is considered as less risky and here is why, during these four months of almost unchanged uptrend, the VIX stood at historically low levels. Now, at the end of March, the VIX is testing its 200 days moving average, after a long accumulation on the historical lows and it is trying to get through the 13 points mark that has been intact since January.
Some weeks ago (1), I wrote an article about a negated pattern of an “orthodox broadening formation” on the Dow Jones Industrial Index. This kind of pattern is not so very common to find on price graphs; it occurs when a series of three or more price fluctuations widen out of size so that peaks and troughs can be connected with two diverging trendlines (2). Generally the pattern comprises three rallies, with each succeeding peak higher than its predecessor, and each peak separated by two bottoms, with the second bottom lower than the first one. Orthodox broadening formations are associated with market peaks. Several of these patterns, according to Edwards and Magee, appeared at the 1929 Tops of many of the active and popular stocks of that day (3). Perhaps we can best see what this formation is, if we examine the image below. I have numbered from 1 to 5 the significant turning points.
Donald Trump’s first weeks as US president are turning out to be just as controversial as his bruising election campaign. A flurry of executive orders on border controls, trade and healthcare has dominated headlines, causing dismay and galvanising opposition.
A new presidential cycle just begun in the USA and the stock market has welcomed 2017 with a bullish note. The S&P500 rose about 7% in the first two months of the year, the month of March has started in a corrective mood and the market retreated a bit still leaving the progress around 5% year-to-date. It was a hefty start, that could well lead to a seasonal top. At the moment, we see the recent high of March 1st, near 2’400, above 21’000 for the Dow Jones Industrial, as a strong resistance, but it is interesting to compare the bullish wave of these recent weeks with the recurring cyclical patterns. First, we note that a healthy February is not so common. February is used to be a sluggish month for Wall Street, even worse in the first year of the presidential cycle with an average return, for the 16 occurrences since 1953, of -1.83%. In figure 1 is shown the average historical yearly pattern of the S&P500 since 1952 compared with the average of returns in the first year of the presidential cycle. They are very similar, even if the first of the four years term tends to be a bit more volatile and less performing. Usually, February and August are the worst months followed by June and September.
Richard W. Schabacker, financial editor of Forbes Magazine with previous experiences at the Federal Reserve Bank of New York and at the Standard Statistic Company (today Standard & Poor's), wrote three important books (1) on how financial market works. He described the first price models (patterns) that can be identified on charts, to better understand the sequence of underlying psychological relationships between buyers and sellers. Hence is the psychological aspect that drives in many situations the movement of market prices. Professor Lo of MIT, is the author of a theory related to financial markets that combines the rational aspect with the psychological aspect (2).
Whenever the Dow Jones Industrial Average reaches a new milestone the investors are used to cheer. It happened last week, when the most famous of the stock indexes broke the 20’000 mark, after flirting with this significant level for about two months. Is this new record so important for the market? To be honest, it looks difficult to find a rational reason for all this excitement, 20’000 is just a number, as they were all the round numbers that the index had reached in the past years. Psychology is important at this matter: a close above 20’000 feeds optimism and confidence, especially among retail investors, and translates into new purchases.
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