Q2 Newsletter Released

2nd Quarter Newsletter has been released.

Trading Algo Generates a Sell Signal

Trading Algorithm generated generated a sell signal at 1322 (SP500) this morning. Hence, the trade was closed from 1300 to 1322 (~4.5% profit)

We will discuss the new market structure evolution, Inflection Point Model and Sentiment conditions in the next market analysis post.

Note: Upon re-running the Inflection Point Model, we realized that the model showed a potential market turn 3 days ago. This is the drawback of not having subscribers. You get lethargic and do not run your own models regularly. When there are subscribers (even just few), they keep you on your toes. Anyways, we will soon be releasing the introductory subscription details.

For now, please enjoy the soon to be released Past Calls page and the 95% accuracy.

7 Month Trading Range: Breakdown or Breakout (Part 6)

Summary of Last 5 Parts:

US and European stocks are in a 7 month long trading range. This trading range can either give way to a significant rally, or we might be witnessing a top formation and can result in a sharp decline. However, keeping in mind the market structure and analyzing the sentiment prevalent in the global markets especially due to the European and US debt problems (money being pulled out of the market), it is evident that market will most likely breakout rather than breakdown - Behavioral stock market analysis.

Risk Management:

SP500 is in a trading range from 1250 to 1360.

Current trend: UP

Up trend defining level: 1320

As long as the market stays above 1320, there is a very high probability of the market breaking out above 1350 to high 1400s. However, if the market closes below 1320, then the trend will turn neutral and the best strategy will be to go in cash and wait for the trend to turn up.

If the market breaks below 1250, it would signal the completion of a H&S topping formation, which could give way to significant selling pressure.

The thing that bothers me is that: How come everyone knows that we are heading for a recession with all the layoff announcements, bad housing market, Global debt issues and slow economic growth, but still the market does not sells-off. It will be very ironic, if in the midst of all of this bad news market (SP500) rallies to new all time highs by the year's end (We will discuss this potential, over the next few months).

Upcoming Posts

Following are the upcoming releases at Understand, Survive and Thrive.

1. Final Part of 7 Month Trading Range: Breakdown or Breakout, will be released July 26, 2011 or July 27, 2011 - Risk Management
2. 2nd Quarter Newsletter will be released on July 28, 2011
3. A website section summarizing UST's Past Market Predictions and accuracy percentage

7 Month Trading Range: Breakdown or Breakout (Part 5)

Sentiment / Fundamental Analysis 

In order to better analyze the current situation, I decided to look for signs of excessive bullishness, bubble like conditions and stock buying rampage. After exhaustive research, I could not come up with a compelling case for a top being formed. In fact, I came across an interesting article at MarketWatch by James Altucher, which pretty much summarizes the sentiment picture and supports the possibility of an impending Breakout. 

The numbers: Jim Cramer compared LinkedIn to TheGlobe when it went public in 1998. This is ridiculous. TheGlobe had less than a half million in revenues. Linked in had $243 million in revenues in 2010. It doesn’t mean that LinkedIn is necessarily a bad investment or a good investment. Bad investments happen in bubbles and non-bubbles. But certainly it’s a real company where people are willing to pay for its services.

Definition: A bubble is defined as a market where an asset goes up one day solely because it was up the day before. In other words, people see it going up, so they rush in because they are greedy that it will go up more. But in today’s market, one can say that companies such as  LinkedIn and Groupon are not in bubble territory because it is quite possible that their future cash flows will back into their market value. Let’s not forget that Dendreon Corp. had a $5 billion market cap before it had any revenues. This is because many people, probably correctly, assumed that once prostate-cancer treatment Provenge started getting sold at $90,000 a month, usage would justify the $5 billion market cap. With TheGlobe.com it was almost impossible to back into a multibillion dollar market cap.

Mutual Fund redemptions: We are on track for the fifth straight year of higher mutual fund redemptions than inflows. This year so far, mutual funds have lost $8 billion to redemptions. In a bubble, retail investors are obviously doing the reverse. They are so afraid to miss the pop in their favorite asset class that they put MORE money into mutual funds, not less. Domestic mutual funds added $1.3 trillion in assets in the 90s. So far in the 00s they have lost $59 billion.

Earnings: Zynga is often cited as Exhibit A of the bubble we are heading into. Zynga might be worth up to $20 billion in an IPO. Who knows? What we do know is that it had almost $400 million in cash flow in 2010 and is the fastest  growing (in terms of earnings) company in history. Of course people want to invest in these companies! If you pick the right one you’ll end up owning the world’s first trillion-dollar company, based on cash flows, not bubble-like projections.

Valuations of public companies: Because of the massive redemptions in domestic equity mutual funds, tech stocks in the U.S. are 1/10 as expensive as they were in the bubble days of 2000. CSCO had a P/E ratio of over 100 in 2000. Now it’s at 12. AAPL also was over 100. Now, its forward P/E, without backing out its $65 billion in cash, is at 12. Even GOOG is at a forward P/E of 15. Nobody would call these bubble valuations. In a bubble these valuations might be 10 times higher, and a market cap weighted index like the Nasdaq 100 would already be at all-time highs if Apple, for example, was trading at 100 times earnings.

Innovation. Google just launched Google+.  Considering that Facebook recently traded at an $84 billion valuation in the secondary market, the advent of a competitor to Facebook might significantly add to Google’s already cheap valuation. Apple just released the iCloud, allowing users for the first time ever to seamlessly update all of their Apple devices from the same source in the cloud. Apple will also be releasing the iPad3 in the fall (most likely) and will continue with new releases of the iPhone 5,6,7, etc. Meanwhile, Google is working on cars that drive on the highways without any drivers, just radar. The innovation economy is more in place than ever. In a bubble, companies are formed with no assets JUST to go public and make money for their creators. At the moment, the companies mentioned above are all focused on their customers.  

7 Month Trading Range: Breakdown or Breakout (Part 4)

Definition of Triangle and Sideways Correction, per Elliott Wave Theory

HORIZONTAL TRIANGLES (TRIANGLES)

Triangles are overlapping five wave affairs that subdivide 3-3-3-3-3. They appear to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility. Triangles fall into four main categories as illustrated in Figure 18. These illustrations depict the first three types as taking place within the area of preceding price action, in what may be termed regular triangles. However, it is quite common, particularly in contracting triangles, for wave b to exceed the start of wave a in what may be termed a running triangle, as shown in Figure 19.

Figure 18

Figure 19

Although upon extremely rare occasions a second wave in an impulse appears to take the form of a triangle, triangles nearly always occur in positions prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse or wave B in an A-B-C.

Currently we are in a Bull Market based triangle formation. In the next post, I will discuss various fundamental/sentiment based reasoning to support this scenario.

7 Month Trading Range: Breakdown or Breakout (Part 3)

"The billionaire trader said on the call that investing with him would never be free from turbulence, but he said that global economic factors have made this year's ride bumpier than he is willing to stomach." Reuters (Paulson: Our Bets Were Too Aggressive)


In contrast, the Understand, Survive and Thrive team has nailed this market from all directions, over the last 7 months or so. And I would like to thank God for such prime performance. 


BREAKOUT
Now lets look at the Breakout scenario. It is highly probable that this 7 month long consolidation, was a 7 month long sideways correction. Corrections can take various shapes i.e. either by time (sideways) or by price (down move). Once this correction ends, we will experience a very sharp rally. I have been favoring this scenario for the past few months. The following chart was published in June/July 2011. These charts show the evolving triangle formation.

If you would have known this scenario, you could have made serious profit over the past few months. In any case, following is the current chart of the SP500 - A fully complete triangle, ripe for a breakout above 1370.

Explanation
Since February 2011 top, we have experienced 5 market moves between 1250 and 1370 (SP500). All of these moves have been in 3 wave format, which suggests that we are in a triangle formation. Triangle formations are consolidations, which lead to significant moves in the primary trend direction. Because we are currently in an uptrend, the next major move out of this triangle should be to the upside. 


Sentiment Support
If it were the top, we would be reading articles about the best of days are in front of us rather than articles about economic recession and layoffs. Furthermore, the article from Reuters about John Paulson, is a contrarion indicator. How Ironic will it be that a Star Hedge Fund manager says, "Eighty-one percent was way too high. We cannot operate the fund at that level, I'd like to bring the risk down further to about 50 percent," right as the stock market is about to stage a huge rally.


Historical Examples:
Following charts show what happens after the market breaks out of sideways correction - Triangle formation. In both instances, these indices experiences a sharp rally to the upside after they broke out of the trading range, as their primary trend was up.

Sensex - Indian Stock Market (2009-2010)

Emerging Markets ETF (EEM) - 2009-2011)

In the next post, I will discuss the current sentiment & fundamental picture in detail. It will support or negate either one of the two scenarios (Breakout or Breakdown).

7 Month Trading Range: Breakdown or Breakout (Part 2)

First possibility of such a long lasting consolidation is that we are experiencing a gigantic top formation, professionally known as the Head and Shoulders formation.This formation is a typical termination pattern and often takes place at the top. We have experienced such a formation once previously in the recent history:

Every one knows what happened after 2007 top: A 50%+ decline in the stock market, the Great Recession and much much more. Looking at the charts, similarity is eerily identical. For one instance, it might mean that we are about to experience the following again:

However, I do not think that the stock market is going to experience the same fate. In fact, this time it might be totally different. And instead of a significant decline, we might experience a sharp rally. I will discuss the rally potential in the next part of this analysis.

7 Month Trading Range: Breakdown or Breakout (Part I)

US Markets have experienced a sideways trading range from January 2011 to July 2011. On January 1, 2011 the SP500 tagged 1296 and on July 18, 2011 SP500 touched 1296. This seven month trading range is clearly evident in the following chart:

This long lasting choppy market action begs the question that whether we are about to leave this trading range i.e. are we going to Breakout or Breakdown? In this regard, I will be posting several posts to analyze current market structure in conjunction with past experiences and predicting the future direction of the market, alongside risk management strategies.

Since next move in either direction will be explosive, it can result in gigantic profits. 

Note: This topic will provide the basis for the ClariTweet event: Discussion on the future market direction.

Next Posts:

1. Breakdown - Top 
2. Breakout - Sensex, Emerging Markets
3. Academic Pattern of Breakout 
4. Reasons of next market move
5. Risk Management

Lessons From Yesterday and Bottom

"In the name of Allah, the most Gracious, most Merciful"

Yesterday's market action again validated the importance of the Trading Algorithm. It allowed me to risk a very small capital position to pick the bottom. I got out with a minor loss, and then bought again at a lower price.

In any case, Trading Algorithm will go partial long above 1315, and full long above 1325, with tight stops. Next post will deal with several possible avenues of current market action. This post will also lay the foundation of the ClariTweet event.

There are a lot of positive divergences in the market:
1- Nasdaq Futures did not make a lower low while SP500 Futures did
2- Financials made a lower low than the the June low, while markets did not make a lower low
3- Euro has bottomed
4- Broader indices are at a critical Proprietary Moving Average. If the market holds at this level, it would mean that we will experience a sharp rally from here.
4- Broader indices have declined in 3 waves:

All of this reasoning suggests that the market is near a turning point. Specially with us being inside the Turn Window. Hence, I cannot go short as there is a very high potential of a rally. Therefore, I am still optimistic and  look forward to adding to my long positions.

Market Bottoms - July 15, 2011

Today is July 15, 2011, and the market action over the last few days suggest that the market might have bottomed. It is a very interesting time, and the corresponding rally can be very severe.

Trading Algorithm has given a partial buy signal, with a full buy on close above 1328 (SP500). Market has tried to test the bottom established 3 days ago, and has succeeded. Today is also with in the turn window defined by the Inflection Point Model. 

Finally, risk management wise this is a very low risk entry point. Therefore, you can place a stop very close to today's bottom and risk very small capital.

I will post indepth market structure analysis soon.

Note: This does not mean that market cannot go lower over the next few days, as the turn window is still active till next Friday. That is why risk-management is important and pays the greatest dividends.

Fed Stimulus and Economy

I thought the following article was interesting and would like to share it with you. It was first published by zerohedge: http://www.zerohedge.com/article/biggest-fed-money-pump-lehman-went-under

Indeed, for the week ended June 27, the Fed flooded the financial system with $76 BILLION in liquidity. Bill King of the King Report puts that number into perspective noting that it’s BIGGEST increase since September 22, 2008 right after Lehman Brothers collapsed.

That’s right, the Fed just juiced the system as much as it did when Lehman Brothers went under. While a shockingly large single money pump, the Fed’s generally been flooding the system with liquidity at a pace equal to that of 2008 since the beginning of the year. 

In 2008, the Fed put roughly $1 trillion in liquidity into the system to try and hold things up. So far in 2011, it’s put in nearly $700 billion. You think that the recession ended and systemic risk has gone away? Explain this one.

In simple terms, it’s clear that beneath his attempted calm, Ben Bernanke is in fact scared stiff. Why else would he be printing money night and day? If the financial system was indeed stable and secure, why is he pumping money at the same pace as 2008?  

This all ties in with what I’ve been saying for months now… that 2008 was in fact the warm up and that the REAL Crisis is fast approaching. And when it hits, the Fed will be POWERLESS to stop it. Because this time it will be entire countries, NOT just Wall Street banks that collapse. So what’s coming will be the equivalent of 2008 all over again, along with food shortages, civil unrest, outbreaks in crime, bank holidays, and the like. It will, in short, be like what’s going on in the Middle East today (though NATO won’t be bombing us).

Turn Point Action Plan - July 13 to July 22

We have finally entered the turn window, with the market declining over the past few sessions. This decline has brought back a lot of pessimism in the market related the European debt issues and US slow economic recovery.

After re-running the Inflection Point Models, following charts and conclusions were achieved. 

These models are suggesting that the next market turn date will be around July 19, 2011 (+/- 4 days). Therefore, the turn window from July 13 to July 22 is still valid. Furthermore, we are in the earnings season and many times market turns during early earnings weeks, after deceiving many by its initial decline. This week is also the options expiration week, which in itself brings many market turns.


On the other hand, market's recent decline was 5 wave, which suggests that after the market undergoes a partial bounce, it will again decline to 1290s. In any case, I will wait for the Trading algorithm to generate a buy signal before jumping in on the long side. Overall, the market is tracing out a nice base, as discussed in June posts, before exploding higher. Risk-Management is the key over here to ensure that we are not caught in market's trap.


Note: If the does not bottom during this turn window and continues to decline after July 22, 2011, then the markets might face severe downside risk.

Trading Algo: 15% Profit in 2 Weeks

In the name of Allah, most gracious, most merciful

Market action over the past two days signifies the importance of the "Trading Algorithm." Trading is not a simple game, it’s a strategic war where one needs to be on the lookout all the time. In order to be a successful trader, one needs to cut short the losing trade and let the winner run. If a trade decision is accurate it would result in mammoth profit, whereas if it is incorrect, it could substantially reduce profitability. However, this is a very tricky task because it is almost impossible to be certain about the outcome of a trade decision.

Keeping this important trading attribute in mind, UST conceived, devised, optimized and incorporated the Trading Algorithm, as an integral part of its trading mechanism. Trading Algorithm is the most critical part of Understand, Survive and Thrive’s arsenal of fighting the shrewd and fast-paced equity market. In short, Trading Algorithm is like the one stop shop of stock trading, as it deals with trend identification, position taking, profit targets, risk managements, profit taking and disciplined observation.

Specific benefits and working details of the Trading Algorithm will be discussed in a future working paper published by the Understand, Survive and Thrive. In short, the parameters are especially optimized after comprehensive statistical Monte-Carlo simulation. But today I will discuss the most recent example of this algorithm’s achievement.

RECENT TRADE

This model allowed UST to go long on June 24, 2011 at 1274 (SP500) - TNA (3X small caps ETF). At the same time, it allowed UST to pre-define the trading risk of 2% (This percentage varies depending on the market structure). Secondly, it allowed to raise stops to price sensitive levels ensuring stability and hedging against losses. Finally, it allowed us to exit the market with a 15+% profit, even with the market's recent sharp decline. These buy and sell signals were sent to some of the people who requested subscription information.

Now the model is suggesting that one should wait before going long again. We have already discussed the upcoming turn dates, and will further analyze the market based on the latest market decline.   

Overall, this is a rational approach to market analysis, as it combines analysis with actual trading positions and a guerilla approach. Although there are many different black box methods available in the market, including the Inflection Point Model (UST) – which has a success rate of 90%, rational trading methodology is critical for successful trading. 

Q2 Newsletter in July

Second Quarter Newsletter from Understand, Survive and Thrive, will be released this Month. Be sure to keep an eye on the Newsletter section.

Market did decline today as indicated in the last post. At this point, it seems like we will see a slight new high in the next week before a significant correction.

Market Structure & Correction

Another day, another strong rally, another reason to be bullish. However, based on the TV presenters and sentiment surveys, it seems like we are approaching a phase of minor correction.

Following chart shows the most appropriate Market Wave structure, supporting the documentation presented earlier about the turn date.

In summary, we need one more down up sequence to complete the wave structure. 

Rally Update & Inflection Point Model

It is by the grace of God that UST presented the following analysis, before it ever happened:

1. On June 24, 2011: Future Rally & Risk Management!! was published. Market has rallied from 1267 to 1341 since then. 
2. On June 30, 2011: Market Rally and Upcoming Earnings was published, with a timeline of potential top.

          Since then, market has continued to rally impressively and is now near the possible turn date mentioned in the last post. At this point, I decided to re-run Model 1 & Model 2 of the Inflection Point Models to get a better handle on the next potential market turn point. After re-running the models, following charts and conclusions were achieved. 

Model 1 is suggesting that the next market turn date will be around July 19, 2011 (+/- 4 days), Model 2 is also showing credible activity around that time frame. Therefore, we can have a turn window from July 13 to July 22. Furthermore, according to the last post next week is the Earnings week - many times market turns during this week. Finally, July 13, 2011, also coincides as the date of trend reversal per the symmetric analysis presented earlier.


Now the question remains: What type of pattern will the market trace out over the next few days, which will suggest that we are near a top? I will further analyze the market from Elliott Wave and Market Barometer perspectives to better comprehend the future market trajectory.