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Monday, June 25, 2012


~reposted from

I had dinner with one of our members the other day and got what I think is some great advice: explain how one might best use

General Orientation

First, I believe in market timing.  While certainly not definitive proof, our performance over the past three months makes a good argument.  A hypothetical, unleveraged portfolio that simply bought SPX when we identified bottoms and sold short when we identified tops would be up nearly 35% since the new site was launched on March 22 [see: performance.]

So, I focus on trying to determine where the markets might be headed over the next few days or weeks.  Active traders can take advantage of anticipated swings, while buy and hold types can implement defensive measures and/or tailor their asset mix accordingly.

I don't suggest specific trades.  Everyone has different investment objectives, risk tolerance and cash flow needs.  Some day traders, for instance, are comfortable with futures or options and watch their investments like a hawk.  Others simply want to protect their trust fund or 401(k) from the next crash.  Most are somewhere in between.

My posts can be somewhat dense.  They often take an hour or more to write, and 10-20 minutes to read.  And, they're additive -- meaning I don't re-explain the big picture with every post.  If you're new to PW or have been away on vacation for a week or two, it helps to go back and catch up on the past couple of weeks.

In general, I try to avoid posts like "the monthly cycles guarantee the market's heading to 1390."  The internet is rife with these prognostications, and they're mostly worthless.  If it did go to 1390, how would we know whether it was a well thought-out forecast or someone's lucky PO box number?

I try to explain the reasoning behind my forecasts.  This makes it easier for folks to compare my forecast with others they might run across. You never know when someone else has a better handle on things at the moment.   And, I guarantee you we won't earn 35% every quarter.

I also try to convey the degree of my certainty.   When I'm really torn between two directions, or see the risk as being unusually high, I try to remember to say so.  This happens frequently, and often as not is the result of market makers trying to wring the last cent out of bulls before a downturn (and bears before an upturn.)

It will help to understand some of the terminology I use -- especially the harmonic terms with which many investors are unfamiliar.  They are explained under the "learn" tab.  I'll post more chart patterns and definitions with examples over time, but the markets have been so challenging lately I'm working overtime just to keep up.


I usually begin a forecast by observing major trend lines and channels (parallel trend lines.)  What do they say about the long-term trends?  There are often relevant channels that slope both up and down. Smaller degree channels often run counter to the direction of larger degree channels.  And, it's not unusual to have channels within channels within channels. The dollar is a great example.

In general, prices moving in a channel tend to stay in that channel unless acted upon by some other chart pattern or trend line.  It's not hard to see how the smaller channels conflict with the larger purple pattern.  Something's gotta give, and the consequences can spell danger or opportunity depending on whether someone's properly positioned.  Larger/longer channels usually win, so a break from one is a big deal.

Once I have a sense of what the channels indicate, I look at the harmonic and other chart patterns.  Like channels, harmonic patterns can be nested inside one another and often conflict.  They can also evolve, such as when a Gartley completes at the .786 Fib level, but goes on to form a larger Butterfly pattern, or a Butterfly completes within the XA leg of a larger Crab pattern.   Here's a great example from the Butterfly pattern page.

It's hard to keep track of all the various patterns.  But, I've found it extremely important to watch for both the patterns that track your expectations and those that conflict.  If nothing else, it helps to know when the upside/downside case is helped or hurt by that day's price action.

The same can be said for chart patterns such as Head & Shoulder patterns or Wedges. It's not unusual, for instance, for a Rising Wedge to set up in the right shoulder of a H&S pattern such as recently happened in the S&P 500.

I also like to look for correlations between patterns in different assets.  If I see a huge run-up coming in equities and the US dollar at the same time, something's probably wrong with one or the other forecast.  The less certain I am about a particular chart, the more I'll look elsewhere for confirmation.  Other indices such as COMP, RUT, NYA and e-minis have often provided hints when SPX was tough to figure.

Once I have a price target in mind, I try to work out the timing.   Factors such as Fibonacci time ratios, options expiration, Fed meetings and elections often play a role in the timing of price movements.  Contrary to what I was taught in business school, the markets rarely follow a "random walk."

Once I have a set of forecasts that agree with one another, I'll ask myself whether they make sense given what's going on in the world (financial and otherwise.)  What's the financial press saying (hint: usually wrong)?  Are there potential downgradings in the works?  What about seasonal or cyclical factors?

I rarely look at other analysts' opinions.  But, when I do, it is always after determining my own forecast.  I'm loath to develop a bias based on a theory I don't understand that well.  After a spectacular first eight months last year, I gave way too much back over the next six months when I bought into the prevailing Elliott Wave P-2 script.

I'm often told that my style resembles that of one analyst or another.  And, I'm frequently asked whether I agree with a particular person.  It's not that I'm smarter than anyone else, but I really try to avoid such questions.  They require a level of familiarity with someone else's technique that I might not have.  And, they can be a real distraction.

Having said that, if a member comes across a really compelling conflicting forecast, I'm certainly happy to entertain it.  Just make sure the question includes an explanation of the other guys' reasoning. I just don't have time to become an expert on the effects of solar flares and rising hemlines.


Markets generally move in concert (or opposite one another.)  So, when the S&P 500 crashes, you can usually expect to see the NYA tag along.  For this reason, almost all of my daily posting is done around the SPX.  So, members have to do a little extrapolation if they own something slightly different.  Otherwise, I try to stay current on the US dollar (DX), the euro (EURUSD) and VIX.  In my opinion, the three of them can explain what's going on at least 90% of the time.

If one wanted to track along with what I'm thinking, it would be a pretty simple matter to buy an ETF such as SPY at the bottoms and sell it short at the tops.  The only caveat would be to closely monitor the site, because I sometimes opine on short-term swings that can really add up.  Members are notified of new posts by email and updates within posts by text (if you sign up for it.)

I don't always post when things are right on track.  For instance, if my top scenario is that the market will turn at 1326, don't expect a new post announcing that we've hit 1326 and the market should now start going up as I said two days ago.  I might post if I have something new to add, but more than likely I'm busy putting in trades like everyone else.

Likewise, if you find yourself wondering why I haven't yet posted when one of my forecasts starts stinking up the joint, odds are I'm studying it intently and/or preparing a new post.  I can't watch every market every moment of every day, and I'll occasionally miss some stuff while shuttling a daughter to school or basketball game.  But, I do my best to stay connected and will let folks know if I'm going to be out of pocket for very long.

Even really clever forecasts can be rendered useless by unanticipated events or my sheer stupidity, so I'm a big believer in always using stops.  Sometimes, I remember to mention them, but the lack of a mention doesn't mean they're not warranted.  My recommendation -- always use them.

I hope to start charting more non-US markets and currency pairs soon.  And, I'm often a little behind on indices like NDX, RUT and COMP and currencies like the AUDUSD and JPYUSD.   Hopefully this will improve as the dust settles a bit more.


I'll update this piece periodically as time permits.  Please pass along any suggestions.  I read everything that comes my way, even if I don't have time to respond right away.  And, as always, thanks for being a member of pebblewriter.  I'll continue to do my best to be worthy of that honor.



...reposted from

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