Apr

Trading Timeframes – V Bottoms – It’s ALL Speculation in the New World Paradigm

Three Weeks ago tonight I felt inspired to comment on the market and noted that the S&P had bounced 12% from the "666" Low. As of today we are 26% higher than that Multi-year low of 666. Remember that number if you can to establish a reference point because it stands as somewhat of a line in the sand as we move forward into the New World environment, in which anything can happen. We have come to expect a series of clearly unexpected and dramatic events both in the market and in world events.

This is a speculators market to say the least. I speculate that many traders such as myself, sleep best at night when much or all of the "bankroll" in the trading account is in cash. Theoretically if one has a stop-loss on each trade, you might come back from lunch to find your trading account is all cash and the New World is now your oyster.

I’ve heard a few traders throw out the term V-Bottom so let’s see what one looks like. This is the trade we posted 3 weeks ago in our prior post.

"Market Higher 12% from the lows – Hope Springs Eternal When the Weather Gets Nice"

A look at the V-Bottom:

The original set-up:

Interestingly enough there are tons of charts that look very similar to this and the pattern shows a high correlation to the overall market. Any sensible trader would take the bulk of profits here, while most would have scaled out of the position long ago (except for maybe that last 1/4 as we discussed). Buying opportunity of a lifetime? That remains to be seen.

I find myself holding some stocks an hour, some till the close, some overnight, some for a few days and some for a few weeks. You can do that with good trailing stop loss orders, but I’m inclined to reign things in a bit here and be ultra-cautious for a bit. Some of the real action has been in the low priced stocks and some good old fashioned speculation can be a lot of fun. There are a lot of stocks trading like options and you can pick up a thousand shares in the morning and sell them after lunch for a good days pay.

Speaking of a good days pay, I recently read that throughout much of time and history, a working man would exchange an entire day of manual labor for 1 ounce of silver. Boy is that ratio out of whack now. It’s not hard to imagine that the trend over time might favor reversion to the mean. If you are a newcomer please note that we have liked silver as an investment for many years. I keep an ounce in the office, a Maple Leaf dated 1990 I think cost me four-something when silver was three something. I could have bought a value meal with it at the time but today it will buy 4 value meals so I guess it has done ok. I still have it which is more than I can say for the other four bucks I had in my wallet at the time. The reason you want some of these is to hedge against the implied arrogance our government has in thinking that it’s "less than 100 year old" experiment in fiat currency will not ultimately fail as have all those before, throughout history. It is inevitable that the current iteration of what we use for money, FRN’s, will be worth less or (worthless) in the future. Devaluing the currency and inflation is a fact of life since our currency is no longer tied to gold and silver. It will be interesting to see what they come up with as a substitute once the last 5% of purchasing power evaporates. It might not be a bad idea to hedge with a few of these:

For more insight I recommend this article by Jason Hommel.

They talk about "diversification", which is gibberish for fully invested in a bunch of stocks, funds and ETF"s, maybe a piece of property that’s down almost as much as the market. I say diversification in modern times should expand well beyond the scope of the markets. With the Black Swans on the Horizon one might consider stocking up on weapons, ammo, food, supplies, and other survival items as a small portion of a diversified existence. Gold and Silver and some of that New World Currency are a must as well. Shiny trinkets and durable items are still real cheap and something tells me the Trillions upon Trillions of digital FRN’s might make them more expensive in the future. Diversification means being prepared for inflation and deflation, whichever comes last. Diversification mean being prepared for anything and everything, in which case there is no substitute for a secure remote location.

I have great hopes that the economy can get back on track to the good old days but it seems like a slow-motion train wreck. It’s hard to see how the market can get back to normal while the global economy is in shambles. Normal isn’t a 52% pullback and a 26% bounce in the S&P. I’m by no means a perma-bear but it’s hard to imagine the market can continue to go straight up from here with all the unresolved problems out there. The market is getting ready to hit some major overhead resistance and the range I’m watching is from 775 to 875 on the S&P for the next month or so. That range is kind of the no man’s land and we will watch for a break or the upper or lower end to help read the longer-term trend. Bear Market rallies are fierce as we just witnessed and can easily go further than imaginable fueled by short-covering and rule changes.

Only time will tell if the market really bottomed at 666 or if all hell breaks loose and we penetrate that to the downside. In that case we can feel more secure with our diversification supplies. Someone told me that the economy might be ten times worse that they are telling us but I hope he’s wrong. Prepare for the worst and hope for the best makes sense when you happen to live in interesting times.

Here’s a picture of a real market bottom.