The Markets, China, and Charts

The Talking Heads are all a-twitter about China. It is the Story du Jour. Please remember:

“There is always a story. -E.M.Smith”

At one time I spent a few years trying to figure out The Stories. One time it was The Fed Bank, another it was Country {A, B, C, D, E, … pick one}, other times it was corporate “issues” and bonds yields and …

Eventually I figured out that the Talking Heads on TV were just reading copy produced by someone with a Literature degree and some interest in markets; but generally not a Wise Grey Head…

That was when I realized that “There is always a Story” but it doesn’t mean much.

So the Story Du Jour is “China Sees The Rocks!!!”.

There may, or may not, be some merit to the story; but that does not matter at all. All that matters is that some number of people with a lot of money are making decisions based on The Story. And they do. Either due to belief, of believing that others believe and that’s enough…

It was at that time that I started to think maybe, just maybe, The Story didn’t matter so much and “what they do” mattered. At that point, I started to look at charts to see “what they do” since everything is reflected in price and volume…

Now The Story today is that China is desperately trying to prevent a stock market collapse. It is supported by some truth and facts. Central bank selling T-bills and T-Bonds to support the currency and use that money to buy stocks to support stocks. The Story then spreads to concern over “contagion” to places like Australia (due to the large amount of mining dependent on China demand) and then on to the USA with loads of listings of companies who have profit tied to China ( KFC anyone? AKA Yum Brands.) and product sales tied to China ( Intel ) and product manufacture tied to China ( Apple and many many more using those Intel chips in their products ) and so the story goes.

The reality is that China is not rolling over dead. It is dropping from 12% / yr growth to about 4 to 5% / year growth as it has done a couple of times. Though, IMHO, this time it will not recover to 12%, that is just an opinion.

“Everyone has an opinion worth nothing. -E.M.Smith” (even mine)…

So we have a nearly full on market panic based on “The Story”…

And that doesn’t mater.

“It is what it is. -Paul The Mechanic”. (Swiss German accent please ;-)

So how to look at what “the crowd” is doing? (Remember to read Extraordinary Popular Delusions And The Madness Of Crowds to which the ‘the crowd’ reference reflects… )

Well, via the charts.

So today was another down 500ish day. Not really a surprise. The very long view 10 year weekly chart already told us the long bull run was over, and tops go very very quiet on volatility just before they break down into astounding volatility. So the high recent volatility just confirms what was already stated: that the top is in, and it’s down from here for about a year. And well before The China Story we had seen that the very low volatility said it was likely over.

Now we are in a “topping phase” where market makers think the top is in and that the recent plunge is not going to hold; but they are no smarter than anyone else (even though they think otherwise…) they are just possessed of more detailed inside information. So they “re-test” the lows. That means they drive the prices down to the bottom of that last drop, and only when it fails to punch through, believe that it is time to ‘buy the dip’ (which they do in that second dip…)

But what happens if it DOES punch through? Then they shift wholesale to being ‘short’ the market, not ‘long’ and make sure they don’t carry ‘inventory’ over the weekend and do a bunch of other similar things. Any market maker with remaining inventory will try to sell out of it on runs higher in price. Eventually, the price touches the SMA stack from below, and all sorts of folks dump stocks trying to get out more or less ‘whole’. Watch for that.

A few decades back, this happened about 2 to 4 weeks after a plunge, and with prices ‘testing the highs’ almost as high as the start of the drop. In the last decade (last crash included) it has been more machine driven and not patient enough for that (so I no longer try to carry a ‘long swing trade’ back to the SMA stack as it might resolve via the SMA dropping not the price rising…) Remember that you are playing against a computer now, more often than not.

What do charts look like now?

The multi-year chart is not significantly different from the prior postings.

Volume still not high enough to call it a ‘bottom’. MACD below zero headed down. DMI “red on top” and not yet crossed over ADX. All very very bearish. It looks very much like a “market top” on a very long scale. SMA stack not yet rolled over, so still might be just a ‘correction’. Still, it looks more grim than not.

On the 1 year chart, it looks like this:

SPY 1 year daily with Volume+ MACD and DMI 1 Sept 2015

SPY 1 year daily with Volume+ MACD and DMI 1 Sept 2015

MACD solidly below zero, looking like it wants to ‘plate sideways’ without a crossover to the upside. So “steady down” instead of reversal.

DMI clearly ‘red on top’ and though it had an inflection, it has NOT crossed over the black ADX line. Touched and pulled up sharply. Implying more down to come.

Now look at volume. The two days prior to today were much higher price, and volume was comparatively low. Now, on a big down, volume spikes. The implication is that “volume is to the downside”. Yes, the volume was less than the prior dip… and as one Talking Head put it “The market was down today not from sellers, but from a lack of buyers”. The Market Makers can’t make you buy, but they CAN scare you into selling… So all that implies more down than up too.

Also note that price has not yet crossed the little red PSAR dots, so not a ‘buy signal’ yet.

Finally, the SMA stack is clearly rolled over and falling fast. IMHO price will return to the SMA stack “from below” and then most likely fall away again, but via the stack dropping to match, not from a big ‘bid’ raising prices.

So that’s our context. “Topping” on the decadal time scale. Bear / falling on the annual scale.

As to The China story and “why?”:

“Why? Don’t ask why… Down that path lies insanity and ruin. -E.M.Smith”

So I don’t interest myself in “why”. I think more often in terms of “when”, sometimes “where”… always “how much”. -Joubert

Let’s look at some Day Trader charts.

SPY 5 day 15 minute chart with Volume, MACD, and DMI from 1 Sept 2015

SPY 5 day 15 minute chart with Volume, MACD, and DMI from 1 Sept 2015

Look at the 2 days prior to today. I thought of making a posting about them, but it was 3 AM on Monday and not a lot of folks could do anything then anyway.

Dead Flat. Be most afraid when everything is Dead Flat. When they are Spike DOWN, it is a good time buy more than a time to sell…

So that Dead Flat on Fri and Mon chopping back and forth over the PSAR was just screaming “be out – we are a confused market and NOT moving up with conviction”.. and that which fails to go up on volume?… goes down on shorting.

The SMA lines merged and rolled over late Monday shouting “be out now!”. MACD crossed to below zero and with ‘red on top’ mid day Monday saying “Be out now!!! Really!”.

Mid Monday ADX was “below 20” saying “flat market – all the risk, no reward, be out” and DMI- the red line was ‘on top’ also saying “be out”.

Finally, though trickier to pick out of the statistical noise, more volume red bars were high compared to back bars. Volume was to the downside. Time to be out.

So then we come to today. PSAR very close to price. Just a small uptick can say “Buy The Dip”.. but our context (longer charts) is not good for a long term long position…

The final “at the close” orders bar was very high up volume, but in a down day context. Ambiguous at best.

MACD stays ‘weaving sideways’ or ‘plating sideways’ well below zero, saying “down is still the trend” while DMI is still ‘red on top’ and with a weave of it’s own with ADX.

Until there is a ‘blue on top’ for both of those, not a lot of reason to be in and plenty of reason to sit in cash. One need not play every hand. (In baseball analogy: You get an infinite number of ‘balls’, but only ‘3 strikes you’re out’… rather Cricket like in that respect… so wait for the “perfect pitch” and only swing at those. “When in doubt, be out. -E.M.Smith” )

SPY 5 day 15 minute RSI Slow Stoch Volatility with Bollinger Bands 1 Sept 2015

SPY 5 day 15 minute RSI Slow Stoch Volatility with Bollinger Bands 1 Sept 2015

So here we have another somewhat different view of the same stuff.

Bollinger Bands went ‘way tight’ on Friday and Monday saying ‘not good’. Then Monday tried to hit the top of the band, failed, and went to the bottom saying “trade out”. End of today still on the bottom of a way blown open BB as volatility spiked, saying “Hell No”…

Now RSI is a fun one. It tends to be a day or two in advance. You would think that ‘Advance Notice” was very very good, but it is usually more ‘cognitive dissonance’ for folks when they see it. So on Thursday last it was “near 80” saying “Day or two… it’s comming“… then we had the drop at the open 2.x days later as it crossed through the mid-line. Now we are ‘near 20’… but that does NOT mean “up tomorrow for sure!”.. it means “up in the next couple of days”. And I’d take that to mean an up day about Thursday. Subject to change as each day a new chart with more recent information forms.

Volatility has gone up, but not enough to be compelling, saying “Wed or Thurs up” while Slow Stochastic (that is a VERY FAST day trade indicator) has given several rapid trade in / trade out calls over the week. It is mostly hanging around in the bottom half of the range (note that it was solidly in the top half in the W Th F start of graph band with only a ‘trade out and back in’ on the Thursday dip prior to close.)

So reading tea leaves Way Beyond Their Precision: I’d guess a positive open tomorrow (based on Slow Stoch crossover) and then a mid day failure and a turn down at the close (MACD DMI) but that by about late Thu or Friday a run to the upside (RSI). Then an eventual move even lower ( yearly and multi-year charts).

But, as always, you can “expect in one hand and spit in the other then see which is wetter”…

That is just the bias you set going into the trading day. As things unfold, charts change, and you change with them.

I can only hope that learning to read charts like this helps someone hang onto their cash a bit better.

UPDATE 5 Sept 2015

So “how did I do?” on those predictions (calling them projections would just be BS…) from above? Let’s look at the end of the week 10 day chart and score me.

SPY vs MIx of "safe havens" 10 day 15 minute chart 4 Sept 2015

SPY vs MIx of “safe havens” 10 day 15 minute chart 4 Sept 2015

First off, after telling folks that things move faster now with computer trades, I then said basically don’t expect it to go up fast. So it immediately went up the next day. OK, a bit slow on my part.

I did get the “mid-day failure” right, but it was very weak and over early. That, then, had the MAC and DMI show “blue on top” and MACD doing a zero cross upside about lunch time. Volume went up a little on that rise. At that point, the “down at the close” goes out the window as it is short term trader buy signal time. I failed to project the MACD and DMI moving ‘blue on top’ after a sustained open to the upside, and that caused the prediction at the close to be off.

My “Late Thursday early Friday” run to the upside happened late Wednesday early Friday, so I was predicting a slower market, but had directions right. Note To Self: It’s a faster market now…

Finally, I predicted it would not hold to the upside and would move lower. Yup, Friday it happened. Again a bit earlier than I’d predicted in that I saw it as coming next week some time.

In a real swing trade ( couple of days long so not a ‘day trade’) you would have been watching this chart each day and exited on Thursday at the MAC and DMI crossovers to ‘red on top’ and with the penetration of PSAR – all at about mid day Thursday.

So, all in all, it would have been a useful prediction and the trade based on it would make a little money, but throughout the day it would be a ‘hustle’ as things run at you a little faster than expected.

Now, back at the chart, I’ve added FXY the Japanese Yen along with Gold and TLT a bond fund. The last 4 days Gold has diverged from the rest of the ‘safe haven’ indicators. Someone is selling a lot of gold. Yen and TLT both rose on Friday in a down market. Likely Asian traders getting out ahead of the US markets being closed Monday and an unknown looming from the China market being closed last Friday. There is a general tendency for Yen to move in opposition to the US markets and I attribute that to the use of Yen as a base currency by many traders in Asia (as it avoids $US exposure and / or tracking…)

What does this chart say to me now? OK, I’m going to ‘read it’ but not do a postmortem on this reading in this posting. If I keep this up every day, we will all be just day trading by the end of the month…

MACD and DMI both have “blue on top” and even though MACD is below zero, the two together (and the down inflection of ADX) implies an up day on Tuesday when US markets reopen. Price crossed PSAR late Friday, so a ‘buy in’ on Friday was called. Likely a modest ‘gap up’ open on Tuesday (though being a long weekend and with news being volatile, can be derailed). Overall, the SMA lines are getting a bit choppy and weaving. Volume is hard to detangle as it is a Friday before a holiday and “special things” happen. Traders tend to exit positions and that volume is gratuitous (i.e. not informative of intent as intent is just ‘go party’). The big down spike at the end is a worry, but likely the “book gains and clear out” from a load of folks along with the longer term folks (who do things once a week) selling mutual funds.

Overall, I’d be out / flat for the weekend, even though there was a ‘buy’ signal, just due to the holiday conflicted schedules from China / USA and the volatile news situation. Tuesday I’d think about taking a position. The 6 month daily chart still has MACD and DMI calling for down, and it looks generally like price is in a narrowing wedge sideways. When that hits the SMA stack, I’d expect a down leg, so not interested in holding a long position, but a bit early to put on a short. Newsflow is all about The Fed meeting and whatever The Fed does will drive a market response. Until then, more narrowing range and / or nervous panic selling on dips and rumors. Some folks pushing the ‘buy the dip’ that’s a ‘bull market rule’, but we are now in a suspected top or unconfirmed bear market and in that long term context, the rule is “sell the rips” and “when in doubt, be out”. Now is a time of doubt.

So, overall, I think a blind prediction of the future a few days out went OK, if the timing was slow by about a day. With the holiday confounder in the mix, and The Fed looming, don’t see a clear “set up” for next week, and while it may start up Tuesday, the “for how long” may not be enough time to make a profit on a trade. (Swings accelerate in timing and narrow in range in a wedge, so harder to make a trade that makes money as the frequency goes up and the distance between buy and sell narrows). At this point, waiting for the ‘point of the wedge’ is what I’d be doing.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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15 Responses to The Markets, China, and Charts

  1. BobN says:

    Great charts and explanation – Thanks!

  2. E.M.Smith says:

    @BobN:

    You are nost welcome! Hopefully they actually work out correctly too… otherwise, they are just a very techincal “story” 8-0

    ;-)

  3. omanuel says:

    Now that the 2009 Climategate emails have finally exposed the unmitigated arrogant selfishness (hubris) of world leaders,

    https://www.researchgate.net/publication/281017812_STALIN'S_SCIENCE

    The $4,000 question is just this: Can our society be returned to sanity (contact with reality) without undergoing a crash landing of the world’s entire economic and social system?

  4. E.M.Smith says:

    @Omanuel:

    “returned” … Um, I’d have to say “Claim of prior sanity unsupported by the evidence” ;-)

    But to the meat of your question:

    It can, but it is highly unlikely to work that way. generally hasn’t. Once the rats are in the grainery you pretty much have to live with them, get starved out as they eat all of it, or exterminate them as they will not leave on their own.

    Traditionally we had cats ( police / regulatory enforcement ) to control the rats, but now the rats have figured out how to own the cats via feeding them pensions based on your children…

    In short, as long as we are headed as we have been for about 30 years+, it will not end well for the economy.

  5. u.k.(us) says:

    @ E.M. Smith,
    Thanks for your response on the earlier thread.
    How them bunnies doing ?
    It seems like the volatility has awakened the trader :)

  6. omanuel says:

    E.M. Smith

    Skeptics had the ability to detect the deceit and have a moral obligation to now protect the many benefits society receives from the social structure as it is rebuilt to eliminate deception.

    We are on the verge of a new era of world peace if science and spirituality merge to reveal a beautiful, bountiful and benevolent universe that first

    1. Endowed us with “inalienable rights to enjoy live, liberty and the pursuit of happiness” and

    2. Now sustains every atom, life and planet !

    As I recall, governments are instituted to protect our inalienable rights, and we have a moral obligation to rebuild governments that become destructive of this basic purpose.

  7. p.g.sharrow says:

    Well gentlemen, Prophecies say that “the philosophy of Moore”,(Thomas Moore) which is the basis for the modern Liberal Progressive concept, “must burn itself out and be discredited”. From my opinion, that means that things must get worse before the reset, quite a bit worse. At least 2 more years of drop before things will no longer get worse. My own vision (nearly 30 years ago), was of a period of much reduced economic activity.
    Also the Prophecies say the next period would be lead by “the wise old man” that will set the stage for the new age. Don’t know who that would be, just that he would be an unknown and appear after the Great Deceiver is gone.
    The Great Deceiver, “Once he loses popular support, He will attempt to rule by decree. 7years he will be on the world stage and then disappear.” How or Why, I don’t know….???
    WWIII, under way now, must also be won. “The head oligarch will be assassinated by a Muslim group, much to the detriment of the Muslim cause as he was helping them behind the scenes”. That item should be a good indication of the beginning of the end of this Muslim war against all others…pg

  8. omanuel says:

    Thanks, pg, for information I had not heard.

    In 1956, Dr. Elizabeth Cochran forced me to memorize parts of the 1776 US Declaration of Independence in my first year of college at Pittsburg State College.

    That has proven to be one of the most valuable lessons from my academic years.

  9. Terry Jay says:

    E M:
    Have a look at FI.com, Ken Fisher. He dislikes technical analysis, and has a column in Forbes. Last forecast I saw was for an up year, but a correction at any time. At the moment, A correction looks likely, a bear less so.

  10. p.g.sharrow says:

    @pmanuel; I am not sure that Putin/Russia understand that they are shooting themselves in the foot if they think they will be able to move outside of the world currency. This may be good for their internal controls, but outside, no one wants Rubles. Same problem in China. They are both selling dollar assets to makeup for dropping income and pay for their own internal social welfare problems.
    There are far more Dollars out there then the Federal Reserve has created. Perhaps as much as 5 times! Much of the world, officially and unofficially trades in US Dollars.With the drop in price of oil and other real wealth the dollar becomes more valuable, not less, to the people of the world.
    Unintended consequences… pg

  11. omanuel says:

    @p.g.sharrow

    The followers of Stalin certainly know how to use corrupted physics as scare propaganda. See CERN video:

    CERN & SCARY APOCALYPTIC EVENTS

    The web site and CERN video show modern physics of scare propaganda:

    http://wchildblog.com/2015/09/03/cern-scary-apocalyptic-events-september-2015-high/

    https://www.researchgate.net/publication/281017812_STALIN'S_SCIENCE

  12. Richard Ilfeld says:

    Good cash flow, low leverage, high dividends, decent management.
    In my opinion, which as has been pointed out is worthless, charts of less than 2 years may be trading vehicles but are more measures of psychology than performance. You can trade on rumor, fear, and the madness of crowds or the allure of high tech, You can spend dividends at the grocery store. It has worked for me – not wealthy but comfortable while never having a pension nor inheritance, in common with most, I believe.

  13. E.M.Smith says:

    I’ve put up a ‘post mortem’ on my predictions from the prior set of charts.

    @Richard Ilfeld:

    Well, yes, if you are a decades long investor you simply must look at decade scale charts. And yes, fast charts are for trading only. But…

    At the moment you buy or sell, every long term investor is a ‘trader for the day’. So knowing how to do that well can bump you up 10% or cost you 15% if done badly. No sense buying today if next week will be 10% off… and you can identify that pattern.

    I started investing life as a “Deep Value Investor” in the Ben Graham school (and own his books and love them – the recent rewrite by someone else being not nearly as smooth in language pattern… get the older edition of “Securities Analysis”…) and yes, in the long term GARP (growth at a reasonable price) is a winner. BUT:

    ALL markets are measures of psychology. Always. Ever day and every decade.

    Why can a stock (same company, same prospects and performance) sell for a PE of 5, 10, or 15 and all be thought of as ‘correctly valued’? So you try to ‘make the trade’ to buy it when it is 5 and sell it when it is 15. That, basically, is what the GARP and Value methods are all about. Finding when the psychology is out of sync with the long term prospects. I just found that it was easier to see that with a decade long chart of volume and price / SMA stack as the “buy” moment just screams at you. (Sell is more subtle and took me 2 or 3 more years to work out).

    It is part of why my ‘trade rules’ have me shift from long term during long ( 10 year chart) bull market runs to ‘shorter term trades’ near indicated tops and bottoms. Maximum preservation of capital at the longer term inflections and insuring you have Cash at the bottom buy calls. It’s fine to be a ‘long term value investor’ but how do you buy that value if you have no cash at the bottom? So that means you must find the sell moment at the top …

    That was the path that led me to all this charting stuff. (And why I didn’t say much for the last couple of years as it was all just deadly dull on the 10 year and 1 year charts…) But now we have a topping weave / probable inflection and I like watching / calling them ;-) (Even if I have never sold my Birkshire A share… bought in the crash of ’87 within a couple of days of the exact bottom for about $2800 and yes, I wish I’d bought 2 of them ;-)

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