Pinch me when it’s over

Just a short blog today given a hectic schedule this week.

I wanted to revisit a chart that I keep on my watch list. Many of you will have seen this chart before—which I refer to as my “short termed timing” chart. It’s got all of 3 of my favorite neartermed indicators on a daily candle chart. I look for coinciding hooks on RSI, Stochastics and a Bollinger Band from their respective extreme levels in order to detect neartermed upside or downside potential. Right now the three do not line up in any extremes, so I have nothing to report to you as far as a neartermed buy/sell signal. The last short termed signal we got was a week before Christmas, which did result in a minor selloff (kiboshing the “Santa Rally”). I circled the three overbought zones, including the BB upper band touch and falter, on the chart.

sp-timing

Despite no new buy or sell signals on the short termed system (although the momentum lines are getting closer to a sell signal…)- there is another situation appearing on the chart I thought you’d like to be aware of. Every once in a while you will see a “Bollinger Band squeeze”. This is when the two respective volatility bands (Bollinger Bands) move from a fairly wide position into a narrow position. I have circled the instances when such a “squeeze” –or “pinch” — occurred on this chart with thick green circles. You will note that a BB squeeze can lead the market into a more significant change in direction (albeit temporary) – into either a rally or selloff. A BB squeeze simply means that volatility has changed—which implies market change to some degree. The recent squeeze is indicating some change may be coming. Given the seasonal and electoral patterns discussed here in the past, I wouldn’t be surprised if we do see a move lower later this month.

2 Comments

  • Hi Keith:

    Thanks for the recent update on “Smart Money/Dumb Money.” (I’m not among the offended). I notice in a Google search you did a Globe & Mail article 6-7 years ago on Inverse ETF’s. Hint, hint, re: a future blog.

    How often do you use such products? How long do you hold them? (It would seem to me that if they should be held on a “daily” basis, it isn’t much different than placing a roulette bet at Casino Rama!) With such a short holding period, what indicators do you look for to pull the trigger on buying such a product? How liquid are these products? (Ie, I wouldn’t have concerns about the liquidity of something like ZEB, but an inverse ETF?).

    I have been keeping an eye on HIX and HIU for a number of weeks, and just went looking for one that encompasses the Dow (DOG? Don’t know how effective it is, but GREAT name for it!). Is it safe to assume if there’s a market correction through time — as opposed to a dramatic decline — these products are virtually useless? (Obviously, I’m of the belief there’s a correction coming).

    Thanks Keith, and best wishes to you and your staff for 2017, Pete Cox, Calgary.

    PS — My kids got me your book for Christmas, and this novice in TA is looking forward to getting into it. (Frankly, your book looks a lot less intimidating than Brooke Thackray’s, which I also received).

    Reply
    • Thanks Pete
      You’ll appreciate Brooke’s book more after you read mine. Brooke puts together the finest technical guide to seasonal investing there is–but its not for the complete novice. I wrote my book to be retail-friendly (note–I didn’t say dumb money friendly…grin!). Read his book after Sideways and you will find the Thackray Guide to be a gold-mine!

      As far as inverse ETF’s–the single inverse ETF’s are not too bad insofar as deterioration in NAV due to contract rolling and costs, not to mention the effect of daily restatement of NAV on an up-day for the leveraged ETF’s–there is certainly some deterioration–but its the double leveraged ones that will really beat you up over time.
      Where do I use them? Well, I buy inverse ETF’s (single not leveraged) to offset existing equity positions if I feel there is an unusually high potential for a selloff–I often use them prior to a non-predictable event that could go either way. For example–I held an inverse into the US election. Obviously in hindsight it wasn’t needed – and was in fact detrimental to my returns (I sold the morning after election)–but I am always willing to risk making less money vs. risk a significant loss. You know the math: If you have a $100 portfolio and lose 20%, you now have $80 and need to earn 25% now just to get back to $100.
      Conversely– If I hedge with a single inverse ETF and miss out on 5% upside –its easier to make up that 5% over time than digging myself out of a 20% hole if the market sells off hard.
      That’s my opinion, which isn’t necessarily the “right” opinion–but its how I tend to operate.

      Reply

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