SPYing A Trend

The SP500, aka the SPY, has been on a tear since the low of $2,200 on March 23rd. To the disbelief of many, the market has been on a V shaped recovery so far.

As I am a primarily a trend trader and use the Ichimoku Cloud as my primary technical trend indicator I noticed today that the SPY had a bearish TK cross on June 23rd. This occurs when the fast moving tenkan crosses under the slower moving kijun on the Ichimoku cloud.

If you don’t know TA jargon, it’s OK. This early signal could be reversed with another move higher which would signal bullish continuation but if it continues downward we may have the beginning of the exhaustion of this record setting rally.

What’s important here is to notice when strong trends falter. Is this a hiccup for the bulls or the beginning of a bearish trend?

I have no position in SPY but if I were long I would sell 25% of my position on this cross as a defensive measure and move my stop loss for the rest to the bottom of the Cloud (~$3,000).

This Index signal coincides with many new all time highs for individual stocks. However, as I run through my stock screens I also see many double and triple tops and other less visible stocks showing more bearish indications.

This is not a call for end of the rally but it is something to notice and track.

It’s difficult to keep a level head when markets are gaining 13% per month. This pace is not normal or sustainable. Keep an eye on the trend.

The Trend is your Friend

Jesse Livermore, the legendary early 20th century stock trader, is the single greatest influence on my trading mindset. If you have not read “Reminiscences of a Stock Operator” and/or “The Boy Plunger” I recommend you buy and read them immediately. These books about Jesse Livermore’s life are entertaining and highly educational for everyone, trader or not.

One of the best tools for tracking a trend is the Ichimoku Cloud. An example of the Ichimoku Cloud applied to BTCUSD daily chart generates 7 trades (noted by markers at top of chart with 6 of 7 trades being profitable) over the past 18 months.

BTCUSD daily chart (click for big)

Different trading styles have different time preferences. Higher timeframe charts produce less trades per year. These higher timeframe trades are more profitable for less work. In these volatile times I believe you must be flexible enough to obey trends that are between 4H and 1D. Timeframes less than 4H are too noisy and over 1D can be too slow. Timeframes come down to personal preference and trading style. For me, having been a day trader looking at 15m charts, I can tell you I greatly prefer the higher timeframes for consistency of profits and quality of life.

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:  It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

“The desire for constant action irrespective of underlying conditions is responsible for many losses on Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.”

Jesse Livermore

The key to trend trading is patience and persistence. I have lacked both the past couple of years.

Going forward I’ll be blogging more consistently on trends I’m trading.

Here’s a snapshot on a few notable assets:

Apple, a close above $374 opens target $430. However, $374 area could be firm resistance. Stop $345.

“Experience has proved to me that real money made in speculating has been in commitments in a stock or commodity showing a profit right from the start.”

Jesse Livermore

BTCUSD, in cloud and trending down. Neutral trend with bearish bias. Confirmed sell signal $8600. Triple top formed at $10,500.

BSVUSD, below cloud and trending down. Bearish trend with support near $150. Reverse trend at $170. Stay out till trend reverses.

“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”

Jesse Livermore

TSLA, all time high with price 20% above Ichimoku Kijun indicator. This displacement between price and Kijun is a classic retrace signal. However, markets are irrational. I would be selling TSLA here to rebuy at Kijun support of ~$1,000. TSLA is a gamble for longs and shorts. It’s one of the most volatile and irrational assets to trade bar none in 2020 (including crypto).

AMZN broke a triple top and is now up 43% in 90 days since the Ichimoku cloud long signal at $2,008. Price looks determined to test $3,000 and I think it’s an ideal time to offload into that strength any shares you don’t plan to hold for 3+ years.

“End trades when it is clear that the trend your are profiting from is over.”

Jesse Livermore

To say these are unusual times in the markets is an understatement. Rarely has humanity had macroeconomic, political, health and cultural movements of this magnitude coinciding at the same time. Anything is possible in this environment.

Would you like to see more of these charts? What assets would you like to see tracked?

BTC Bull or Bear

There are many Technical Analysts calling for a big BTC rally.

Bullish case from popular TA guru masterluc:

I am not convinced we can apply the previous log trend to the future of BTC for several reasons:

  • BTC hit it’s scaling limit and experienced very high fees. Nothing has been done to address this matter.
  • Lightning Network is still vaporware.
  • Moving from $1,000 to $10,000 is a different scenario than moving from $10,000 to $100,000.
  • The blow off top from 11k to 20k happened in 15 days AKA a blow off top. Charts are damaged.

While the outlier scenarios of mooning to 100k and beyond may grab our attention the most likely scenario is a standard market chart of a blow off top and long road to recovery.

The dreaded and often mocked market cycle chart which BTC has mirrored very closely:

As Jesse Livermore has said:

There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure.

Now my caveat. Without a doubt Cryptocurrency is the most exciting technology since the Internet and we are in the very early stages. However, the Internet does not look like it did in the early 90’s, early 2000’s or even 5 years ago. I expect Crypto to move even faster through it’s stages of evolution.

Much like the dinosaurs were hit by a mass extinction event I think a mass extinction is necessary in Crypto. There are hundreds of bad projects using scarce resources. Once we move out of the dinosaur period of Crypto we’ll have an explosion in usage, utility, adoption and price by the projects that survive. Unfortunately I don’t see that rebirth happening in 2018.

Below is a weekly BTC chart with my thoughts on certain price levels. You will see that BTC hit mania phase and for 15 days was a rocket ship. This ended predictably in an almost equal sized crash. (click chart for big)

BTC has name recognition but it no longer has the technology lead. The objective facts are that BTC has pinned it’s hopes on Lightning Network and so far this has been a poor bet. Much like during the early Internet AOL had a substantial lead and then used it’s first mover advantage to create a walled garden but eventually this advantage lost out to market forces. Sound familiar with BTC promoting Lightning Network? History looks ready to repeat.

Once the BTC issue is resolved, one way or another, the Crypto market will enter a new phase.

As Jesse Livermore said, “there is nothing new…because human nature does not change….and it is human emotion that gets in the way of human intelligence”.