A Quick Look at the US Presidential Election

Sep 27, 2008: 6:10 PM CST

Whoever wins the White House in November will affect the economy and of course the Stock Market in different ways, so let’s take a quick look at the polls and see who’s up and what could transpire in the upcoming election just over a month away now.

By virtually all accounts, Democratic Senator Barack Obama leads Republican Senator John McCain in national polls, and Real Clear Politics averages multiple polls to come up with the aggregate Obama lead of 47.9% to 43.6% (a 4.3% advantage).

However, it’s not national polls or a national vote that elects the US President, it’s the series of state-wide elections and state-by-state results that contribute to an overall majority vote by electors in the Electoral College, and – not surprisingly – Senator Obama leads by almost all accounts in the all-important “Electoral Vote” count as it stands currently – which is always subject to change in light of significant new developments.

Real Clear Politics – an independent/non-partisan site – currently lists Senator Obama with 223 solid/leaning Electoral Votes to Senator McCain’s 163 vote total – it takes 270 Electoral Votes to win the Presidency.  RCP lists the remaining 147 votes as “Toss-Ups” from averaging polls that determine a lead less than 5% for a candidate.

Over the next month, watch the “Gray” states closely, as it will be voters in these states that will determine the next President of the USA.

So what is the current status according to RCP, if you assign all Toss-Up states according to the aggregate averages so far?

The RCP Average gives Senator Obama the edge currently – 286 votes to 252 for McCain, and if this holds until November 4th, Barack Obama would be the next US President.

It goes without saying that a lot can change between now and then, and plenty of websites will be full of information, punditry, analysis, commentary, projections, etc.

If you’re interesting in following closer, I suggest visiting some of the sites (all over the political spectrum) included in the “Three Blue Dudes” Presidential Election Projection Database which categorizes and updates 78 sites that hold their own projections (some through statistics, some through polls, others through ‘wishful thinking’) of the outcome of the Electoral College vote.

As it stands now, of the 78 sites, 69 sites project an Obama win; 4 project a McCain win; and 4 sites project a 269/269 EC Tie (which is a distinct possibility this year).

The Vice-Presidential Debate is yet to come, as are two more Presidential Debates, as well as the resolution of the Economic “Bail-out” Bill which is currently working its way through Congress.  The race so far has been quite eventful, and I suspect it will continue to be so until that fateful evening in November!

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The End of Washington Mutual WM – A Look Back

Sep 26, 2008: 10:40 AM CST

First, we never know when a company will declare bankruptcy or cease trading – charts can’t tell us that.  What they can do is warn us to a deteriorating situation and allow risk-management procedures to take place, as well as warning us that we should probably avoid or reduce exposure to a given stock.  Let’s look back at Washington Mutual (WM) on multiple time frames for such clues – and let’s try and find the optimal moment when we could have known something was wrong.  Let’s start at the top!

Washington Mutual Monthly:

If you put up a momentum oscillator, you’ll find that as price swings narrowed, a massive negative momentum divergence developed on the monthly chart and a ‘Triple Top” chart formation became the dominant structure into 2007.  Still, those are not necessarily reasons to exit – only hints.

The largest warning sign – a dramatically significant one – came when price violated the 50 month exponential moving average in mid-2007 – a simple lookback on the chart shows that this has never happened since 2000.  In fact, each time the “50″ was tested, it represented an excellent investment opportunity.  Price broke the average, which would have been a conservative exit point for long-term investors.

When did things get ‘really’ bad on the montly time frame?  Price closed two months beneath the 20 and 50 month EMAs but the most significant development – and the source of last resort for the bulls – was the negative crossunder of the moving averages on the monthly time-frame.  At this point, there was absolutely no justification from the charts (basic technical analysis) to be ‘long’ or owning this stock – best to move on to others in more favorable technical (chart) positions.  This occurred around $32.50 per share.  Though there was no way to forsee the impending decline, the odds did clearly shift to warn of lower prices ahead.  Technical analysis forecasts probabilities – not magnitudes.

Let’s drop to the weekly chart to see this and the subsequent development closer.

Washington Mutual Weekly:

There was another significant clue that the structure had turned overwhelmingly bearish in mid-2007.  What was it?

Price supported at the 200 week moving average, but broke in in late July ‘07, but even that wasn’t the significant bearish development.  It was actually that price closed multiple weeks beneath all three key weekly MAs and then found resistance and formed an ’shooting star’ candle at the confluence of the three key moving averages (I’ve circled this point).  This was the absolute ‘last resort’ for buyers and was a clear and evident signal to exit this stock on a position trade or investment basis – it was also a very high probability ’short sell’ with a stop around $40 (and entry around $35 or so).

Ultimately, the moving averages had crossed over, formed a confluence, were tested, and were found to be resistance.  What happened next was awful for buyers, but the signs were building and the dark clouds were gathering.

I point out a 100% rally in early 2008 which was ultimately brutal for short-sellers and confusing for buyers who may have thought this was the bottom.  All it did was draw price back to the 20 week EMA which formed an “impulse sell” trade that ultimately achieved its target and far more – this was another high probability short sell entry.

Price met its target, formed a bear flag (actually a wedge) back into its 20 week EMA in May and then continued its plunge almost unstopped.  The stock is now worthless.

Washington Mutual Daily:

Just to show how confusing and how difficult ‘calling bottoms’ can be, notice the massive, multi-swing divergence that set-up for the better part of 2008.  It looked like the $3 per share level might just be a bottom, and we had multiple tests and a momentum divergence to back up this case.  However, the moving averages were still in the most bearish orientation possible on the daily chart and price still was unable to gain traction at all above these averages.

It looked like the divergence was working in early September as price rose quickly, fell even quicker (knocking out stops from any divergence or support trade) and then rallying more than 100% yet again in mid-September, drawing in many new investors and signalling a possible “all clear here” sentiment.

That was ultimately not to be.  Investors punished the stock this week, sending it cascading lower, destroying all bullish hopes and as of this morning, the Goverment seized Washington Mutual’s assets and were sold to JP Morgan Chase.

There’s many lessons to be learned here, from the notion “Identify the downside and always guard against risk” to “never catch a falling knife” to “never bet against the trend” to “never buy a ‘cheap’ stock” and many others.  Take time to learn more from this development, and add it to your growing arsenal of knowledge.

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Dollar Supports… For Now

Sep 25, 2008: 6:23 PM CST

In a testament that classic technical analysis is still ‘working’ in this environment, the US Dollar Index supported at the $76.00 level, which I highlighted in prior posts “US Dollar Index and Support” and “Dollar Index Targets Achieved Today“.  What’s likely in store now and has the structure changed?

Earlier, I indicated that the $76.00 level had Fibonacci retracement support, as well as weekly and daily moving average support.  For now, it has held as expected, but we’re already nearing upside targets and the price could turn back down after its expected pause.

Let’s look back (reference the earlier blog posts) and see what the chart looks like and how it is playing out.

US Dollar Index Daily:

Technically – and until proven otherwise – the Dollar is on an impulse swing up.  However, it’s worth noting that the recent price swing down was significant (quick) and could be the start of a new motive impulse down, such that these past three up-days may be part of a bear flag retracement pattern, especially if we keep rising at a 45 degree angle as we are.  It could even be a “dead cat bounce.”

Either way, let’s look at a couple of potential resistance confluence points.

The next obvious possible resistance would come in at the declining 20 day EMA at $77.60, which also happens to correspond roughly with the 38.2% Fibonacci retracement of the recent down-swing at $77.65.  Watch the $77.63 level closely for signs of possible weakness.  Should we blow through this zone to the upside, the 50% Fibonacci retracement comes in at $78.15.  There are no obvious MA Resistance zones beyond the 20 day EMA.

If this structure does wind up forming a bear flag, look for a retracement to these levels and then determine if a ‘measured move’ trade sets up on the chart.  Also, if price heads lower, carefully watch the $76 level again – there’s a lot of confluence of support at that level that – if broken – would be significant.

US Dollar Index Weekly:

Not much to show on this chart, other than the $75 to $76 level is a critical Index support zone, both from EMA confluence and Fibonacci retracements.  Notice how the index ’stuck’ the $76 level at the weekly 50 EMA.

And, as indicated earlier, Oil and Gold retraced a bit this week, but we need to keep constant focus on these inter-related markets… and now a careful eye on the News and Government action as it develops… and changes moment by moment.

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Intraday Action Since Last Friday – Divergences

Sep 25, 2008: 10:36 AM CST

Contrary to popular belief, the US Equity Market did not rise when Monday morning’s trading opened… or Tuesday’s… or Wednesday’s… but a lenghty and significant positive momentum divergence formed which has given us in part today’s rising index action.  Let’s see this informational formation and what could be ahead.

We’ll use the SPY (S&P 500) ETF as a proxy on the 15 minute chart:

Envision the large surge Thursday/Friday – this chart only shows a portion of that surge as I wanted to focus on the ‘let-down’ period that has become this week.  I heard many people say over the weekend “The bottom is here! Get back into the Stock Market on Monday!” and while that may indeed be the proper play, I was skeptical for further upside price action – I felt strongly that a retracement at least partially of the large ’surge’ was due – that has happened but in a much more interesting structure than I anticipated.

First, look at the stability of the downward sloping trend channel than has formed and the steadiness of the retracement so far.  The 20 period EMA quickly resumed its place as overhead resistance and quickly crossed beneath the 50 period EMA – signaling a bearish shift in orientation.

Price formed a few mini-bear flag patterns into positive momentum  divergences… which turned into a multi-swing or ’super’ divergence… which is playing itself out this morning.  You can note at least a four-swing positive divergence pattern with price and the momentum oscillator beneath it – significant price moves can often arise from a lengthy divergence.

Price is now above all moving averages on this timeframe, hinting that they will serve as support (or at least a low-risk long entry should price test these ‘confluence’ levels soon).  Also, we have an officially confirmed positive change in trend on this short time frame (for what it’s worth).

Let’s rise to the 30 minute chart.

Next, we’ll step up to the 30-minute chart:

This takes into account part of last week’s action and shows the initial surge and clean retracement (which almost looks like it’s forming an extended bull flag or possible “A to B = C to D” Measured Move pattern.  It would be fascinating if we achieved that target, but we’ll have to see.  Look back to last week’s multi-swing positive momentum divergence and the resolution that occurred – I’m not saying that will happen again, but it’s an interesting observation.

Oh, and is the $118 level ‘magic’ support?  Possibly, but it also corresponds with the 61.8% Fibonacci retracement of the Thursday low to the Friday (opening) high which rests at $118.48 (roughly where price has supported).

What’s the expectation?  Odds seem to favor upside action and a potential positive reversal to the upside in these short-time periods, and a move beneath $118 would clearly invalidate this view (potential to place stops).

Keep in mind that breaking news can change the structure, so be careful to trade exclusively off technicals (or fundamentals for that matter) or to use excessive leverage right now or large position sizing in this environment where rapid swings can emerge seemingly out of no where.

Still, risk control and capital preservation are the goals of the day.

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Had Enough Therapy?

Sep 24, 2008: 9:43 PM CST

I came across a relatively new blog on psychology with a unique perspective and title that I wanted to share with you entitled “Had Enough Therapy?” written by Stuart Schneiderman, an executive life coach.

Though the blog is not entirely focused on trading (but touches a variety of topics from politics to sports), Schneiderman has written a few stand-out posts on trading discipline and that mirrors the insights and teachings of Dr. Brett Steenbarger at TraderFeed.

I wanted to highlight two specific points, one of which is entitled “Learning to Win” where Schneiderman specifically draws upon Dr. Steenbarger’s insights on trading traumas.  He sarcastically yet effectively describes how standard “just talk it out” approaches to trading traumas caused by losses doesn’t really work because of the psychological conditioning mechanism which bypasses logical thought processes.

He writes:

“Let us say that a trader was traumatized by a loss? How will he conduct himself to avoid it every happening again?

He may be too quick to take small profits because he panics about the possibility that they will disappear. He might allow his bad positions to decline too long because he refuses to take a small loss.

In the end he might become accustomed to losing money because he has gained extensive experience at it. And he will accept it because he will feel that trauma has defined him as a loser.”

Read the full post for the full background, but I wanted to pull out this specific quote from Dr. Steenbarger that I have written down and memorized deeply:

It’s not about thinking more positively about yourself; it’s about removing the self from pure performance skill.”

In “Is Virtue its Own Reward,” Schneiderman again addresses the fincial markets and the skills required to trade them.  He discusses pure contrarian thinking, sentiment, investment vs. trading, and Liar’s Poker and When Genius Failed.

I could’t agree more with this statement:

A market is made up of billions of individual decisions. To imagine that you can walk into it and make it do what you think it should do is a recipe for financial ruin. Humility, not pride, will make you a better trader and a better person.”

Finally,Virtue may be its own reward, but it may also reward you in other, less mysterious ways.”

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