Technical Analysis & The Importance of Simplicity

Simple statements are to be prized more highly than less simple ones because they tell us more; because their empirical content is greater; and because they are better testable.

– Karl Popper

I view charts as a representation of market behavior, the only mode of market experience which can be objectively observed.

Future behavior can be derived imperfectly from past behavior.

The best chartists recognize predictive patterns in accordance with the law of parsimony for the reason Popper captures in the above quote.  Sure, they are easier to understand but, importantly, they are also more falsifiable.

Note Exhibits A & B

Exhibit A


Exhibit B


Comparing Gold’s Move to The NASDAQ circa 1990-2000

This chart comes to you from Serge Farra and was posted on the excellent Slope of Hope Blog.

It compares the NASDAQ ($QQQ) from 1990-2000 to gold ($GLD) and breaks the respective charts into stealth, awareness and mania phases.

It depicts gold presently as being in a huge bear trap and projects 2012 as the beginning of a massive blow off.

Well worth a few minutes of your time…


Update: While editing this piece I noticed Robert’s excellent deconstruction of a similar theme.


Clouds so swift The rains fallin’ in…

Clouds so swift
The rains fallin’ in
Gonna see a movie called Gunga Din
Pick up your money
Pull up your tent McGuinn.
You ain’t a-goin’ nowhere

The Bob Dylan songbook might be the perfect hurricane soundtrack… not just for the obvious like A Hard Rain’s A- Gonna Fall or Hurricane … The biblical allusions, the personification of nature, the nod to mortality…

Anyway, that lyric from You Ain’t Goin’ Nowhere was the first thing that popped into my head when it started sinking in that a hurricane was coming and that I would need to batten down the home front.



Do not Sell Insurance and Buy Home Depot

I am hearing hurricane trades everywhere and I do not like them here so please make it stop.

I remember the days when this was really a trade but now everyone knows about them and writes about them.

There are few stones left unturned.

So please do not short the insurers and buy building related stocks like a Home Depot ($HD).

I have heard this trade every year during hurricane season since the mid 90s and I’m sure it was discussed well before that.

Its a known trade, its in the market and then some.

The actuaries at insurance companies have been doing this math since Nefertiti inspired Thutmose and they know how to break down the probabilities much better than you do.

In fact, the insurance companies LOVE hurricanes because it is free and effective fear based advertising.  What’s going to make you run out faster to buy insurance than watching Anderson Cooper visit the devastation every night for the next 10 weeks?

I don’t want to be long insurance here but if I did I would be using any anticipatory weakness to buy.

And I’m not planning to short construction related names (though its tempting) but if I was would view any hurricane related strength here as a chance to sell.


Talking Gold On CNBC Today

I did a spot on CNBC earlier today with Herb, Brian and Mandy and we discussed the recent selling in gold ($GLD) from technical, global macro and psychological perspectives. It was a lot of fun…

You can watch the segment here:


20 Year SP500 Fibonacci Analysis

Golden Spiral Courtesy of Wikipedia


This video below filmed by @newsagg is a wonderful analysis of Fibonacci ratios drawn on a 20 year chart of the SP500 ($SPX, $SPY).

The confluence of the 61.8% line drawn from the early 90s bottom to the 2000 top and the 50% line drawn from the 2000 top to the 2008 bottom is remarkable.

We are presently bouncing about this line so the historical price context is key. The naturalist assumption is that its a pretty important level.  Well done @newsagg!



Adios Gold, Next…

As of this weekend, I am no longer long $GLD which was by far my largest position for a long time.

I held this and traded around it for almost 4 years and have been watching the action extremely closely for a long time.  The following are some notes that were good for me to write down and that some of you may find helpful.

First Some Details:

– I entered the position over a few months in q4 of 2007 by selling puts, lost half of the shares in Nov of ’09 getting called and reentered by selling puts.

– Including selling covered calls, my cost basis was in the 50s. (more on yield enhancement below)

– I missed the last 18$ of the rally having sold 164 Aug calls for 1.05 after $GLD had rallied significantly and while it was still in the 150s.

– I may look to reenter (see more below).

On Regret of Missing Gains:

I am experiencing some regret as a result of missing the last and extreme part of this rally and wrote about it this weekend in a private log some of which I am sharing in this post.  This is something that I deal with and just try to learn from.

By writing out the process, it looks pretty silly of me to have regret given that it was a big trade so I am just going to laugh at myself here and move on.

I have been through this before and already have a template for not letting the regret lead to chasing these daily rips or doing anything else that is ego baed and not rationally based.

I would not have done much differently and so I think the regret is misplaced and based on greed and not on having done something irrational.

The bottom line here is that I created a good strategy and stuck to it over a long period of time and it was successful.

There, I feel less regret already. :)

Striking but Anecdotal Observations Are Not Reliable:

I recently posted on the illusory nature of the magazine cover effect and over the course of this monster gold rally I have read about and witnessed so many apparent signs of a top that reviewing them might serve to crystallize the point.

– There have been gold kiosks buying your gold in malls for at least 2 years already.

– There have been the “We Buy Gold” commercials on tv for at least 2 years already.

– There have been wildly bullish gold exclamations on StockTwits for at least 2 years already.

– Over a year ago, my plumber came to fix a faucet and was wildly bullish on gold and told me how his heart doctor recommended he put gold shavings in water and drink them for his heart.  It was truly absurd.  It happened that his appearance did mark an intermediate top but not THE top.  Plumbers or dentists or whatever do not necessarily indicate tops although in hindsight we seem to remember it that way.

While the plumber episode may have marked a beautiful short term top, none of these were contrary indicators in the aggregate.

The Largest Gains Come From Holding Winners Over Time

I could find the Livermore quote for you, but youve likely already read it.

You can read more about this in my chapter in The StockTwits Edge where you will find many great examples of experts managing markets well.

In sum, most of my gains lifetime have come from holding a position over a long period of time.

Gregor Macdonald Is The Man:

It was through a series of long conversations and email exchanges with Gregor that I formulated my positions in metals and this was not the first time. We had a great run in coal stocks as well from 2003 and there is no way I would have reached the conclusions I did without his input.

There are few who understand the macro environment the way he does.

Where From Here?

There’s no question that we are seeing a parabolic rise in gold but I am not convinced the long term move is over.

This rationale for the trade was an integration of technicals and global macro based.

The macro part of the thesis posits that there is currently a global and absolute devaluation across currencies occurring and I am not seeing an end to it.

I May or May Not Continue to Trade It

I will continue to look to reenter this position. However, I will be looking for the right setup. Specifically, I will be looking for the price to get hit hard over the course of a couple weeks or even longer.

Presently, we are in a period of high sentiment volatility and there are few assets that are more primitive or more emotionally charged than gold.  This will translate into big moves including big sell offs accompanied by many coming out of the woodwork to declare the gold bull over.

I will relay any future actions on StockTwits.

Selling Premium to Enter Positions and to Enhance Yield

I sell near dated premium to enter positions and to enhance yield as a matter of course.

On entering positions, this means that sometimes while earning the premium, I miss the longer term move. I can live with this as I view theta as a chance to have house odds over the market and always know that other opportunities will come along.

In the case of selling calls against the position, I did so qualitatively but consistently on occasions where I observed price get extended and sentiment get super bullish.  It was a feel thing.

What I Can Do Better Next Time

The next time I enter a large long term trade I will need to work on managing my call selling better. Regretful or not, I did give up a 10% move and over 30% from a cost basis perspective.

My goal will be to maintain the strategy of only selling calls  on portions of the position rather than the whole position which is what I was doing for much of the time I was in this trade.

I think I got too certain of my ability to time the sell offs after big runs and this overconfidence prevented me from better managing the yield enhancement.

Automation, Employment and Kurt Vonnegut

Remember the days Greenspan would trumpet productivity improvements brought on by the internet as a key factor in maintaining benign inflation during economic expansion?

It was a great time.

But these days, productivity gains brought on by the net as well as other technological advances only serve to exacerbate our nation’s inability to improve employment.

It turns out that accelerating productivity has a downside that has served as a headwind to one of the primary objectives of quantitative easing.

I spent the weekend rereading Player Piano.  This was Vonnegut’s first novel published 60 years ago and its prophetic.  The story is set in a future US in which many jobs have been lost to automation (hence the player piano as the primary metaphor).

Vonnegut depicts the ‘reeks and wrecks’ as a mass of the formerly employed who have lost self respect.

It attacks the complexity of a dilemma we are only beginning to recognize we are in but will only grow worse fast unless the economy improves considerably.

It is as important a read as you will find to try to make sense of what is happening right now socioeconomically.

Here’s an online copy to check out.

10 Signs of a Gold Top

After throwing water on the reliability claims that magazine covers predict major market inflections, I figured I would provide some signs to keep an eye out for that might signal a $GLD top.

10 Signs That Will Tell You Gold Has Topped

10. The Total Market Cap of the TSX Venture Exchange Surpasses that of the NYSE.

9. Dentistry becomes sexy & NBC creates a weekly drama around the personal affairs of an LA dentist’s office.

8. Rick Dees has  a viral video on YouTube called “Doing the Bug.”

7. My plumber pulls up to our house in a Maserati and trousers which actually cover his ass crack.

6. Bernanke admits its a currency.

5. Sean Combs partners with The Franklin Mint and creates his own coinage… The Diddy, the Half Diddy…

4. Buffett says he doesn’t understand it.

3. Alchemy makes a huge come back, vc’s over fund and molecular scientists invade the valley.

2. Kate Middleton is spotted wearing Run DMC style bling and thick chains become the coveted accessory among the US McMansion Soccer Mom Set.

1. Biggs gets long the $GDX.

Our Leaders Have No Idea What To Do Here

The wise man learns from the mistakes of others, the average man learns from his own mistakes and the fool never learns.

– Levin’s Mom

I think Levin’s mom was misquoting Bismark but I like her version better.

Before we wrap it up for the week, here are a few observations about the current environment.

1. Most World Leaders Have No Idea How To Resolve Our Considerable Problems: The world is too complex and leadership quality is too low.  Further, most are hindered by the decision making constraints of the partisanship loaded political systems within which they are operating. Double whammy.

2. Often, People, Institutions & Governments Repeat the Same Mistakes Over and Over Again: We do not always learn from past mistakes even when we are aware of the mistake and the damage we have done. So, sadly, counting on the US to respond to this (similar to 2008) turmoil more rationally is a mistake.

3. The US Needs Precisely One Thing and One Thing Only, A Great Leader: Until one of these comes along and ascends, we are limited. In fact, a nation in turmoil is more vulnerable to a false savior candidate who makes claims of greatness but who winds up doing more damage than good.  During the upcoming elections we will REALLY need to stay aware of this because the US is very vulnerable to seeing a malicious president get elected.

4. Market Sentiment Is Incredibly Fickle Here Which Signals Confusion and Anxiety: More than usual. We are getting bullish spikes with every market ramp and Armageddon chatter on all sell offs.

5. Must Reads: This post on taking losses and this one on surviving a crash are as important as anything you will read in this market.

6 Finally, Best Quotes via StockTwits Today:




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