factor update, april 19, 2015

Factor LLC Colorado Springs, CO 80903 Web: www.PeterLBrandt.com Email: [email protected]

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Factor Update, April 19, 2015 General market comment The past several updates have expressed my uneasiness with global futures markets based on two reasons. First, the period from Aug 2014 through mid-Mar 2015 was an extraordinary illustration of classical charting principles at their very best. I will remind you all again that periods of excellent trends are followed by periods of choppiness. Second, there is almost a complete absence of quality chart patterns developing across global futures and forex markets with the exception of Asian stock indexes. Market review Factor Moves are currently ongoing in:

Lumber

Singapore Index (new)

FXI - ETF

Soybean Meal

FTSE 100

PBH

Mexican Peso

TWTR

Hang Seng Index

SGX Taiwan Index

Factor Moves are developing in USD/CNY, National Instrument (NATI), GBP/NZD, Silver, USD/INR and USD/JPY. Factor Moves were terminated or completed this past week in NYSE Composite Index, Credit Agricole and CQQQ. This issue also comments on Topix, U.S. stock indexes, Sugar, Canadian Dollar, Crude Oil, Shanghai Composite Index and CAF.

U.S. stock indexes The daily chart below is the NYSE Composite Index. Comments follow on page 2.


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Early Wednesday afternoon I issued an email alert that the NYSE Composite Index had broken out of a 9-month congestion zone. The breakout was impressive even though it was not with a wide-bodied candlestick bar (WBB). WBB breakouts are always preferable. Later the same day I posted a Tweet raising a concern that the advance in the NYSE Composite Index was not confirmed by the DJIA, DJUA, DJTA, Nasdaq and S&Ps. Needless to say, I received a number of email comments (some rather snarky) on the juxtaposition and apparent contradiction of these two messages. An explanation of the juxtaposition in two stanzas might be helpful. First stanza. It is a very, very, very rare day when every conceivable piece of a puzzle comes together to confirm a trade. This lack of overwhelming evidence can create tension for a trader whether the trader is a macro fundamentalist or technician. There will always be loose ends in a trade. A certain amount of disharmony is a condition in which traders must learn to operate. Becoming gun shy because all the stars are not aligned is not a healthy trading habit. Second stanza. I think it is important for a trader to constantly challenge the assumptions behind a trade. Challenging assumptions does not mean a trader should bail out from a trading idea. My expression of two different points of view simply reflected curiosity, not second guessing. How did this juxtaposition play itself out for me as a trader? There is no NYSE Composite Index future contract so there was no direct expression of the trade. The best proxy futures instrument was the Russell. Yet, I did not want to chase the rally in the Russell on Wednesday due to that lurking question of non-confirmation. On Wednesday I did place an open order to buy the Russell at 1265.7. This order filled Friday morning at 03:59 AM (I was awake and at the computer at the time). I was stopped out 17 minutes later. This is not my definition of a position trade.

The breakout in the NYSE Composite on Wednesday appears to be one of two things a premature breakout that will be confirmed in the near future by a real breakout, or a giant bull trap a signal that the 6-year bull trend in U.S. equities is quite tired. The lack of confirmation by the major indexes would support the bull trap interpretation. Yet, one day does not make a market. The daily chart of the Russell remains in a strong trend despite Fridays weakness. Additionally, the weekly chart of NYA (next page) has not been damaged.


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For now I want no part of U.S. stock indexes. The daily chart of the S&Ps displays a possible 5-point triangle top. With some imagination, this 2-month trading range in the S&Ps could become part of a much larger top encompassing the price action of Nov through Jan. The next few weeks could be interesting.


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Shanghai Index The first rule a chartist must follow is to respect price action. Price is king. The Shanghai Index has doubled in the past nine months. This has been an explosive move. The market on a daily chart looks over cooked and ripe for a sharp reaction. This reaction may have begun on Friday. Yet, viewed on a monthly chart, the current advance does not even compare with the bull move of 2006-2007. Interpretation China has a long way to go, but things could get volatile. If you are long Asia, hold onto your hat, the ride could get wild.


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Singapore SSG Index Factor Move in progress The advance on Tuesday in the Singapore Index nicked the upper boundary of a 4+ year ascending triangle on the monthly graph to launch a Factor Move. While a closing price penetration of an important boundary can be reason to establish a position, it is not necessarily a valid confirmation of a breakout. Edwards and Magee specified that a breakout is not valid until prices move 3% past the boundary. Schabacker was less specific about the percent penetration.

The 3% guideline does create a problem when trading leveraged futures contracts. For example, 3% of the current price of Gold is $36, 30 cents in Soybeans, 63 full points in the S&Ps and 12 points in the Singapore Index. No way will I wait for these types of confirmations as a futures trader. Thus, what is necessary for a breakout to qualify for a trading position is not necessarily enough for a market to qualify as a valid breakout. Another practical challenge for traders is the nature of the longer-term weekly and monthly graphs. On a daily chart pattern ranging from three weeks to 10 weeks or so, a closing price breakout can become quite clear even with a % to 1% boundary penetration. In the case of a multi-month or multi-year pattern, the matter of boundary penetration becomes far less certain. In such cases I prefer to use a weekly or monthly closing price chart to draw the boundary line. Viewing both can be helpful. The weekly chart of the Singapore Index shows that prices narrowly closed above the upper boundary of its ascending triangle. The upper boundary on the monthly closing price graph (dashed line, top chart) has been more decidedly penetrated assuming a firm close at the end of April. Factor is long SGX Singapore.


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Guggenheim China Technology (CQQQ) I took partial profits (QP) in CQQQ on the way up. The stock then reached 70% of its projected move last Monday and the 3-day trailing stop rule was triggered on Friday. Factor is now flat. Is there still money left on the table? Yes, of course! Do I care NO, not at all! An obsession with riding a trade to its absolute top is not a trait a trader should groom.


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FTSE 100 Factor Move in progress In last weeks Update I commented that I was a sucker to re-enter a market that had already fooled me twice. The serious chart students among you should note that the 3-day trailing stop rule will be activated by a move below Fridays low. Thursday was the high day. Fridays close was lower than Thursdays low establishing Friday as the set-up day. I fully expect a trigger day to come early next week. Normally I employ the 3-day trailing stop rule after 70% of a move has occurred. I often will employ the rule to keep a small loss from becoming a bigger loss. Just a side note it is impossible to experience wonderful markets such as we had from late summer 2014 through mid-Mar without also enduring the type of markets experienced on Friday. A trader cannot have his cake and eat it too.


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Hang Seng Index Factor Move in progress The advance on Apr 8 completed a massive ascending triangle on the monthly and weekly graphs and launched a Factor Move. I took partial profits (Quick Profit Unit) on Apr 9 and remain partially long. This move may have just begun. The profit target is a long way off. I will use a moving average to manage the remaining long position.


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Morgan Stanley China A Shares (CAF) I was stopped out of a long position in this stock on Friday via on the 3-day trailing stop rule. Note the high day, the set up day, and the trigger day on Friday. Once I get stopped out of a stock like this I remove the symbol from my watch board. When a trade is done it is time to move onto something else. Dont get obsessed with a particular stock or futures market. Canadian Dollar I received some emails this past week about the Canadian Dollar and I need to point out a few things that pertain to proper chart interpretation. The C$ did complete a H&S bottom, but a very awkward one. It is always my preference to draw a flat or horizontal neckline even if it means not all highs (or lows in the case of a H&S top) are perfectly connected. Because the right shoulder was stunted, it is my belief the rally will be belabored but I could be wrong. I am interested in buying a neckline retest for a Swing trade. Factor is currently flat.


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FXI Factor Move in progress The completion of the 5-year ascending triangle on the monthly chart launched this Factor Move. Partial profits were taken on Apr 9 (QP). I remain long a 50% position. I will consider moving back to a 100% position if the current correction retests the moving average line shown on the daily graph. The 3-day trailing stop rule is not in effect because the stock has not moved 70% of its projected distance.


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Crude Oil Some chartists have declared a major bottom in Crude Oil based on the completion of a 15-week double bottom on the nearby continuation futures chart (not shown). They could be right the double bottom indeed does exist and meets the necessary requirements described by Edwards and Magee. The individual contract months have not yet completed the double bottom but are challenging the mid-point high. I continue to view the 3+ year symmetrical triangle completed last Sep as a valid top. A rally into the mid-70s would do nothing to disrupt the longer-term bear trend in this market. I believe the deferred contract months will trade in the low $50s. Might the double bottom offer the opportunity for nimble traders to be long? Yes, but this is not a long-term bottom. The massive over-leveraging in the energy industry based on $100 Crude Oil will not be resolved by a 15-week bottom. Sorry North Dakota.


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PBH Prestige Brand Holdings has traveled more than 70% of its projected distance and the 3-day trailing stop rule is now in effect. A high day and set-up day were established this past week on the daily graph. Fridays low is now my defensive level. I remain long.


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USD/CNY The U.S. Dollar/Chinese Yuan weekly chart continues to trace out a 2+ year cup and handle bottom pattern. This is one to watch carefully. An ascending triangle bottom is another interpretation. Factor is flat. Soybean Meal Factor Move in progress The dominant chart development is the completion of a continuation H&S pattern that is part of a larger possible descending triangle connecting back to the Nov 2014 high. The high of the retest rally on Wed is now my defensive position. Factor is short. I am getting the feeling that my bearish bias on the Soybeans complex may result in death by paper cuts.


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GBP/NZD If this currency cross does not penetrate the 2014 low, then I believe this could be a real sleeper trade in 2015 and beyond. The completion of a H&S bottom on the monthly graph would establish a profit target of 2.40xx. The beauty of classical charting principles is that a trader does not need to be concerned about a possible set up from day to day. I have an alert programmed at 2.1150. If my cell phone alerts me that the crossrate hits this level, then I can make a trading decision. Until then I need only to review the charts of this cross once each week. Sugar The Sugar market has completed a small 4-week H&S bottom. My guess is that this pattern might carry prices a bit further, but will eventually be resolved in the same way as did a similar H&S pattern in Jan. (See red boxes.) Sugar has been in a bear trend since Feb 2011. Raw material markets require extensive base building. V- extended bottoms are a rarity in traditional commodities.


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USD/JPY USD/JPY continues to coil now into month #5. I believe this congestion will lead to a sizable move. The odds would favor an upside resolution because most congestion zones serve as continuation patterns, but this bull trend is now 30 months old. Factor is flat. Topix Same song 117

th verse. In Dec 2012 I cited an eventual target of 1760. To be honest, my market call has been

better than my trading in the Japanese stock index markets. I have caught a fair chunk of the advance in the various Japanese indexes, but also got chopped up along the way. The Oct 2014 correction did the most to throw me off the scent. I am long, using Fridays low as a defensive point.


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Mexican Peso (futures) Factor Move in progress Last weeks Update described the concept of choosing the path of least emotional regret. Based on email traffic on the subject, this concept struck a chord with a number of you. I returned to the short side of the Peso this past week based on choosing the path of least regret. I will use this past weeks high as a defense line. The weekly graph displays a powerful bear trend with a likely target of .053xx. The initial targets are .06026, then .05806. It should be noted that the Peso is within striking distance of an all-time low.


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National Instrument (NATI) This stock remains poised for a major buy signal. I am raising my breakout buy level to $35.06. Factor is flat.

Lumber Factor Move in progress This past weeks decline was the largest one-week decline since the symmetrical triangle top was completed in mid-Feb. A likely target is the 2011 low at 211.


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Silver The Silver market continues to trace out a possible 6-month continuation H&S pattern on the weekly and daily graphs. It should be noted that the target of the H&S pattern is identical to the target from the 14-month descending triangle completed in Sep 2014. A decisive advance above the Mar high would set up a possible fulcrum bottom. Charting lesson: One way to determine if a pattern is reaching maturity is that there could be a valid breakout in either direction. If a pattern you identify cannot tell two different stories, then the pattern is questionable.


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Twitter (TWTR) Factor Move in progress The Factor is 100% long TWTR. I need to make a point using the daily chart as a reference. I know chartists that would not give up on the long side of TWTR unless the Mar low is penetrated. These chartists use the last reaction high or low with a pattern as their point of defense. I will testify that some of the chartists that trade this way are brilliant with fabulous performance histories. This is a very valid way to approach chart trading. However, it is not the approach I take. I have very little tolerance for a trade that digs into my pocket. Because of this, I often will be stopped out of trades when no real damage is done to the pattern that triggered my trade. Making a market really prove a chart interpretation wrong necessitates taking much smaller positions but such an approach is a very valid way to trade chart patterns. USD/INR Indian Rupee This is yet another forex cross that deserves the full attention of forex chartists. Factor is flat.


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Taiwan SGX Index Factor Move in progress It was three months ago that the Taiwan Index completed its continuation H&S pattern. The market has gone nowhere. I was stopped out of half of my position on Fridays break. Credit Agricole This French stock is another example of the 3-day trailing stop rule. I am flat, with no interest in the French market again due to the outrageous transaction fee (proposed for the U.S. by the Dems in Washington). Interestingly, a third of my profits in the trade came from the short Eurocurrency hedge. In other words, without the hedge the trade would have been 1/3

rd less profitable.

plb ###

factor update, april 19, 2015

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