Natural gas out of thin air…Now there’s a good idea
With front month Natural Gas closing at 3140 yesterday, its lowest price in over 2 years, you might be bracing yourself for my annual tirade about the flagrant abuse of customers by the energy cartel that operates in Britain. But you would be wrong.
Well sort of anyway. I can’t help myself from mentioning that in the same week that Nattie traded 3140, a whopping 80% decline from its 2005 peak of 15780, it was reported on the BBC news that this year alone the ever fleeced British consumer experienced a rise in energy bills of a staggering 25.4%. So much for free markets levelling the global playing fields!
Oh well at least the powers that be tell us there is no inflation to worry about, so I am sure we should behave as the reliable unquestioning citizens that we are expected to be and believe all of this utter rubbish.
But hey ho, I promised not to get on my soapbox today, so let’s turn to something a little more positive. I was joking with friends yesterday about how they will be giving away natural gas with cornflakes before long it is so darn cheap. Funnily enough that might almost be the case soon.
How about an unlimited supply of cheap, carbon neutral Natural Gas! Sounds impossible right?
Well think again. Like Steve Austin you will be relieved to know that we have the technology! Better still it is under construction right now. Natural Gas produced out of thin air that does not fill the environment with CO2. What a wild idea.
Here is a very short article I read this morning about powering cars and homes with this cheap, clean, energy.
Click here to download the PDF
Pretty cool stuff I am sure you would agree.
Of course by the time the poor old consumer has access to it, you can be sure it will be much more expensive. As domestic gas supplies continue to demonstrate there is no correlation at all between what we are charged and the true wholesale prices that prevail.
However unlike “Natural Natural Gas” this stuff looks to be available in virtually unlimited supply, so may well be a key component in powering our homes and cars as the impending energy crisis starts to materialise.
About 10 years ago I did drive an LPG car and as a confirmed petrol head I can say that it isn’t as good as the real stuff, but much closer to it than electric is. I am also sure that the technological improvements since then will have been very considerable. So my guess would be that in 2013 when these cars arrive, they will be pretty impressive. We’ll find out soon won’t we!
For the avoidance doubt…Thank you Audi for the use of your article and for letting me share it with my friends.
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Copyright © Simon Townshend Ltd 2011, all rights reserved
Beware of news…but be aware of what it can tell you
The stock market was potentially in big trouble from the day they caught bin Laden.
No I’m not joking here, I’m actually being very serious. For over a decade now it has been accepted wisdom that the most bullish news that could hit the market would be catching the worlds most wanted man.
“The day THAT happens the market will just explode north and never look back.” I cant remember how many times I have heard those or similar words, since the atrocities of 9/11. And lets face it 9/11 did have quite the opposite effect, sending markets spiraling into the abyss.
So on Monday May 2nd we hear the news that conventional thinking said would trigger this rocket in equity values. We buckle up ready for the ride and watch with amazement as…
Nothing happens!
True the market was up briefly for a few hours that Monday morning before it closed down on the day.
So the next day, on Tuesday, there I am asking the traders in my group…”Where is the Osama rally then?” No one knew.
With hindsight this was the short signal of the year. But sadly we cant trade hindsight, even though bizarrely from that Tuesday onwards we had all been openly talking about the “Osama Top”.
Well now we can see from the chart above that the capture of bin Laden nailed the top in the stock market to the absolute very day. How stupid not to have just shorted it right there and then. Why didn’t we?
Well because we didn’t actually have a sell signal from our normal trading strategy and we are always fighting to follow our rules. That is true but also makes good cover for the other truth that secretly we were scared that the “rally of a lifetime” might just come about as all the experts had foretold for the prior ten years!
There can be no doubt that this was one heck of a missed opportunity. If I am honest we should have been bold and just stepped right in when the market failed to rally. No we didn’t have a sell signal in the normal sense. But we did have the biggest tip-off of all…
The fact that a market failed to rally in the face of the most bullish news it could possibly have received.
Now THAT is a sign of a market in serious trouble. Failing to respond positively when it had every reason to do so spelled the end of this cycle’s irrational exuberance!
This recent sell off didn’t just appear out of nowhere a month ago. It is purely a continuation of the new trend that started the day the market signaled that the bull market was done for, by failing to gain any ground at all when it should have exploded.
The market was telling us that the game was over. We just weren’t smart enough listen. Or to be precise we were smart enough to listen, which is why 24 hours later we were already talking about the Osama Top. But we weren’t smart enough, on this occasion, to react to what the market was telling us. This was an expensive mistake, even though we were following our trading rules by not taking any action.
The moral of the story therefore is simple…
A market that fails to rally in the face of exceptionally bullish news, is in serious trouble and has run out of steam. A market that fails to fall on exceptionally bad news, is in fact very strong and is likely to be turning up very soon. This strength or weakness is hidden from view but the LACK of reacting in the way it really should be in extreme circumstances is without doubt a genuine tipoff about what is about to take place.
Remember though a missed opportunity is only a missed opportunity if we fail to profit from it OR fail to learn from it. In this case we’ll treat this as an educational expense rather than a disaster!
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Copyright © Simon Townshend Ltd 2011, all rights reserved
Head & shoulders top…achieves minimum objective
Well it took a long time to form, but when it triggered boy did it run! Hmmm, but maybe there is more than just one force at work here?
George and I have been following the weekly chart of the S&P over the last few weeks, watching that classic head and shoulders pattern form. Yesterday the minimum downside objective was achieved. Pretty cool reaching a target of that magnitude within 2 bars eh?
Now classical chart patterns are not something I would claim to be any great expert in. But George likes the head and shoulders for the simple reason that it is about the most reliable of the “old school” pre-computer age setups.
The spice I would throw into the mix here, is my observation that the down move is a 1-sided market. Those who joined us for the seminar in Santa Monica a few weeks ago or who have worked with my behind the charts technique will know exactly what this means and its implication on the future.
So here is a great example unfolding where an age old technique and a modern day discovery are working hand in hand to create a really powerful combination.
If ever there was a certainty in trading it is this: After the dullest of dull starts to the year, exciting times lie ahead! Just remember that expanding volatility means much larger swings, which means much larger stops and much larger targets. In turn that means much smaller size so as not to increase your dollar risk per trade!
It is true that higher volatility means greater opportunity. But that greater opportunity should come from a greater number of trades and NOT from trading the same unit size with increased dollar risk per trade. Remember money management rules always take precedent over trading rules. So enjoy the great times ahead but keep a level head at all times!
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Copyright © Simon Townshend Ltd 2011, all rights reserved
The storm clouds are gathering
I want to start this article my pointing out that I am no economist, just a humble engineer with a half logical but inquiring mind. Not that I place much faith in the predictions I have seen from proper economists over the years!
Anyway having recently been studying the copper market where we missed a very nice short trade, I was suddenly struck by something unusual – a huge divergence between copper and gold has been developing over the last month:
Notice how these markets usually follow a very similar path? Sure the amplitude of each swing varies, but the general direction tends to be the same. Until all of a sudden about a month ago this changed fairly dramatically.
When an established pattern suddenly changes my interest is aroused as it means that “something” is going on and the market is trying to tell us something. Well actually the market is probably trying hard not to reveal its secrets to us mere mortals, but it cannot avoid leaving its footprints behind for those that are looking.
What do we know about these two markets? Well gold is a long established hedge against inflation. For decades it has been the place for people to put money when they fear inflation which is of course a mechanism for devaluing cash. (In practice it turns out that this gold instead of cash strategy doesn’t actually perform anything like as well as we might believe, but that is another story altogether.)
The copper market has become something of a proxy for economic activity over more recent times as our lives have become ever more dominated by consumer and electrical goods, computers, phones etc. Everywhere you look these days, you will find copper. Actually I would argue that it is more a proxy for discretionary spending rather than the purchase of essentials like food. But that is probably a mute point.
So what might this sudden divergence between these markets be hinting at? Gold continues its upward march reminding us of the looming inflation threat that clearly in not abating but becoming an ever closer reality. Indeed UK inflation figures just released showed CPI already at almost double the 2% target figure and RPI at a 20 year high at well over 5%. So here at least the penalty for all this printing money madness is no longer a threat but already becoming a reality.
Of course economists and politicians made a big thing about this recession being so different from the past due to the absence of inflation and how much pain we were spared as a result. So no doubt these oracles will be relieved to be out of recession (apparently!) now that inflation is set to strike?
Well not so fast please, let’s not forget this copper market. If this proxy for economic activity is to be believed (and who knows?) this market seems to be seriously pricing in a fall in economic activity. A 20% decline in copper prices in a month is more than just noise. Most of the traders I speak with (and what the heck do we know!) have been taking a double dip for granted. The debate that rages here seems to be “2 dips or 3?”.
So let’s see then – we have:
- no jobs (and unemployment still rising)
- no growth (and quite possibly negative growth ahead)
- inflation (at some point interest rates will have to be raised)
- debt of unimaginable scale (and no realistic prospect of reducing it currently)
Forgive me for being pessimistic but this looks to me like the perfect storm brewing and it is not just the markets hinting at this possible scenario. Uncanny isn’t it that yesterday we had the SEC proposing tightened circuit breakers in the stock market to prevent crashes (like limit moves don’t suddenly become targets for traders!) and today Germany implements a 10 month short selling ban (which they will also try to rollout across the rest of Europe too).
Do you think maybe these guys are trying to get ahead of the game this time? An interesting few months ahead of us I suspect.
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Copyright © Simon Townshend Ltd 2010, all rights reserved
Spontaneous reversals – impossible to predict?
In theory if something is spontaneous then by definition it is impossible to predict. But that doesn’t mean that we cannot spot the telltale signs that often precede “the unpredictable”. As always with the markets the key is in understanding what lies behind that which is visible on the surface.
So let’s look at a spontaneous reversal, or as most people refer to them – the V-reversal.
In Financial Physics we specify 3 ways in which a new trend may be born. Of these the least common (by far) is the V-reversal – where a market just spontaneously turns ending one trend and instantly starting a new one in the opposite direction.
As well as being rare such new trends are extremely difficult to anticipate. Difficult yes, but not totally impossible 
. That is why a few days ago I included the following excerpt in my daily update sent to members of my S-I-R service:
So we were all on notice that the stage was set for one of these unusual events and hence in our shorter term trading to switch to playing the short side of the market. I also promised to write an article explaining more about this situation. So, here I am going to show you how we knew to switch to the short side days in advance of this rather impressive, and theoretically unpredictable, spontaneous reversal:
The What, the Why and the How
I don’t have room here to explain why this works, but I will show you exactly what to look for – the telltale signs, so that you will know in future what to watch out for. My suggestion for how you might use this insight is mainly as a filter rather than as a trade setup. So next time you see this you will know NOT to consider buying pullbacks etc.
As well as knowing when not to buy pullbacks, there is also a way to use this to trade against the prevailing trend – shorting in this case. But this is only for those who are highly experienced with this technique and I am not able to share that here. It is extremely aggressive and you have to know exactly how to play it.
But if this insight just keeps you out of one losing trade in future than I will regard it as being worth my time writing this. (For my S-I-R members I will elaborate further next weekend on both why this works and how to actually trade it, as I promised you previously.)
Right. What we need to look for is a market (any market and any timeframe) where a trend is underway that meets these criteria:
- A low volatility trend (lots of small overlapping bars moving strongly in one direction)
- No swings within the trend (just a single, painfully slow straight line crawl)
- The whole trend taking place displaced from its mean (see chart below)
Here we can see a simple Keltner channel added to the same S&P daily chart. (The parameters are largely irrelevant but as I know I will get asked – 21 period exponential moving average and 2.25 ATRs are the settings used here.)
Notice how this trend consisted of a single low volatility crawl along the outer band. This is not the usual series of swings and waves, but one single move. Note that moving along an outer band is critical here – this means that the move is displaced from its mean. If it was just a crawl along the moving average the situation would be totally different.
This action is rare, yet whenever you see it you will find that it very frequently ends with the hitherto totally unpredictable V-reversal – hence you don’t want to go buying pullbacks!
Have a rummage through your charts – look at different markets, various timeframes, etc. You won’t find many examples but you will be amazed at just how many of them end in a spontaneous reversal.
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Copyright © Simon Townshend Ltd 2010, all rights reserved
Keeping out of trouble
I know many readers of my articles are S&P traders. If this is your primary, or only market, then this article is aimed squarely at you. If you trade other markets then the same concept applies to all markets, but each market reaches this point in its own cycle at different times.
In my opinion the S&P is currently presenting the most difficult environment that we have to face. Volatility has collapsed and volume is extremely light. This is a continuation of the declining environment that we saw over the last few months of 2009. This is the most dangerous place for a trader to be trying to eke out a living. The true opportunities are very few and far between and when they do present themselves the risk / reward ratio is well below the realistic levels we should all be striving to achieve most of the time.
The loss per trade should be much smaller than normal with reduced volatility, so you shouldn’t be doing too much damage to your capital with a few losers. However the percentage of winning trades will be well down against most traders normal strike rate too, so the losses may be smaller but potentially there will be a lot more of them.
The reason I regard this as is the most dangerous of environments is that there is a real risk of serious overtrading. Frustrated, eager traders find it very difficult to sit on their hands for long periods of time and that is precisely what a professional trader must do at this time. In the essentially random noise that we have been seeing over recent times it is all too easy to think you have spotted a worthwhile trade only to discover that it is actually just noise and your trade is a loser, albeit a smallish loser.
Really good days present relatively few trading opportunities if you think about it, yet it is all too easy to “keep spotting setups” in the current rubbish environment. So you can easily find lots and lots of those small losers. Guess what, at the end of the day a lot of small losers add up. This potential death by a thousand cuts is why I regard this as such a dangerous place to be.
So should you stop trading? My advice is to try to continue as normal provided you have or can develop the personal discipline necessary to take very few trades. When this market suddenly all comes good again you want to be there in the saddle and in touch with the market, not reading about it in a newspaper lying on the beach somewhere. As easy as it may sound, such discipline in extremely rare and only comes with experience. That experience must also include living though times like this I am afraid!
If you find you do not yet have that level of discipline to rein in your trade frequency, then my second piece of advice is to put in place mechanical rules to prevent overtrading. As an example I have a simple rule in my own trading plan that I may only take a maximum of 3 losing trades in a day and if reached we shut up shop for the day. That is 3 losers in total by the way, not just 3 in a row etc. Even if we had 5 winners mixed in with the losers, once 3 is hit then that’s the day over.
In this environment I tighten that up even further. 2 losers and I’m done for the day. Your risk per trade is probably only half what it would normally be. So you can take a couple of small losers per day for a long time before doing any real damage to your capital and that is really what we are trying to achieve here – keeping your hand in, whilst protecting your capital.
When this all changes as it will eventually (and probably all of a sudden), you want to be at worst only a few percent below your equity high. If you burn off 30% of your account unnecessarily in this junk today, then you will waste a lot of the profit from the new good environment just climbing back up to where you were before. Believe me I have done this in the past and working hard just to get back to where you were before is even more frustrating than losing the money in the first place! That’s why I am never going there again.
If you have little or no ground to recover when things get good again, then those first 30% of profits go straight to the bottom line where you want them. That is worth developing the discipline for and being patient in these challenging times.
If you find that you just don’t have the discipline to stop at the maximum number of losers per day that you have set yourself then further action is called for. (I have been here before too and it is another place I have chosen never to revisit again!). Speak with your broker and ask for a maximum daily loss limit to be set on your account. This is an amount more than which you cannot lose. Once the limit is reached your platform will shut off trading access for the rest of day. This way you are forced to stick to your rules, whether you have the discipline to do it yourself or not.
Finally don’t despair! This will change and probably very soon. This reminds me very much of the last throws of the bull market in back in 2007. Volume slowly fizzled out as all of the buyers reached the end of their cash reserves. As the volume dried up the volatility diminished to the point where you often wondered if the market was even open at times (sound familiar?). Just when you thought everything had changed for good and you would never see money flowing through the market again – Bam! The market turned down under its own weight and before long the sellers were only to keen to jack up the volume once again.
I am no forecaster, but my gut feel is that 2010 is going to be a great year. If I am right (and I hope I am of course) the key to maximising success this year is starting off from a good place and not at the bottom of an ugly drawdown. So have faith, keep your powder dry and preserve your capital.
I wish you a very successful 2010.
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Copyright © Simon Townshend Ltd 2010, all rights reserved
How long do bear markets last?
Or equally importantly – how long do they take to recover from?
Recently a financial commentator was heard exuberantly announcing that times are tough but don’t worry in a couple of years the market will recover its recent losses. Oh really? That doesn’t sound too plausible, although if last year taught us anything it is that just about anything is possible, however improbable!
Intuitively we know that there is way too much damage done for this market to regain its losses quickly. This is the largest market decline since the 1929 slide and whilst that market did eventually recover to its 1929 highs that took some while as we will see in a moment.
We should also remember that on average markets fall at approximately three times the speed that they climb. There are many credible explanations for this phenomenon and whilst it is a very crude tool to put too much faith in, it does provide a rough benchmark of what is reasonable to expect (once the market finds the bottom of course). If a bear market from peak to trough lasts 2 or even 3 years, then we should be thinking roughly in terms of 6 to 9 years for a complete recovery to the previous highs. This factor of three is a widely known average across all markets and is not specific to the stock market per se.
We looked back at all the major declines in the Dow Jones over the last century to put the current market into some context and here are the results.
The 1929 decline was obviously far worse than the current market with a staggering 89% peak to trough loss. However it is the time that we were particularly interested in for this exercise. A decline taking approximately 3 years took a whopping 26 years to be recovered. The market fell roughly 8 times as fast as it recovered.
The second worse decline was in 1973, although at 47% loss this was less bad than we have seen so far this time! This bear market lasted approximately 2 years and took 10 years to be fully recovered from. So it took 5 times as long going back up as coming down.
The two more recent and less severe declines had recovery periods shorter in duration: 1987 was only a 3 month “hit”, but still took 2 years to recover. So about 8 times as long. Whilst the 2000 decline put in a performance much better than the average, taking only 4 years to recover from a 33 month decline. It is also worth remembering that this was also the least severe fall in percentage terms and logically the size of the loss would also have an effect on the recovery time. Hence the contrast with 1929 at the other end of the spectrum.
Obviously our current bear market hasn’t quite reached 2 years in duration yet, but neither is there any evidence yet of any bottom being found. But even if we were to march straight back up from here, the prospect of regaining those 2007 highs in just a couple of years is about as likely as a win on the lottery! At some point in time we will get there, it just won’t be anything like as quick as most people believe or hope.
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Copyright © Simon Townshend 2009, all rights reserved.
Expect shares to rally next week
Despite the pain and grief everywhere you look these days at Hedgehog we are just continuing to plod on in our low key way, grinding out a profit most days. We did nothing today as it was just too volatile. But we have a decent month underway. We are making new equity highs on the year so there is nothing to worry about here. (Hopefully that wont jinx the month!)
If you missed the news this evening, no doubt you’ll catch the newspapers over the weekend. “Biggest fall in the FTSE for 21 years”, blah blah blah. The S&P did go as low as 839 today – almost exactly a 50% fall from its high last summer.
So here we are going out on a limb expecting shares to rally next week! Well thats just what our model says so whatever we feel emotionally, we have to give it the benefit of the doubt. Yes the market was down hard today, but we were getting buy signals on the shorter term timeframes towards the end of the day.
These signals (which obviously are not 100% accurate but are about as good as it gets) have to be placed into context. In this case the buy signals would be no more than signals to exit any short positions, but certainly not to initiate new long positions. The reason is simple: the larger timeframes (daily, weekly, monthly) are all making new momentum lows. Therefore the odds overwhelmingly favour new lows to come. Those new lows may be many days, weeks or even months in the future but they will almost certainly be seen.
So short term we expect to see a bounce, probably over the next few days, but ultimately the downtrend will reassert itself – hence the logical interpretation of exiting shorts but not initiating longs. Rightly or wrongly on this occasion that is what the model says and in the long term we take money out of the market by playing the high probabilities.
One important thing to remember is that bear market rallies can be very dramatic, but that does not negate the downtrend nor the downside momentum. In other words this volatility is not going to disappear anytime soon!
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Copyright © Simon Townshend 2009, all rights reserved.
Follow Up: After this email was sent out to members the next 2 days delivered an astonishing 16.1% rally in the S&P 500. A month later however new lows were being made again, exactly as the model suggested.
Dont panic!
During turbulent times it is natural to worry. Members who have been with us for a while have received these reassurances before, but for the benefit of our newer members this is just to put your mind at ease that today’s events have not caused us any grief at all. We made a little money today, nothing too dramatic but the main thing is we are up and not down!
A few weeks ago we pointed out the v-reversal that created a short-term bottom and a 14% rally. These are huge swings we are seeing these days! Last week we finally closed below that low which set the stage for today’s sell off. Early this morning we were discussing the possibility of a “Black Monday” after some pretty interesting activity on Friday. The much talked about $700b bailout was finally approved and the stock market held it together for a whole 20 minutes before tanking to close on its lows! A market that fails to rally on good news is internally weak. A market that falls hard on good news is in serious trouble! Hence today’s action.
For those that are interested here are a couple of statistics. Firstly last weeks sell off was over 9% and this is an interesting observation: The last two weeks that saw moves of this magnitude were in April 2000 (-10.4%) and September 2001 (-11.6%). In both cases the market was substantially lower a year later. As we know from our model momentum is a leading indicator. These stat’s demonstrate that even on the longest of timeframes this type of momentum takes a lot of time to wear off, despite large and prolonged bounces against the trend.
The second interesting statistic comes from sentiment readings. In our last message we pointed out that there was a higher chance of making an intermediate term bottom if everyone was bearish. When the data was released it transpired that 49% of people were still bullish! That was an amazing insight. Markets rarely bottom without everybody being on the same side of the market, so until all of those people get panicked out of their long positions we are unlikely to turn back up. So will we see an extreme sentiment reading this month? We’ll have to wait and see.
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Copyright © Simon Townshend 2009, all rights reserved.
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