Identifying and trading a bear market

S&P price action, the curve, priced in rate expectations and common sense are all telling us a bear market is eminent and the move could equal or exceed the percentage declines seen in 1987, 2000 or 2007.

1983 through 2019 chart

Comparing  1987, 2000 & 2007 to 2019.

1) S&P price action

1987  Top heavy price action, corrects , fails to make a new high on recovery and collapses.

1.02) 2000  Top heavy price action, corrects, fails to make a new high on recovery and collapses.

2007  Top heavy price action, corrects , fails to make a new high on recovery and collapses.

2019 Price action is in the Ionosphere, volatile, sharp breaks, sluggish recoveries and no significant new high for over a year. Interest rates, history, common sense and current US economic fundamentals tell us when the bear engages it will be tenacious. If you do the math, US economic fundamentals are horrendous with the only remaining tool the US recessionary war-chest, quantitative easing, all other options to cauterize the financial hemorrhage on deck have been exhausted.

2) The Yield Curve, 1987, 2000 & 2007 to 2019.

1987, The yield curve didn’t invert until 1988 but it was a very different world then, 10 year Treasuries were yielding over 9.00%, 3 month over 8.00%, reported inflation was 3.58%. In 1987 Investing in Treasuries made sense because they offered investors a real rate of return in excess of 4.42% (real rate of return = the Treasury rate minus reported inflation).

2000,  the curve inverted in June 2000 the bear market fully engaged in October, average Treasury yield 6.43%, reported inflation 3.37%, investing in Treasuries made sense because the real rate of return was 3.06%.

2007, the curve inverted in January 2007, the bear market engaged in October. Treasury yields averaged 4.80%, reported inflation 1.93%, investing in Treasuries made sense because they had a real rate of return of 2.97%.

2019, The curve inverts in January 2019, Treasury yields are averaging 2.14%, reported inflation 2.44%, investing in Treasuries no longer makes sense, they have a negative rate of return of 0.30% with annual currency and instrument risk 5 to 20 times greater than yield (depends on duration). This risk reward ratio makes them one of the worst investments on the board.

3) The markets’s priced in rate expectations 1987, 2000, 2007 compared to 2019.

1987 on the 25th of August 1987 the S&P put in its high at 337.80, on the same day 4+ trillion in derivatives positions was pricing in 1.50% in rate hikes telling us the US economy was strengthening and in an uptrend.

By the 13th of October 1987 the S&P had fallen 23.30 points(-6.90%) to 314.50,  4+ trillion in derivatives positions was now pricing in only 1.07% in hikes, 0.43% less than in August telling us US economic growth was weakening.

By the 20th of October (1 week latter) the S&P had sold off a total of 35.90% to 216.50 and didn’t see a new high until July 1989.

2000  on the 5 October 1999 the S&P was trading at 1,316.40, 6+ trillion in derivatives positions was pricing in 0.4550% in rate hikes telling us US economy was healthy.

On the 24th of March 2000 the S&P hit it’s high at 1,552.80 however 6+ trillion in rate derivatives positions was now pricing in only a 0.2850% rate hike, 0.17% less  than in October 1999 telling us during this 5 month period that US economy had softened.

By the 24th of October 2000 the S&P had fallen 137.30 points (-8.84%) to 1,415.50, 6+ trillion in interest rate derivatives positions went to pricing in a 0.2550% rate cut, this move from an expected rate hike of 0.2850% to a 0.2550% rate cut told us the US economy was no longer strengthening but weakening and weakening at an accelerated rate.

By the 15th of December 2000 the S&P had fallen another 80.00 points(-5.65%) to 1,335.50, 6 trillion in derivatives positions was now pricing in another 0.48% in rate cuts, for a total of 0.7350%, telling us the US economy was entering a recession and the bear market was engaging.

By October 2002 the S&P was trading at 768.65 down –50.50% from it’s March 2000 high, we didn’t see a significant new high in the S&P until March 2014.

3.02) 2007 on the 20th of August 2007 the S&P was trading at 1,450.50, 10+ trillion in interest rate derivatives positions was pricing in 0.20% in rates hikes telling us the US economy was expanding but at a slow rate.

On the 11th of October 2007 (less than two months latter) the S&P put in it’s high at 1,576.10 however 10+ trillion in interest rate derivatives positions had a much different opinion and was now pricing in a rate cut of 0.2150%, the change from pricing in a rate hike 20 August 2007 to a rate cut 11 October 2007 told us the US economy had quickly gone from strengthening to accelerating weakness.

By the 15th of November 2007 (a little over 1 month latter) the S&P had sold off 103.45 points (-6.056%) to 1,472.65, during this same period 10+ trillion in interest rate derivatives had priced in an additional 0.5500% in rate cuts to bring the total to 0.7700% telling us the bear market was engaging and a recession was eminent.

By March 2009 the S&P had sold off  57.70%. and we didn’t see a significant new high until March 2014.

3.03) 2019 on the 5th of December 2016 the S&P was trading at 2,200.65, 17+ trillion in interest rate derivatives was pricing in a 0.4350% rate hike telling us the US economy was healthy.

On the 21st of September 2018 the S&P hit a new all time high of 2,940.90, 17+ trillion in interest rate derivatives positions was now only pricing in only a 0.1750% rate hike (0.26% less than in December 2016) telling us the US economy was showing signs of weakness.

By the 26th of December 2018 the S&P had sold off  594.30 points to 2346.60 (-20.21%) 17+ trillion in rate derivatives positions was now pricing in a 0.1500% rate cut telling us US economic growth had stalled and the economy was weakening.

By the 12th of July 2019 the S&P again traded at a new high 3,013.93, up +667.32 points or +22.14% from it’s December 2018 low, 17+ trillion in interest rate derivatives were now pricing in rate cuts greater than 0.70% telling us the US economy is weakening and a recession is eminent.   

An expected rate cut of greater than 0.70% coupled with the violent (but very tradable) price action we’ve seen over the past 2 year tells us the bear market eminent and to prepare.

Sure, 2019 might be different than the top of every other bull market since 1929 but I think the odds of that being true are less likely than bipartisan cooperation in Washington DC and balanced Federal budget in 2020.

2 year S&P chart 

The last 4 bear markets to full recovery

1987-1989, high August 1987 337.80, low October 1987 216.50, total sell off -35.90%, recovery to new high July 1989 346.10, sell off to recovery 1.9 years.
2000 – 2007 high March 2000 1,552.90, low October 2002 768.65, total sell off -50.50%, recovery to new July 2007 S&P price 1,555.90, 7.3 years.
 2007 – 2013,  high October 2007 1,576.10, low  March 2009 666.80, total sell off -57.70%, recovery to new high April 2013 S&P price 1,597.60, 5.5 years.
2000 – 2013, When the market sold off from it’s March 2000 high of 1576.10 it didn’t see a significant new high until March 2014 1,884.00, 14 years.

1983 – 2019 chart

Fundamentals 1987, 2000, 2007 to 2019

1987

1987, total Federal debt was 2.34 trillion, 42.22% of the US population was employed, annual personal income $16,313, Fed debt per taxpayer $22,974. Fed debt per per taxpayer was 1.41 times greater than annual income.

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1987 Debt to GDP  = 48.55%

10 year Treasuries were yielding over 9.00%, 3 month rates over 8.00%, reported inflation was 3.58%, real rate of return greater than 4.42%

Chart

In late 1985 and early 1986, the US economy shifted from a rapid recovery out of the early 80s recession to a slower expansion, resulting in a brief “soft landing” period. The stock market advanced and the S&P 500 peaked on the 25th of August 1987 at 337.89.

1984-1987 chart

OPEC collapses in early 1986 and the price of crude oil falls more than 50%. The middle east starts tuning up it tanks and putting in it’s ordinance orders in, China was having a special on anti-ship silkworm missiles at 1.2 million a piece perfect for punching holes in tankers, Iraq is a big buyer.

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In the 1980’s regulation, taxation & unionization forced many US companies to relocate to more cost effective manufacturing environments, US wealth and more importantly jobs left the US. US  trade deficits soared, concerns escalated that this loss of US wealth and jobs could put the US economy and financial markets at risk.

US Balance of Trade

In 1987 efforts to limit trade advantages by Asian countries stoked controversy, from 1977 to 1987 ownership of US debt by Non US investors had soared 230% from 85 billion to 280 billion USD, large Treasury investors were worried that Pacific Rim countries would respond to anti-trade policies (such as tariffs), by not purchasing and/or potentially selling US debt.
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These fears were put to rest by politicians, bankers and brokers, perpetually reiterating  that these countries would not kill the golden goose and be happy to continue buying US debt using money generated by their trade surpluses with the US, US Treasuries made sense for these Foreign investors, the USD was stable paying over 8.00%, reported US inflation less than 5.00%.

Please note in 1987 the US hadn’t discovered (or maybe had the conscience not to use) “Quantitative Easing” (Quantitative Easing is the Fed’s creation of trillions of USD  backed by nothing to buy trillions in debt no one else will for example, the 2+ trillion in bad bank loans and 2+ in Treasuries at non competitive rates during the last recession that free market investors wouldn’t touch).

By October 1987 4+ Trillion of USD in interest rate derivatives had gone from pricing in a 1.60% rate hike to just a 1.07% confirming the US economy was slowing.

Chart

8th October 1987 the market’s price action was tired, we were seeing sharp breaks and sluggish recovery, after the last sharp break the S&P failed to put in a new high in a reasonable amount of time, technical liquidation of long positions engaged, net new shorts were established, both price action and the EMA9 (red line on the chart below) dropped below the EMA18 (blue line), as a technical trader you would enter moderately aggressive net new short positions.

Chart

Thursday 15 October 1987 The US has the worst trade deficit in history coming in at 15.26 billion (33.90 billion in 2019 dollars) the market panicked, igniting  another round of heavy selling. I’d like to point out in July 2019 The US Trade deficit was 55.5 billion up from 50.80 billion in June in the last two months over 100 billion in wealth has left the United States, Since this report was released in October 1987 over 15.21 trillion.

Thursday 15 October 1987 The U.S. House of Representatives passed a bill that eliminated what they called “government-funded corporate takeovers” by removing deductibles (purchases that can reduce the amount of tax debt such as interest payments) when large company tries to buy the majority of stock in a smaller company making these purchases less attractive. These large “takeover” purchases had supported the market and fueled it higher were now gone.

Thursday 15 October 1987 equity markets continued to decline attributed

to anxiety among institutions, especially pension funds and individual investors, which led to a movement of funds from stocks into bonds.
Thursday 15 October 1987  by the last ahlf hour of trading  very heavy selling by portfolio insurers

Thursday 15 October 1987 Persian Gulf, Ali Khamenei (“Supreme Leader”of Iran at the time) finally gets the Silkworm missile set he ordered from China (remember this is before Amazon) and he’s anxious to play with it, he fires one off and hits the American-owned (and Liberian-flagged) supertanker, the Sungari, off Kuwait’s main Mina Al Ahmadi oil port. Ali and the other grease jockeys are hoping this will bump oil up from $20.00 to $25.00 a barrel as  he really needed the money. It had a rough decade for Ali, most of his “commission income” came from the Iranian oil and arms industries and he was down to his last 32 billion, first the Egyptian-Israeli peace treaty in 1979 jeopardized his arms revenue, then he gets shot in 1981 paralyzing his right arm and trigger finger, denied superpower status in the Persian Gulf, the war with Iraq was winding down and oil at $20.00 a barrel he could barley make any money after he paid the smugglers to get it out of the country and onto the free market. He was stressed out, worse he couldn’t even have a stiff drink to chill out.

Friday, 16 October 1987, Ali and the grease  jockeys disappointed that the missile hitting the super tanker Sungari only rallied crude oil $0.47 a barrel fired off another and hit the U.S.-flagged MV Sea Isle City, still no carry through in the oil market it, actually gave up some some ground because the sell off in global equities, these guys were just having a rough couple of years, now their Chinese made Silkworm missiles (that cost over a million a piece) punching holes in ships in the Persian Gulf can’t even rally crude a $1.00 a barrel? Time to call up the troops & terrorists and get ready for another war.

Friday, 16 October 1987 London markets unexpectedly closed due to the Great Storm of 1987,

Friday, 16 October 1987 When the United States opens retail liquidation of long potions (most program traders were already short on the 8th) aggressively began to engage, program traders added heavily to their existing short positions pressuring the market even lower, by the close the S&P had traded at 281.94 down 16.56% from it’s August high of 337.89. Treasury Secretary James Baker added fuel to the fire stating concerns about the rising value of the US dollar and falling stock prices, he sounded harsh, confused and blamed the stock market decline on overvaluations, the market closed and margin calls we’re generated telling customers to get out or pay up.

1 January – 16 October 1987

19 October 1987 (Black Monday)

While US & European retail retail investors were still sleeping forced margin call liquidation began to engage, huge institutional  sell orders generated by pension and other funds hit, more huge orders from program traders adding heavily their existing short positions.

When Europe came in margin call and European fund liquidations, selling momentum accelerated exponentially when program traders added to their short positions in both the stock and especially the futures markets (futures has no up-tick rule)

By the time the US came in it was game over, there were no buyers to sell too, prices free fell with tenacity, every time the market closed (they take time outs) it would gap lower when reopened

19 October 1987 damage report, by the close the S&P had declined 20.45%, it was, and remains, the single biggest one day percentage decline in history. To put this decline into perspective the stock market crash of 28 October 1929 setting off the great depression was 12.82%. Until 19 October 1929 this sell off was the largest one day percentage decline and to the day remains the second largest.

1 January – 19 October (“Black Monday”) 1987

What I believe is one of the main reasons for the crash

In 1987 all orders were done in the pits by open outcry, Institutional Investors could arb their orders over the phone

retail investors had to telephone their brokers, once the client got through to the broker the broker would write it up an order ticket & time-stamp it, then give that ticket to the branch’s order desk, the branch’s order desk would review it, re-write the order, then transmit or call the order to the the firm’s order desk on the floor, the firms floor desk would write it up again and give the order to  a “runner” who brought the order to a deck holder who stood on the outside of the trading  pit, the deck holders (one for buys orders another for sells), would organize the orders by price & time received then feed the orders to the floor broker in that order, the floor broker would then hand signal and yell the order to any takers in the pit, once the order was executed the floor broker would write his badge number and the badge number of who he did the trade with, size and price(s), the floor broker gave it to the deck holder, the deck holder to the runner, the runner gave it to the firm’s desk on the floor, the floor desk transmit it to the branch’s order desk, the branch’s desk would review & log it then tell the broker to pick it up, the broker would finally telephone the client with his fill, such speed and efficiency this system is still partially in place.

1988 it wasn’t as bad as expected, especially during the first half of the year, as the anticipated negative fallout from the October 1987 stock market collapse did not materialize. Economic output grew moderately, employment expanded, inflation ticked up, the budget deficit increased by a modest 5.5 billion to 155.1 billion, personal income rose rose 7.15% and the national debt remained relatively constant at 2.60 trillion.

The US had “no emergency and temporary rate cuts”, no quantitative easing and savers actually maintained a very healthy positive rate of return throughout the brief recession and entire recovery. Just take a look at those rates, people that worked and saved money their entire lives actually could live off their interest income.

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The Gulf War – Iraq, President Saddam Hussein accused Kuwait of flooding the market with oil and driving down prices. As a result, on 2 August 1990, Iraqi forces invaded and conquered Kuwait. The UN immediately condemned the action, a coalition force led by the United States was sent to the Persian Gulf. Aerial bombing of Iraq began in January 1991 and a month later, the UN forces drove the Iraqi army from Kuwait in just four days. In the aftermath of the war, the Kurds in the north of Iraq and the Shiites in the south rose up in revolt, and Saddam Hussein barely managed to hold onto power until the US invasion in 2003, Iraq was cut off from much of the world.

Despite all the wars per capita defense spending decreased.

Year Defense spending + or – Per Capita + or –
1988 $330,190,000,000 3.07% $1,353 2.11%
1989 $343,139,000,000 3.92% $1,393 2.96%
1990 $342,113,000,000 -0.30% $1,376 -1.23%
1991 $320,409,000,000 -6.34% $1,272 -7.49%
1992 $348,645,000,000 8.81% $1,368 7.48%
1993 $344,109,000,000 -1.30% $1,333 -2.51%
1994 $336,444,000,000 -2.23% $1,288 -3.43%
1995 $326,560,000,000 -2.94% $1,234 -4.13%
1996 $316,417,000,000 -3.11% $1,181 -4.30%
1997 $325,201,000,000 2.78% $1,199 1.51%
1998 $323,277,000,000 -0.59% $1,177 -1.81%
1999 $333,446,000,000 3.15% $1,200 1.88%
Average $332,495,833,333 0.41% $1,281 -0.75%

Maybe Treasury Sectary Baker was right, the market was just overvalued going into the crash and the US economy was fundamentally sound.

2000

2000, total Federal debt was 5.63 trillion, 46.79% of the US population was employed, annual personal income $30,640, Fed debt per taxpayer $42,632. Fed debt per per taxpayer was 1.39 times greater than annual income.

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2000 Debt to GDP  = 54.24%%

10 year Treasuries were yielding 5.74%, 3 month rates 6.11%, reported inflation  3.45%, real rate of return greater than 2.29%.

Chart

In the 1990’s regulation, taxation & unionization forced more US companies to relocate to more cost effective manufacturing environments, US wealth and more importantly jobs left the US, trade deficits soared to to 447 billion annually in 2000 up from 159 billion in 1987 contrary to any rational thinking concerns dissipated that this massive annual loss of US wealth and jobs could put the US economy and financial markets at risk.

US balance of Trade

In 2000, these fears were put to rest by politicians, bankers and brokers, perpetually reiterating  that these countries would not kill the golden goose and be happy to continue buying US debt using money generated by their trade surpluses with the US, US Treasuries made sense, the USD was stable, 3 month rates were paying over 6.00%, with reported US inflation less than 3.45%. Treasuries owned by Foreign and International Investors has soared to a record 1.08 trillion up from just 279.5 billion. (this isn’t good) Please note in 2000 the US still hadn’t discovered (or maybe had the conscience not to use) “Quantitative Easing”

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Predictions that the a bear market would engage emerged during the dot-com “bubble” in the late 1990’s stating with the October 27, 1997 mini-crash in the wake of the Asian Financial crisis.  Technically, this market reversed from long to short on the 16th of October 1997 when both price action and the EMA9 (red line line) moved below the EMA18 (blue line)

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This “mini crash” caused an uncertain economic climate during the first few months of 1998. However conditions improved and the Federal Reserve raised interest rates six times between June 1999 and May 2000 in an effort to cool the economy and achieve a soft landing.

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17 February 2000, The Nasdaq composite index rallied 121.22 points, or 2.7 percent, to 4,548.87 surpassing its previous record close of 4,485.63 on 10 February, volume also set a record at 2 billion shares. Technically, price action was cleanly above the EMA9 (red line) the EMA9 was cleanly above the EMA18 (blue line) confirming the 29 October 1999  long at 2,637.44.

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17 February 2000, 6+ trillion in interest rates derivatives positions was pricing in an increase in rates of 0.35% telling us that US economy and markets were healthy.

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17 February 2000, the curve was positive, also telling us that US economy and markets were healthy.

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24 March 2000 NASDAQ hits a intra-day all time record high of 4816.24 and closes at 4,691.61 as money managers snapped up the year’s best-performing technology stocks five sessions before the end of the first quarter (refereed to as window dressing). Technically, price action was cleanly above the EMA9 (red line) the EMA9, was cleanly above the EMA18 (blue line) confirming the

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24 March 200 6+ trillion in interest rates derivatives positions was pricing in an increase in rates of only 0.15% 0.20% less than 17 February telling us the US economy and markets were slowing down.

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24 March 2000, Washington; Federal Investigators launch a probe into White House E-mails, the lost e-mails consist of all electronic messages sent from outside to White House employees from August 1996 to November 1998 — a period that covers the Democratic funny-money probe and the Sexgate scandal that led to President Clinton’s impeachment.

24 March 200 AMB. Peter Van Walsum Chair Iraq War Sanctions, testifies before the United Nations that A Russian tanker, the Volgana (ph), loaded with Iraqi oil, was seized. But many other vessels sneak through the Gulf with the help of Iran. The oil-laden ships can hug territorial coastlines of Iran and escape the multinational forces (mostly US) which, by law, must remain in international waters. Iran gets a percentage of the smuggled oil sale for the service as do the smugglers, with Iraq pocketing the rest.

 

 

 

The burst of the stock market bubble occurred in the form of the NASDAQ crash in March 2000.

 

 

Growth in gross domestic product slowed considerably in the third quarter of 2000 to the lowest rate since a contraction in the first quarter of 1992.[4]

 

 

 

2007 Annual personal income $39,801, total Federal debt per taxpayer $64,863 or Federal debt per taxpayer was 1.63 times larger than annual  income.

2019 annual personal income $53,658, total Federal debt per taxpayer $143,980 or Federal debt per taxpayer is 2.68 times larger than annual personal income,

 

The 1.73 trillion the Fed bought in bad bank debt during the last

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Most longs decided on liquidation and taking the 8.32%+ in time deposits. Very aggressive selling began in Far Eastern markets Monday morning(Asia) 19 October and accelerated by the time London was up and trading, largely because London had closed early on October 16 due to the storm. By 9:30 a.m (London), the London FTSE100 had fallen over 136 points. Later that morning, two U.S. warships shelled an Iranian oil platform in the Persian Gulf in response to Iran’s Silkworm missile attack on the Sea Isle City, selling accelerated, by the close on 19 October the S&P had lost more than 35% of its value the majority of on the 19th of October 1987.

Alan Greenspan was on an airplane to Dallas on ‘Black Monday’ when the stock market began to plummet. On arrival he made a few phone calls, and early the next day the Fed issued a statement;

‘The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.’

It followed up that statement with substantial open market purchases over the next days and weeks. I.e. it created more money. And Fed officials began a round of telephone calls to banks, reminding them they were in the business of lending that money.

 

 

 

Two cost effective instruments to capture both the up & down trends

E-Mini S&P (ES) 1.00 change in price = $50.00
Contract value at 3,000.00 = $150,000.00
Total bid ask spreads and all fees per trade = $25.00 or less
Margin Requirement = $6,300 USD
Margin cost = pay 0.75% annually on longs, get paid 0.75% on shorts
Restrictions on shorting = None
Trading hours = 23.5 hours per day, Sunday afternoon – Friday afternoon
Daily USD volume = 168.5 billion

S&P Micro (MES) 1.00 change in price = $5.00
Contract value at 3,000.00 = $15,000.00
Total bid ask spreads and all fees per trade = $12.00 or less
Micro Margin Requirement  = $630 USD
Margin cost = pay 0.75% annually on longs, get paid 0.75% on shorts
Restrictions on shorting = None
Trading hours = 23.5 hours per day, Sunday afternoon – Friday afternoon
Daily USD volume = 2.9 billion

One simple trading method to capture the remaining move higher and the inevitable larger move lower.

Platform set up

      • Create a separate profile for the ESU19 (S&P E-Mini) or MESU19 (Micro)
      • Set your display to candlestick using 1 minute price data
      • Add in these exponential moving averages (EMAs) EMA4.5, EMA9 and EMA18, if 4.5 is unavailable use 5.
      • Create 8 more charts using the same EMA4.5, EMA9 and EMA18.
      • Set each of the 9 charts for a different time period in this example I’ve set the first chart to 1 minute, the second 5 minutes, then 15, 30, hourly, 4 hour, daily, weekly and monthly.

One glance at my ESU19 profile page and I can I can identify the S&P’s momentum, trend and monitor any trend change as it occurs.

Simplified Trading Procedure

Pick any time period(s) to trade from 1 minute to monthly, use the same rules for all time periods traded.

Longs
If price action is above the EMA9 and the EMA9 is above the EMA18 = long.
Risk on long positions, if the EMA9 moves below the EMA18 exit longs.

Shorts
If price action is below the EMA9 and the EMA9 is below the EMA19 = short.
Risk on short positions, if the EMA9 moves above the EMA18 exit shorts.

The EMA4.5 crossing the EMA9 warns you to get prepared to modify your position.

The longer the time period traded (1, 5, 15, 30 minute, hourly, 4 hour, daily, weekly or monthly) the greater the risk and reward per trade.

To track this this procedure today use the charts linked below all are updated every 10 minutes.

In these examples I’m going to trade using this procedure on 120 minute, daily, weekly an d monthly price bars, the only difference is the time period I’m feeding the exponential moving averages, 120 minute, daily weekly or monthly.

To track trades using 120 minute price bars, use this chart  and follow the rules above using 120 minute price bars.

To track trades using daily bars use this chart, follow the rules above using daily price bars. 

To track trades using weekly price bars, click on this chart,  follow the rules above using weekly price bars and see where we reverse our weekly long position (established 11 February 2019).

Monthly, click on this chart, follow the rules above and see where the current October 2010 long reverses to short using the monthly.

When it does you’ve just confirmed the beginning of the next bear market. For larger scale charts showing entries and reversal periods see 1988, 2000, 2003, 2007, 2009, and 2019.

June 2010 – January 2018  presented no challenge, it was hard not to be profitable. The monthly EMA9 stayed cleanly above the monthly EMA18 for the entire period as a trend trader if you weren’t profitable in this market during this period you may want to keep your day job.

Let’s do the trade-by-trade using the 4.5, 9 and 18 EMAs for all four periods reviewed above 120 minute, daily, weekly & monthly.

Let’s use January 2018 through July 2019 during this period we’ve had confused top heavy price action, nasty breaks, then reversals, up and down trends and no significant overall rate of change (the market is up less than 4.00% during this 18 months)

2018-2019 chart

Performance Summary January 2018 – June 2019 (18 months

In this example I’m trading all four time periods simultaneously using the the same 4.5, 9 & 18 EMA’s reviewed above, the same rules for all four, the only difference is the data period I’m feeding the EMA’s (120 minute, daily, weekly & monthly) no stops, no filters nothing just a simple clean reversal when the EMA9 crosses the EMA18.

Performance is based on trading one contact per time period per trade  maximum number of positions at any given time during the 18 months 4.

I’m deducting $38.90 per trade per contact to cover all bid/ask spreads and fees including automated order entry placement and 24 hour a day monitoring. If I spent 24 hours a day 5.5 days a week glued to my quote machine I could have enhanced performance by $2,400.00 to $172,229.10 but my time is worth more than 23 cents an hour so I opt to pay my broker in Chicago to place and monitor trades for me, guarantee order accuracy and maximum account risk (called a maintenance balance) defined if the account should ever have a drawdown of $30,000 all positions would be liquidated on or before the next close, if he fails to liquidate he’s liable imagine it as a stop based on your liquidating value.

Net profit = $169,829.10
Maximum drawdown = $23,158.90
Drawdown period 26 March 2018 – 6 July 2018
Total number of trades = 180
Average winning trade = $2,565.57
Average losing trade = $819.64
Percent winning trades = 41.67%
Percent losing trades = 58.33%
Maximum margin requirement = $25,200 (cell D17 on the spreadsheet)
Closed out trades = $138,430.50 (cell D13 & shown on the spreadsheet chart)
Open trade equity (28 June) = $31,398.60 (cell D15)
Starting balance 2 January  2018 = $100,000.00 (cell D3)
Ending balance 28 June 2019 = $269,829.10 (cell D17)
Trade-by-trade performance = vertical column M
Spreadsheet download , open it & enable editing.

Performance verification

Performance verification will get you comfortable with the EMA crossovers and help you build the confidence you’ll need to tolerate drawdowns and maintain discipline.

Performance verification using  this spreadsheet is as easy as matching the trade date/price in vertical column E to date/price to the charts linked in vertical column B.  Net cumulative trade-by-trade performance shows in vertical column M.

Example, cell E23 shows a trade taken for the 120 minute EMAs on 2 January 2018 at 2690.75, cell B23 links the chart 02-Jan-18, match the price in cell E23, to the EMA9 EMA18 crossover on the chart linked in cell B23.  

I’ve set up the spreadsheet so you can change

Number of contacts traded for any period (120, daily, weekly or monthly)
Contact size (S&P E-Mini $50.00 per 1.00 or  S&P Micro $5.00 per 1.00),
Total trade cost (bid/ask spread & all fees)
Starting balance.

I’ve kept it simple to give you one simple effective trading methodology that will capture up and down trends in the S&P. You can use this EMA trading method on nearly any market, any time from 30 seconds to monthly, see this link for access to over 100 EMA analysis pages.

Obviously you can step up performance trading additional EMA time periods, and confirming trend using these indicators  and/or implement risk control strategies like collars, collars objectively define risk on every trade and for the duration of every trading period. For the performance of 15 programs that use fully disclosed enhanced EMA analysis see this link.  

If you’re going to trade EMAs with a broker make sure they have automated trading capability, that they’ll guarantee order placement accuracy and allow you to place a maintenance balance on your account. A maintenance balance is a stop based on the liquidating value of your account should it drop to a per-defined  level for example, initial start balance $100,000, maintenance balance of $70,000, should the account fall from $100,000 to $70,000 all positions would be liquidated on or before the next settlement or the broker would be liable.

If you’re going to trade on your own get organized

Delete all the old platform profiles you don’t use, when the bear market fully engages every second will count, do an analysis page for each market your trading.

Example trading 9 different time periods on the S&P using the 4.5, 9 & 18 EMAs, in this example once glance and you can see that 5, (1 minute to hourly) are generating short trades, 4 (4 hour to monthly) are long, trading all 9 at the same time you’d be long 4, short 5, leaving net short only 1 contract, if you work this right it will automatically lighten up your position during trend changes and take aggressive potions when the trend is clean and they all agree.

When trading multiple markets long, short and “on deck”if you’re trading with filters create a separate profile for each sector and a sub for each time period traded example,

On the 5th of July I was trading 47 different currencies using the daily EMA with filters, I’ve separated out the 35 shorts on the left (highlighted in red), the 12 longs upper right (highlighted in green), and the 6 on deck lower right (highlighted in yellow). In seconds I can check  positions versus my run and confirm, I have the correct positions on (long, short or flat) and position size is correct.

To take it a step further you can also create separate profiles for markets traded in a specific sector by volatility and perceived risk, this is one of my slower stock allocations, all sleepers, again using the 4.5, 9 and 18 EMAs on daily data,

Out of the 28 longs 6 are misbehaving, (yellow) but not enough to hit their objective liquidation levels, 22 are behaving, 3 shorts that are doing well (red)  5 more (blue) that are on deck that I’m waiting on to write option credit spreads against. Using multiple profiles you’ll have that information for whatever sector, time period or market instantley.

Always have an eject button, even if your trading a limited number of markets, have eject button in place this will enable you to liquidate all positions in that sector instantly, hopefully you’ll  never need it but it’s nice to know it’s there.

1983 through 2019 chart

Who knows what could happen to trigger a massive selloff?

Let’s assume that the Global Stock Index market is heavily leveraged, with trillions of USD dollar volume occurring daily, much of it automated trading, (formerly refereed to as program trading) The market is stalling with each new high taking longer and harder to achieve, trillions more in interest rate derivatives positions are also pricing is a pessimistic outlook for the economy and the market it spooked, similar to what we saw in 1987, 2000, 2007 and so far in 2019.

Trading the daily EMA4.5, EMA9 and EMA18 it generated a short at 314.17 the 8th of October and reversed to long at 242.81 on the 16th of December 1987

Chart

 

You have to ask yourself how the US Federal  debt went up ___________________ when the reported federal budget deficits during the same period totaled _________?

 

6)   1968-2007 +2.47% Treasury rate above BLS.GOV reported inflation

Average 3 month, 5 & 10 years Treasury rates from 1968 through 2008 (40 years) were 2.47% above reported BLS.GOV inflation providing Treasury investors an average pre tax real rate of return of +2.47%.

1968-2007 Chart

7) 2008-2019  0.00% Treasury rate above reported inflation

Average Treasury rates from 2008 through 2018 (10 years) were 0.00% above reported BLS.GOV inflation and 1.67% below actual inflation providing Treasury investors an average pre tax real rate of return of  0.00%if you give the reported inflation number credibility and a negative 1.67% if you believe inflation is higher than represented. Treasury returns are pretax translated a 2.00% rate with BLS.GOV reported inflation at 2.00% becomes a negative rate of return of at least 0.66%, using actual inflation 2.33%. 0.66% on the current national debt  of $21,462,300,000,000 = $141,651,180,000 at 2.33% = $500.071,290,000. To put this into proper perspective total Federal revenue all sources in 2018 was

2008 through 2019

US Federal debt, debt service cost, Average rate.

 

 

Foreign owned Treasuries

With U.S. Treasuries and U.S dollar near record highs 6+ trillion in foreign owned debt may start to unwind.

 

If the dollar turns lower

 

And U.S debt is at or near record highs where risk outweighs reward 5 to 1

Would you hold it?

China

Japan

6) Identifying the downturn as it occurs

 

120

Daily

Weekly

Monthly

 

 

7) No stimulus amo left with the exception of Quantitative easing (Fed creating money backed by nothing) then using that money to buy US Treasuries and other debt no one else will at the offered rate.

 

 

Spreadsheet and all supporting links

7) One trading method that captured the the majority of all major market moves in the S&P from 2000 through 2019.

The instrument we’re trading in this example is the S&P 500 futures contract, if you’re not familiar with this contract see S&P contact specificationsIndex educational videos & resources.

S&P program here

13) Try this procedure and watch it work on any of the Global Stock Index Futures, individual Stocks or CFDs (contract for difference) below using any time period and these rules.

13.1) Pick a time frame to work with H=Hourly, to M=Monthly
13.2) If price action is above the red line and the red is above the blue = long.
13.3)  For longs, the O=Opinion must greater than a 29% buy.
13.4) Risk on longs, if the red line moves below the blue exit the trade.
13.5) If price action is below the red line and red is below blue = short.
13.6) For shorts, the O=Opinion must greater than a 29% sell.
13.7) Risk on shorts, if the red line moves above the blue exit the trade.
13.8) Same rules apply for all time periods hourly to monthly
Prices are updated every 10 minutes if you have questions send a message.

# CFD Analysis Page H 2H D W M O
13.01 AAPL Apple Inc H 2H D W M O
13.02 AIG American Int. Group H 2H D W M O
13.03 AMD Adv Micro Devices H 2H D W M O
13.04 AMZN Amazon H 2H D W M O
13.05 AXP American Express H 2H D W M O
13.06 BA Boeing Co. H 2H D W M O
13.07 BAC Bank of America H 2H D W M O
13.08 C Citigroup Inc H 2H D W M O
13.09 CAT Caterpillar Inc H 2H D W M O
13.10 CSCO Cisco Systems Inc H 2H D W M O
13.11 CVX Chevron Corp H 2H D W M O
13.12 DIS Walt Disney Corp. H 2H D W M O
13.13 FB Face Book Inc. H 2H D W M O
13.14 FCHIX Franklin H.I. H 2H D W M O
13.15 GDAXI DAX Index H 2H D W M O
13.16 GE General Electric H 2H D W M O
13.17 GOOGL Alphabet Cl A H 2H D W M O
13.18 HD Home Depot H 2H D W M O
13.19 HPQ Hewlett-Packard Co. H 2H D W M O
13.20 HSI Hang Seng Index H 2H D W M O
13.21 IBM I.B.M. H 2H D W M O
13.22 INTC Intel Corp H 2H D W M O
13.23 J225 Nikkei 225 H 2H D W M O
13.24 JNJ Johnson & Johnson H 2H D W M O
13.25 JPM JP Morgan Chase H 2H D W M O
13.26 KO Coca-Cola Co. H 2H D W M O
13.27 MCD Mcdonald’s Corp H 2H D W M O
13.28 MMM 3M Company H 2H D W M O
13.29 MRK Merck & Company H 2H D W M O
13.30 MSFT Microsoft Corp H 2H D W M O
13.31 NDX Nasdaq 100 H 2H D W M O
13.32 NGAS Natural Gas H 2H D W M O
13.33 ORCL Oracle Corp H 2H D W M O
13.34 PFE Pfizer Inc H 2H D W M O
13.35 PG Procter & Gamble H 2H D W M O
13.36 S&P S&P 500 Index H 2H D W M O
13.37 STOXX50 Euro Stoxx 50 H 2H D W M O
13.38 T AT&T Inc H 2H D W M O
13.39 TRV Travelers Co. H 2H D W M O
13.40 UK100 FTSE 100 H 2H D W M O
13.41 UTX United Technologies H 2H D W M O
13.42 US Crude West Texas Crude H 2H D W M O
13.43 VZ Verizon H 2H D W M O
13.44 WMT Wal-Mart H 2H D W M O
13.45 XAUEUR Gold EUR H 2H D W M O
13.46 XAUUSD Gold USD H 2H D W M O
13.47 XOM Exxon Mobil H 2H D W M O

14) Or try it on any of the other markets we trade, updated every 10 minutes

15) Trading Programs to capture the moves on deck.

If you have questions send a message or contact me

Regards,
Peter Knight Advisor

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