Oye Tackle Traders!  

I’m back and coming to you from the beautiful island of Tasmania!… Well, not really, I have moved onward from Tasmania but the power blog has me there chronologically. Anyways, I hope you enjoyed Franco week and I couldn’t be more proud of the guy. It has been fun watching his progress and even more fun seeing him taking charge with Environmental Hedging & Co. He will be joining us often from hereinafter and I hope viewing his progress will inspire you as much as it has me.  

Anticipate great things from him in future blogs and life in general. We plan on doing a back and forth as I am traveling and he is compounding Environmental Hedging. Consider it as a nomad vs. nest maker; bower bird vs. coconut crab; or, pirate vs. scallywag kind of arrangement.  

 

 

 

So, Tasmania is an island south of Australia. And yes, it is apart of Australia. It was the original penal colony for the British rule and Australian colonists. It is also the home of the Tasmanian Devil; the late Tasmanian Tiger; two of the best golf courses in the world (Barnbougle Dunes and Lost Farm); and three Tasmanian friends of mine—Danny, Rose, and Adam… Adam is an accomplished M.M.A. fighter and a prison guard. Danny is a jack of all trades and she is four pushups away from becoming a police officer. And Rose is a nurse, horse enthusiast, and an aspiring vegetarian. They are absolute goofballs and get their kicks from food, private comedy skits, and careering around the world with fake mustaches.   

Anyways, I met Rose and Danny last Sept in Greece on a beach in Santorini and became acquainted with Adam (Danny’s boyfriend) in Tasmania. They are awesome people who pulled out all the stops while I was there. Thus I am very grateful for their hospitality and per travelers code, they have a place and awesome things to do when they come visit me in the U.S. or New Zealand. Anyways, here is a little montage of our time together, hope you enjoy it:  

 

 

Let’s talk trading ladies and germs. As John Bogle said, (who is rather old) “Ive never seen a more volatile market in my career”. And compared to Bogle’s 50 some odd years in the market to my measly 5 years as an active trader/investor I can’t imagine how much things have changed over the years.  

Now, what we have seen over the last few months is a modest correction, hallmarked by a battle between technicals and behavioral analysis, unprofessional leadership and geoeconomics. And produced from this conversation is the formation of two technical patterns—an M formation contained within a potential W formation. (This is what I see at least).  

 

Indeed there are aspects of this that are convoluted, especially since the W formation hasn’t been completed… And 2700-2704 on the S&P is important zone, folks… The last blog I wrote called for a W formation… And indeed it doubled bottomed on the S&P’s 200 day moving average right there in and around 2550-2575. It consolidated there and didn’t have a big momentum break after hitting support. It was basically a dead cat bounce off of that support level, even though said cat almost peeked below support one trading day—which undoubtedly cost people some money.   

Further mentioned in my prior blog is that: Just like in 2014 and 2015 after the consolidation of that second bottom, typically the market shoots up and goes on to break record after record. Which, as of 4-18-18, seemed to be the case. But as mentioned, 2700-2704 is an all so important zone. It represents two things: Resistance that needs to be broken for a W formation to be realized. Or, two, resistance that is not broken, actualizing a Kiss of Death.   

As you can see in the above chart on the 17th resistance seemed to have been broken. There was a fat candle, however, there was a sizable sell off late in the day. As result, on the 18th the market took a small breather above 2700 and just barely above 2704. But on the 19th the market dipped back below that number and dipped with some momentum…  

Now, I am not saying confirmation of a Kiss of Death has been given, whatsoever. There are a few trading days needed before that confirmation can be given to us, technically. Maybe even a week. But then again, it sure looks like this is the case. All the signals that indicate financial market troubles are flashing. And all in all what the S&P chart is detailing is a conversation that nobody wants to have. Well, some do, however, some don’t. And some will be flat out militant about it. I’m not here to please people, just calling a spade a spade.  

It seems technicals are in conflict with behavioral(s) right now. And when I say behavioral(s) I not only mean the traditional market/business cycle (of which we are past due for a crash), the consumptive habits of people, the characteristics of human nature, corporate nudging, and so on and so forth… but also the undeniable fact that the world market is being behaviorally pressured by heaps of objective realities—such as war; ballooning US debt; global currency devaluation; the resulting inflation; geopolitical shuffling; environmental destitution; and populism. All of which increase risk and exposure and change the day to day behaviors of humanity itself. Things that the market is accountable to.  

But of the many things pressuring the world at large there is one thing that seems to capture the most attention, and has obvious short-term side affects for markets and their practitioners. That is: @therealdonaldtrump… 

 

It is undeniable at this point that the market is having a hard time calculating the risk Donald Trump and his Twitter account poses to stocks and thus the world economy. However, it is something we have to deal with. And fortunately for every nihilist out there, they have a growing comedy chest to draw from.  

The point is that all of these temper tantrums, which came after the initial 1000 point drop in the Dow 55 days ago, have not helped the overall situation. It’s easily arguable they have made the situation worse… First and foremost when a drop like that happens to a market it is important for anyone that has influential weight to throw about that they back off and allow fundamentals and technicals to do their thing. Our beloved leader may be taking credit for a recession, and not a MAGA market… 

Anyways, no single one of these above-mentioned variables may have a long-term effect on the overall charts. However, all of them combined, acting as a symphonic force of negativity, can cause death by a thousand paper cuts. Indeed the direct attacks, those off the cuff assaults to the market via Twitter have an immediate effect. The unfounded Washington Post / Amazon roust is a fine example, as was the trade skirmish with China and so on and so forth. The list could literally be a book in and of itself. And I am sure it will be one day, and it will be a best seller, no doubt.  

But as mentioned in the last blog I wrote, we have to sick to the technicals and fundamentals, folks. As frustrating or depressing as all of this is, a double bottom is a double bottom, a W formation is a W formation and an M formation is an M formation… Focus on that… it really doesn’t need to be any more complicated. And if none of that is clear, you shouldn’t be live trading right now. Just stay away and stick to your practice account, read up on technical analysis and read anything that Richard Thaler, (the father of behavioral economics), has written…    

And if you’re bringing politics into the market and trying to play direction based upon those personal opinions, just remember Jessie Livermore’s famous quote, “markets are never wrong, but people and their opinions often are”. Indeed some of us may see these behavioral(s) as a positive, an aggressive shifting of the world order. Others as a negative, a direct attack on tradition and common sense.   

But all of us feel it, and all of us feel that something is wrong with this tension and division. Whatever hindsight determines, the market is trying to bust through resistance but is having a hard time here and now. It’s not quite sure what to do and is being pulled in many directions. Well, specifically, two directions but I am sure you get the point. It truly is a battle between the Bulls, the Bears, and Schizophrenia.  

On one level, (just like when we were at 2550 a few weeks ago), this is a do or die moment for the market. And Ill be the first to admit it may very well shake all of this off, look at its shadow, and go on to hit record after record throughout the calendar year. But then again it may not. It could succumb to all of the pressure and complete a textbook M formation / Kiss of Death…  

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So the point of this week’s blog, and I’ll be quick: Technicals vs. Behavioral(s)?  

Well… all that market charts are the quantification of all that is humanity—economically, consumptively, behaviorally, and fundamentally. They are a mere abstraction of us and to what degree of optimism or fear, we collectively share. And the degree of optimism or fear we have not only determines how we live and treat others but for our purposes as well, how we invest.  

Behavioral risk is increasing everyday, which is partly being detailed in the charts.  

I really think we may have seen evidence of a threshold these last two months… The totality of everything negative taking place is creating fundamental changes, for the worse. Now, even if this market shakes off what I am technically seeing, (and I wouldn’t be surprised), it will, however, be even more difficult to trade. Surprises will increase in frequency and their consequences evermore drastic. All I am getting at is that sometimes we need a reminder that markets don’t go up forever. And that world events, and even Twitter, have an impact:  

“Unrealistic optimism is a pervasive feature of human life; it characterizes most people in most social categories. When they overestimate their personal immunity from harm, people may fail to take sensible preventive steps. If people are running risks because of unrealistic optimism, they might be able to benefit from a nudge. In fact, we have already mentioned one possibility: if people are reminded of a bad event, they may not continue to be so optimistic.”

— Richard Thaler.  

 

Cheers,  

Bob Shannon