Home—Online trading—Spread betting explained—Spread betting blog—Where next for these spiky markets?
Aug 03, 2012, 02:16
Posted byJohn C Burford
Comments (11)
Before I get to the latest charts, I have something interesting to show you about US Treasury bonds, or T-Bonds…
I wrote about T-Bonds in Monday’s article and it prompted quite a few comments (as I thought it might!).
Why would long-term bonds and stocks decline together, asked some.
Surely when risk is on, bonds are sold and stocks are bought, and vice versa. That’s what happens normally…
OK, so let’s start with a recent comparison.
You can see that from 2003–2007 (red lines), bond yields and stocks were rising together as usual:
(Click on the chart for a larger version)
But why is that the ‘normal’ pattern? Simply because, in an expanding economy, demand for credit rises, putting upward pressure on rates, especially when sovereign borrowing requirements are relatively modest. As ever, the supply/demand equation operates.
Next, note how during the credit crunch 2007- 2009 (blue lines), they fell together as final demand in the economy and demand for credit collapsed together.
But since then (green lines), stocks have been rising while yields have plunged.
In other words, we are not in normal times.
This 2009-2012 divergence has been ascribed to the 'safe haven' effect. But surely, shares are anything but safe havens! After all, investors are risking their money to own part of a company which may prosper or may stumble. And yet stocks have also been bid up!
So there is a contradiction here. One of them must be wrong!
I contend that in a full-scale panic, everything will be sold to raise cash, even many 'safe' bonds. Which bonds will be left standing is anyone's guess. But with the rocky US debt background, perhaps Treasuries will suffer as well as many others. Of course, we’ve not reached the panic stage – yet.
But as a trader, I know that we can all reason ourselves to the wrong trade at the wrong time! Just look at gold. Here the bulls have long maintained that hyperinflation is inevitable and gold would rocket. And yet gold prices have fallen in a year. That was the logically correct reasoning, but the wrong trade at the wrong time.
What I see in the T-Bond charts is a possible topping here, that is all. I will let the market decide if I have my timing correct. If I am wrong, I have my break-even stops in to ensure no loss.
At the end of the day, I’d rather have a red face than a big trading loss.
Turning to Wednesday’s action, when the markets were on tenterhooks to hear what succour Bernanke would provide, the 30-year T-Bond future took off, then ran into a brick wall for a superb whiplash.
So see what I mean, take a look at the two-minute chart:
The entire range was over 100 pips in the space of less than an hour. Many positions – both longs and shorts – were taken out by this action. It almost certainly was connected with the huge computer glitch that occurred on the NYSE opening.
Even so, isn’t it remarkable that my tramlines guided the high and low of this extremely volatile period?
As I write this morning, we have seen the volatile effects of yesterday’s Draghi drama – and the spikes I forecast in Wednesday’s article did indeed occur, especially in the US dollar currency crosses.
Here is the 15-minute chart for GBP/USD (the sterling versus dollar rate or ‘cable’ as it’s known):
Obviously, spiky markets like this make swing trading very tough!
But take a look at the next chart and you can see that the spike up in the Dow was more muted:
The rally only carried to the area of previous highs in the 13,100 area and then was hit by massive selling, as I forecast on Wednesday.
Claim your FREE report: The six-step game-plan for spread betting profits
But recall from Wednesday that I was questioning my old Dow tramlines and asking if I should look for another set. Have you found any yourself?
Well, I believe I have found some great new ones, still on the hourly chart! Have a look at these:
Admire the lovely prior pivot points (PPPs) – and also the hit last night on my lower line. The rally this week lies right on the upper line, and we are this morning bouncing up off the lower line.
In other words, the market obviously believes this line is significant, and so shall I. Any break below it should be bearish.
Later today, the monthly US jobs report will be released and this usually induces yet more volatility as traders position themselves for it.
As I write, the market has rallied to the Fibonacci 50% retrace of yesterday’s plunge:
This is a great candidate for a short swing trade as the market is close to the support/resistance zone (pink bar) that was broken on the way down yesterday.
Remember, I’m still holding my short trade at the 13,040 area from Wednesday with my stops now at break-even.
Finally, what are the AAII ‘mom and pop’ retail investors thinking? Here is the survey hot off the press as of 2 August:
Quite an interesting result, don’t you think?
What we can see here is that there has been a swing to the bulls of 10% (as the Dow maintained the 13,000 level). But look at the big increase in the “don’t knows” of 6%, taking it to well above the long-term average.
What does all this mean? Well I think it reflects the deep chasm between the professionals – who are very bullish – and the public, who are much more ambivalent.
One measure of the professionals’ bullishness is the near-record low ratio of cash held by US mutual funds to their assets (around 3.5%). Bearish professionals would keep a high cash level.
Also, huge withdrawals from US stock mutual funds by the public continue, confirming their negative mood – and their need to raise cash. That’s a bearish signal.
So tell me – what do you make of all this? Share your thoughts below.
To me, there is an unstable stand-off between the bulls and bears. But I think this could be resolved at any time with a new trend in place. In the meantime, we must contend with wide swings both up and down.
It must be absolute hell for trend followers!
• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
• The essentials of tramline trading • Advanced tramline trading • An introduction to Elliott wave theory • Advanced trading with Elliott waves • Trading with Fibonacci levels • Trading with 'momentum' • Putting it all together
• Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here.
Published in Spread betting blog More articles by John C Burford
By John C Burford, May 24, 2013
By John C Burford, May 22, 2013
By John C Burford, May 20, 2013
By John C Burford, May 15, 2013
Leave a comment
(03 August 2012, 03:13PM) Complain about this comment
Hi JohnGood comments on bonds. Everything could collapse together.At the moment the market seems to be following the norm but it could well change as you say.Recently you showed a longer term trendline on the dow and it does show an uptrend still in place from the bull market that started in 2009.If this was a bear market surely it would have topped out at the end of last year. Whilst I understand the nature of your short term trading and you are providing excellent interpretations. I reiterate my opinion to keep an eye on the long term position and do not predispose to a bear market until it happens.We are very near the top of the bull market but there could well be some legs left in it yet to finish off upwave 5. The market will let us know soon enough.Joe
(03 August 2012, 03:32PM) Complain about this comment
I wish I'd spotted your trams yesterday, I would have taken profit at 12780 instead by this morning all the gains were gone. I knew the current pattern was about to break and felt it was to the upside which proved correct and is verified by your tramlines.Thanks for your help there.
(03 August 2012, 05:29PM) Complain about this comment
Johnmy problem is with my stop loss positions. On 2 August I placed a short bet on the Dow at 13020 with a stop loss of half the daily range being 50 giving me a stop loss of 13070. The market rallied to 13080 and then plunged over 200 points. I was stopped out and what would have been a wonderful trade turned out to be a loss. I would have thought my stop loss was sensible. Ofcourse you could place a massive stop loss and nearly always catch the move but the risk would be very high. Could you review how you decide on your stop loss positions please.
(03 August 2012, 10:24PM) Complain about this comment
The S&P500 was mentioned the other day. What wasn't mentioned was the down sloping upper trend line taking the April and May high on the daily chart, we're right on that line of resistance now . The 4 hour chart gives an extra touch.John aboveIf you're trading on a daily chart your stop ought to be oa point or two above the previous days high (of you're going short) and your entrance a point or two below the previous days low. This assumes the previous days bar is of 'normal' size. The amount you then trade per pip will be based on a division of pips (entrance to stop) against a % of your account. Ie 100 pip entrance against £10k account with a 1% risk of account would = £1.00 per pip. £3.00 per pip if you wanted to risk 3% of you account.
(03 August 2012, 10:54PM) Complain about this comment
It's all about time frames again John. Joe mentioned about the bull market which started in 2009 and he's right. The Dow is in a huge upward sloping tramline with the top line touched perfectly 4 times and the lower touched twice. As of today the Dow would have to drop thru 11750 for the bottom support line to be broken and untill this happens the three and a half year trend is still intact. Where too now, who knows but I'm now short with a stop just above the high made today. Why, you may not agree but a "double top ?" was made above your 1hr chart upper tramline with a strong momentum divergence. Also a trend change was shown on my 30min Heiken-Ashi bars which fell below my moving average. I'll stay with this untill this trend changes or stopped out or my initial target of 12850 or thereabouts is reached. If this support is broken then 12550 would not be a surprise. It does seem like things are moving towards something massive happening.
(04 August 2012, 02:35PM) Complain about this comment
Bronco Bill and othersFor the Dow, draw all the parallel tramlines as John is teaching.In between and not just the top and bottom.You may be surprised by what it shows. I believe that there are 3 very clear between the top and bottom giving a very good pathway.Also, as I commented a while ago, it is important to watch the US dollar index not just the Euro.Although the euro is grabbing the attention,There was the DXY momentum divergence from its peak pointing to potential dollar down. The euro was not as clear then, but there are high potential reversal targets now for both. The market will know that.Learn to watch and use the trends together not just the Dow on its own, and you need to learn key chart trends the market uses.John surely does this, and will be aware of the common most important chart trends. Take serious note of his comments on the bond market. Turns from the major tramlines are normally part and parcel of sharp moves in the market.Joe
(04 August 2012, 02:50PM) Complain about this comment
I forgot to mention a bit more on the bond comments.Although John points out that we are not in normal times, you have to be aware that when bond yields rise from a low, the market normal rises and it is doing so again.He is pointing out the disconnect when bond yield were falling. this is not the same. But we are at an extreme low.However when bond yield do rise there appears to be a point at which it hits the market hard. In the extraordinary situation we are now, a rise in yields could be much bigger and faster than any norm, and could well cause a market panic when the yields are seen to have risen too much too fast.Joe
(04 August 2012, 09:53PM) Complain about this comment
I agree more often than not with your opinions John but not when you mention about gold. Irrespective whether any of us gold "bulls" ever bought gold for the first time because we thought that "hyperinflation is inevitable" is frankly irrelevant. In 2001 the charts said dump stocks and buy gold.... and still say so. Since 2001 there have been five major corrections two being 27.7% and this one the sixth is now about 19% at present. I and many others bought at the £215 oz mark in 2001 and have been adding on the dips ever since so how you can say "wrong trade at the wrong time" beats me. I'll stick with the charts and trend until it changes, and just because hyperinflation hasn't happened yet is no guarantee that it wont.
(05 August 2012, 12:33PM) Complain about this comment
This may help some to see what John is saying about T-Bonds compared with action on the Dow and S&P. Go to stockcharts.com (its free). Type in "Symbol"....$SPX. When chart appears go for simple "line" chart and eliminate all indicators. Where it says "range" go for 15years. Go to "indicators" and click on "price" and tpe in $TNX where it says "parameters". Where it says "position" click on "behind price". Click on "update" and this chart will show all what John has been saying...brilliant. The same can be done for the dollar and gold thats also an interesting chart.
(07 August 2012, 04:02AM) Complain about this comment
Hi Bronco BillGood advice for the chart but unfortunately the system only gives 3 years on stockchart. Are you registered (could that make a difference)?I normally use marketwatch and can do similar.I maintain that what John is saying is correct but does not relate to a major bottom as the trigger for a fall in the Dow as initially stated.Dont expect the markets to fall when there is a major turn from the lows on the bond market. You have to wait until the yield rise becomes a problem.The only significant deviation from the normal trend was in the first few months of 2009 when we had already crashed and were at financial armeggedon. Not in the situation we are now.You can see the very big disconnect that John refers to and it happened from about april 2010. It should indeed be a cause for serious concern because at some point the bubble has to unravel.Joe
(07 August 2012, 05:31PM) Complain about this comment
Sorry Joe, yes thats probably it I am registered.
Name This will be the name displayed with your comment.
Email This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.
Comment Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.
Enter the text from the box above
Remember my details
By leaving a comment you accept our terms and conditions.
The trades on this blog are all 'closed', past trades. These aren't trades for you to copy, they are there to teach you some useful trading tactics for your own spread betting. And always remember: spread betting carries a high risk to your capital as you can lose more than your original stake.
Cut through the trading jargon with MoneyWeek's easy to understand guide to spread betting terms
In his easy-to-understand video tutorials, John C Burford outlines some of the essential concepts you need to know to become a successful spread better
24 May 13
22 May 13
20 May 13
Compare the leading providers' online trading accounts for spread betting, forex trading, share dealing and CFDs, and open an account online. Plus, get MoneyWeek's tips and advice on trading online.