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    Chart Gallery First Quarter Review and Outlook

The second quarter should see an end to the current decline and a tradable rally

Fine-tuning the early April peak.

The first chart is tied to today’s market based on parallelism. One is the peaks over the last 120 years that occurred in late winder early swing that had the same tidal alinement – our inside formula – confirmed by the peak on 2/12/2020.  The peak event we called, warned our subscribers about, and provide strategies to use to hedge may have been ignored or overlooked because it is easy to be social its human. But the market is “anti-social” that is a fact. Being the one who says ” the party is over,” is about as anti-social as it goes.

The massive decline if avoided saved you lots of profits to re-invest later and the hedges should have made you 30 to 60 % in the space for less than 3 weeks.

The other aspect of the first chart is the historical peaks in April occurred in the same “tidal forces” time frame the market is hitting here in the first few days of April. This fits the outlook for a lower peak to be in place already or will be by mid-week with a downturn to regain its force of trend and a mini-crash into May 2020.

The eighteen-year cycle that spans two years is in gear with the above scenario.

I have posted this chart a number of times, it ties back to its last occurrence of the cycle that ran from 2000 into late 2001.  shifting the 2000-2001 market data so its start date coincides with the start date of the 18-year cycle is what you see in the chart. Now side by side, as the cycle is about to end.

Its projections from the February peak is climatic through the current time frame into April-May, which is in line with our scenario going into the second quarter.

The Bear Market Rule: twice as large in 25% of the time.

Here is another chart that I posted several times last year relating Contrary Thinker’s risk assessment going into the new decade. The risk since the end of 2017 was always plainly labeled as 50% and that from the new high in January 2018 the reward potential was only 10% and not worth the risk.  Markets decline differently that markets advance is a well-known fact that is given lip service in the industry.  But the numbers for the profit-motivated are impressive, as can be seen, illustrated in the tables below.

Based on 120 years of average bear markets, they will take unrealized profits in 25% of the time it took to build the bull market. Hence the 120 months Great Bull Market will be corrected for its excesses in 30 to 32 months. The average bear market declines is 36%. But there are a number of reasons why the risk is greater in terms of price and time, this go-around.

Contrary Thinker’s target area is the previous trading range of the 2000-2009 trading range.

One reason for the higher risk outlook where the market could give back 75% of the 10-year bull is two-fold. One is the base was abbreviated in time, at best it lasted 13 years, whereas the bases that support the previous secular bull markets lasted 17 years, as you can see in the next chart.

The second reason is the outside factor that fiscal and monetary tools are used up. They were used up after the tax cut going into 2018 and the printing of money, leaving intangible (paper assets) investments at risk when they will have to compete with the demand for cash my the economies worldwide as they recover and the demand for raw materials that will be needed.  

But there is more…

In the last three years (39 months), short only breakout systems have outperformed by and hold

The risk in the markets began to show itself shortly after the November 6, 2016 election with the volatile beginning of the “Trump Bump” lowest volatility advance in history. It was when the low volatility regime cracked in February 2018 that the “writing was on the wall.”  This was confirmed from that time because short only breakout systems began to perform better than the buy and hold method – based on risk and reward measures – it was clear.

These tables and underwater graphs are comparing the same size accounts and the short only volatility system is net 14,332.32 slippages and commission $360.00. The buy and hold system had no slippage or commissions taken out even when it had to roll to the next most active contract, assumed to be non-consequential. As you can see they both made about the same net profit since Contrary Thinker called the peak January 26, 2018.  That is one sign of the regime change, short scalping did as well as long-only. The other is the risk, the drawdown the passive investor had to go through to make $37,000 in 39 months.

The Underwater Equity curve charts were popularized by my friend Jack Schwager. It presents a unique way of evaluating equity performance because you can view the relationship between time and magnitude of drawdowns as they relate to previous and new equity highs. Plus the pain the investor would have gone through to get to the end net results.

Over that period, a buy and hold of five mini S&P contracts had a series of setbacks ranging from 30% to 60% to 70% from peak equity, or peak account value. Whereas, the short only breakout system had drawdowns over the same period of 2 1/2% each both in 2019.

During the current decline, the system made $27,000.00 this is a fact that no one can deny and Volatility Report signaled its engagement.

The market has changed and a great traders market has begone. The big base chart above reveals a little talked about fact in the industry. That the stock market spends just about the same amount of time base-building aka in broad trading ranges as it does in secular bull markets.  While the memory of the great bull market will linger for months, if not years with many investors, it is the big swing traders, the market timers who will prosper.

 

Great and Many Thanks,

Jack F. Cahn, CMT
A Thinking Man’s Trader Since 1989,
Copyright 1989-2018

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