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September 4, 2020

MarketMap 2020 Issue #15

“It’s like déjà vu all over again.”

“Bears need love too”

It is worth repeating part of my comment regarding the reversal from the highs on 9/2/20 that “Doing the math, counting forward ten days was yesterday the 2nd. With a potential high pivot threatening, the bulls will attack long volatility futures that are breaking out as they go back to the mean reversion selling of the volatility complex. Hence the key for bears is the ability to hold the break.

I also said in this LinkedIn group space that “Markets do not crash from a major peak.” In other words, a long bar day declines of 4 or 5% off a high is more typical of a bull market shake-out vs the beginning of a new bear trend.”

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May 4, 2020

Volatility Report 5/4/20

All the techies who missed the big top are getting itchy here looking for reasons to sell.

Contrary Thinker did not miss the top (called it 2/12 and 2/19 ) and engaged long volatility strategies (Sunday night 3/23) to hedge traditional portfolios and to profit in 80%/20% split Cash/Futures combination. Here is a link to the 16-page pdf that shows you how we did, track our thinking.

The majority in mid- March called to a quick return to normal as seen in the Goldman scenario posted at that time. Today after a 30% bull market in five weeks the majority on Twitter was back to being bullish. As we go to the open today with just a hint of decline the TA’s that missed the February peak is getting serious about a real bear market. Hedging their advisory and grouping together with the same idea to watch the FANNG sector-based ideas propagated by their seniors to add credibility to their advisory’s caution. 

Contrary Thinker labeled the peak in January 2018 a REGIME Change. Since that date, short only volatility breakout systems on the ES have beat buy and hold the stock index future ES.  CT called the peak in late September 2018 and again engaged long volatility systems into early January. On February 12, 2020, we reintegrated “risk-off.”   We have been faulted by the buy-side only managers for missing the bottoms, our advisory is built of capability and trust. Since the low December 23, 2018, and the low March 23, 2020, we have not given buy signals or risk on advisory.

We did, however, disengage our hedge – the long volatility strategies – when buy signals could have been made, “risk on.” But it was not worth the risk we expect. Furthermore, in the face of the before mentioned long volatility breakout systems in an 80/20 split portfolio with 80% in 2-year notes and 20% in futures, the performance has been above average.

Dow Utilities

Furthermore, as everyone knows bottoms are easier to isolate then peaks and that is CT’s specialty picking the lows is easy and the low in March was signaled weeks before it actually happened, a telling sign for divergence like 2007-08.

The above chart shows the pealing off of the defensive stocks. The group was bought in panic as the flow of funds exited regular shares. Now it is inferred that either the funds are rolling back into the advancing stock market or there is no place to hide in the face of the coming decline.

The above chart of the Dow utilities reveals a background that supports a forceful trend. A move below 753 would be the next sign of the downtrend unfolding and confirmed below 528.

Cash S&P

Like the fixed zones we use the variable bands show the same failure reversals and the confirming breakdown six days later.  What is also conspicuous on the chart it CT’s Technical Event Model (TEM) giving a Panic-Event Signal, highlighted in red.

Today the last two peaks have failed to hold and any trend that can pick up a following here will be dynamic, with the last TE being a rule #2.

similar to the variable bands used on the S&P index, the four markets showed here using our fixed zones; and it is clear that all four of the indices have failed to hold. With these reversals being preceded by Techcnail Event #2, there will be a carryover of the downtrend.

Bottom Line

Risk-off, raise cash use risk-free investments. 

Hedges- Long Volatility Strategies – remain off. While the nominal high may be in place for the secondary bull market posted on 4/29/20, CT will wait for the model to give a clear engagement signal before we go “staus-on.”

 

Subscribe to Contrary Thinker today, if you are a visitor to the LinkedIn “Volatility Report” you know the free look will end 

 

Copyright 1989-2020

Contrary Thinker 1775 E Palm Canyon Drive, Suite 110- box 176 Palm Springs, CA 92264 USA. 800-6183820 or 25/1 Poinsettia Court Mooloolaba, QLD Australia 4557 614-2811-9889

— Contrary Thinker does not assume the risk of its clients trading futures and offers no warranties expressed or implied. The opinions expressed here are my own and grounded in sources I believe to be reliable but not guaranteed.

— Pricing is subject to change without notice.  My indicators and strategies can be withdrawn for private use without notice, at any time.

Trading futures and options involve the risk of loss. Please consider carefully whether futures or options are appropriate for your financial situation. Use only risk capital when trading futures or options

April 20, 2020

Contrary Thinker’s Spring Outlook

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April 15, 2020

Three Waves of Panic Two More Expected

MarketMap Issue #8 2020

Two More Waves of Panic Expected

You see in social media permeating the public domain the fractal overlays of 1929 with the most recent panic sell-off.  The problem with this parallelism it is not anchored to anything at all except the similarity visually when resized and overlaid with each other.

ContraryThinker uses a method discovered in 2000 that I have advanced called the Event-Based Cycle (ECB)  that produces a similar peak to low intervals, it projects related date windows for tops and bottoms based on how the highs are anchored with each other mathematically. The charts below provide what is expected to be the scenario of the market going into late summer; along with an alternate scenario main difference of the low this year hitting later than the others.

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September 28, 2019

Chart Gallery Big Turn September 28, 2019

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September 3, 2019

Bottom Up all time frames TEM Video

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September 3, 2019

Short Term Risk with Video

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February 16, 2019

Direction Neutral Risk Assessment

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November 2, 2018

Yenning for an Opportunity

Japanese Yen FX

If you liked the 90’s the yen may be a flashback to the bull run in the last 90’s. The rules are, to follow a  buying surge because they almost always pick up a following.

The last four times %BB-Oscillator broke above .72 there was a multi-month advance. When %BB moves above .72 it is a momentum surge caused by the market’s realization of some bullish underlying fact that kicks off the trend. In this first chart, the length of the trend after the signals presented long-term opportunities for bull trading.

The context this buy signal occurred in supports a forceful trend. The Technical Event Matrix is registering twos for all three-time horizons. Technical Events Rule #2  precedes trending moves in most cases and provide a bias to trend following types of systems.

There are some other triggers to go along with the %BB-Osc signal. The triangle pattern – while it may not be a valid triangle in EWT terms – has the historical volatility background that supports it. In other words, a move above the descending trend line would be a breakout.

Furthermore, if the yen can get above the high end of the 20-year base, there is a point and figure count or measured move that targets 180.00 The base and triangle both project 160 to 180 for the USDJPY, a buying power for the yen not seen since 1995.

Along with the application of trend following systems to the yen, here are some bullish ETFs for considerations.

Contrary Thinker  1775 E Palm Canyon Drive, Suite 110- box 176 Palm Springs, CA 92264 USA. 800-618-3820 or  25/1 Poinsettia Court Mooloolaba, QLD Australia 4557 614-2811-9889

— Contrary Thinker does not assume the risk of its clients trading futures and offers no warranties expressed or implied. The opinions expressed here are my own and grounded in sources I believe to be reliable but not guaranteed.

— Pricing is subject to change without notice.  My indicators and strategies can be withdrawn for private use without notice, at any time.

— Contrary Thinker does not refund policy all sales are the finale.

Trading futures and options involve the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Use only risk capital when trading futures or options

NO WARRANTY / NO REFUND. Contrary Thinker   MAKES NO WARRANTIES, EXPRESS OR IMPLIED, On ITS PRODUCTS AND At this moment EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL CBI BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THE PERFORMANCE OR USE OF ANY  PORTION OF ITS PRODUCTS.

October 14, 2018

The New Paradigm in Risk Management is Direction Neutral

Almost everyone’s approach to trading/investing is forecasting price direction and calculating support and resistance for risk and reward.

This method looks at context first to judge risk and reward, based on market dynamics.

Here is what I mean by “direction neutral” and it does not matter if you trade mechanical strategies or trade a plan off visual indicators. The only difference is who (or what) is seeing the data stream.

To drive home the significance of this idea you need to contrast it to the industry benchmark. One of the pioneers of systems trading -Robert Pardo – in his original text said the following:

“Let us consider the plus side of the discretionary trader. It is quite simple. The biggest plus is that, to date, I do not believe that a systematic strategy has yet been created that equals, let alone exceeds, the performance of the greatest discretionary traders.”

I accept this as true that a robust trading system or plan will not make anyone rich, and that may be one of the reasons why you trade visually with discretion and not with systematic signals.

In other words, a trading plan or a system – at least the way Bob developed them – are statistically robust and in practice generic. They are designed to deal with all the major conditions in the markets going back over the longest period as possible. They are meant to provide the trader with an average winning trade each time he takes a position on a regular basis over the long term.

This goal of a trading plan or method is the heart and soul of the system trading school of thought that the industry is happy with and many traders do well at. Furthermore, it is likely your goal to make an average amount of money each day or week as supplemental income.

But as Bob says himself in so many words about system trading, it can be good, but not “GREAT.”   He goes on to point out the following:

“Proof of this concept is available by the mere consideration of a short list of some of the household names of the greatest discretionary traders. This short list of the greatest would include legendary billionaires such as George Soros, Paul Tudor Jones, Bruce Kovner, and T. Boone Pickens.”

You can’t argue with that, right?

One of the legends I study is Stanley Druckenmiller, and it is his notion of risk management that I set out to understand and replicate. As it turns out he did not have a corner on the idea, it goes back 100 years and in my lifetime cuts across all of the legends I am familiar with, that “the best risk management is not to take a risk at all.”

Traders like Jesse Livermore spoke about his first principle that big money is made by the sitting and the waiting, not the trading. Waiting until all the factors are in favor of his trading strategy before making the trade.

The modern-day hedge funds control risk by not taking a risk, but once everything is 100% correct based on their comprehensive system or trade plan checklist, they enter the markets and, in their words, “go for the jugular.” In other words, they leverage up and maximize profits.

It is easy to understand, once you cut through what the retail industry and the media publish every day, overlooking the above idea, ignoring or considering it trash. Our even seeing it regarding transactions or Vegas type of gambling, which is the opposite of taking no risk!

Everything the legends do is just the opposite of what the industry promotes, their idea of a trade plan. They only pay lip service to the great ones, when you think it through.  But once you take to heart what they say and what it means to implement you know it can’t be transactional or “you have to be in it to win it.”

The key rule of risk management is to avoid risk, do not take on a position until everything in your model is in your favor. A key rule of opportunity management is once you are in a position, you go for the gusto; you leverage up to maximize your profits.

To execute these two key rules, you need a strategy to get you in and out of the market profitably, the basic trade plan if you will. We have all seen strategies that work. There are many, hundreds of them that are sound.

Key number two is a governing model to tell you when to trade the strategy and when not to trade it.

Like I said above, “no one else talks about this method because no one else has my tools.” But I will rephrase because I assume others in the bastions of Wall Street and behind the boardroom walls on La Salle, that traders running hedge funds have a similar model.

Here is a Long Volatility Example

Regardless of how it is measured volatility reflects the difference between the market as we imagine it to be and the market that exists. It is that tension our model -TEM- seeks to measure its extremes and its outcomes.

If above average performance is achieved moving between short and long volatility exposure, we will only attain that edge if we relentlessly search for nothing but the truth. Otherwise, the truth will find us through volatility.
Here is an example of waiting for the 100% set up. The overarching matrix of engagement is our Technical Event Model (TEM).

One reason why a few will ignore this idea is they doubt they will ever find a method that gives them 100% certainly before they get into the market.  This doubt is imbued into all interested parties no matter what side of the desk they are sitting. It is in every sales and marketing piece that hits the airways. The 100% certainly makes the point but in the real world mark it down to 99% or whatever level gives you supreme confidence.

These numbers to the left will make sense relative to the above approach using TEM. The annual results are from a short only breakout scalping system that implements the Turtle money management method. It is easy to see that the strategy had two good years 2008 and 2018, both high volatility years and both preceded by signals provided by TEM that the year

would be a high volatility one.

However, if you assume you have to “be in it to win it” trading the system blindly, it’s a long time between drinks and a little bit of a bumpy road. In the 14-year history, there is a $53,000 drawdown. So, if one uses negative thinking and assumes poor timing, then the drawdown is a certainly. Given the drawdown, a capital manager would need $1,000,000 in funds to have the risk limited to 5% +/-.

Again, taking every trade, you would expect to pick up at least one year in ten of $200,000 or a 20% return on the account. Now, what if you have a Macro Filter like TEM that tells you when to engage this long volatility strategy?

Going into 2018, TMT’s January 18 MarketMap™  suggested the use of this exact system.  Here is how the year to date would have performed after $32.00 a trade cost to achieve the $243,528.00.  The strategy has the filter embedded in the code and you can see it keeps the systems from trading from June through August. 

The first thing a risk manager will see is the loss in May, on a million-dollar account, is a palpable 1.6%.

However, the successful fund manager needs more than one opportunity a decade, isolating one or two a year would be adequate.

ContraryThinker’s job is to provide opportunities for its professional’s advisors and managers. For all the liquid markets on either side of the trade.

ContraryThinker is always looking for the truth, nothing but the truth.
Contrary Thinking Starts Here

 

Great and Many Thanks,

Jack F. Cahn, CMT
A Thinking Man’s Trader Since 1989,
Copyright 1989-2018
Contrary Thinker 1775 E Palm Canyon Drive, Suite 110- box 176 Palm Springs, CA 92264 USA. 800-618-3820 or 25/1 Poinsettia Court Mooloolaba, QLD Australia 4557 614-2811-9889

— Contrary Thinker does not assume the risk of its clients trading futures and offers no warranties expressed or implied. The opinions expressed here are my own and grounded in sources I believe to be reliable but not guaranteed.
— Pricing is subject to change without notice. My indicators and strategies can be withdrawn for private use without notice, at any time.
— Contrary Thinker does not refund policy all sales are the finale.
–Trading futures and options involve the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options.

NO WARRANTY / NO REFUND. Contrary Thinker MAKES NO WARRANTIES, EXPRESS OR IMPLIED, On ITS PRODUCTS AND At this moment EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL CBI BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THE PERFORMANCE OR USE OF ANY PORTION OF ITS PRODUCTS.

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