Some Random Thoughts: Is The Fat Lady Singing?

Discovering Technical Analysis

Way back when the Earth was still cooling, I became interested in trading. I scoffed at the idea that people would use charts, and only charts, to trade. A company’s valuation has to mean something! I’d spend hours in the library (this was before the Internet, I’m from the 1900s) poring over financial statements, trying to figure out a company’s valuation.

I’d later find a methodology that required both fundamentals AND technicals. I soon discovered that many stocks looked great on the charts but had poor fundamentals, so I had to toss them out. I’d then watch in dismay as they continued higher, often much higher. I quickly learned that some of the biggest winners, those making 2x, 3x, or more moves, had some of the worst fundamentals. At this point, it hit me: “What is, is.” Is the stock going up? Down?, or, Sideways?

Since I had a degree in Computer Science, I figured I might as well use it. I fired up my computer and began to dive into the technicals, and only the technicals.

My hours were now spent programming and testing trading systems. I bought every trading book I could afford. My local library time was now reduced to requesting many arcane trading books that I couldn’t find or were too expensive. Thanks to me, the library near my house probably had the largest number of trading books of any in Louisiana. 

I tested everything and began creating on my own. I was on a Grail hunt. 

One system that I published caught the eye of a gentleman who wished to start a hedge fund. I became friendly with another gentleman who was a commodity trading advisor (CTA). Both connected me with traders seeking programming and research. 

One trader, who wasn’t computer-savvy, hired me to program and run scans. Back then, computers were slow, really slow. What takes a millisecond today took nearly an hour to complete. Rather than twiddling my thumbs, I made a copy of the database and began looking at thousands of charts. This action gave me a feel for the market, sectors, and setups. I made it a game to see if I could complete my analysis before the computer finished scanning. The scans became more of a “backstop.” 

The great thing about the traders I worked with was that they used indicators sparingly (at most, just moving averages). They took a “charts first” approach. I began slowly peeling away indicators and focusing on price first and foremost. 

Practice Deliberate Practice

Whenever I speak in person, I usually ask the audience if anyone is a musician. Inevitably, someone raises their hand. I then ask them, “How did you get good?” They look at me like I pooed my paints and slowly say “practice???” (while giving me a dumbass implied look). Well, charts are no different. You get good at reading charts by looking at a lot of them. By rough estimates, I’ve looked at over 10 million charts over the years. I’ve worn out dozens of keyboards (I now use foot pedals due to repetitive-use injuries, and I’ve worn out quite a few of those, too!).

When you look at charts, don’t just look at them. Like any great musician, you must practice deliberate practice. Don’t just go through the motions. You must seek to get better and better. Look at large moves and ask yourself: “Are any recurring patterns?” Is there anything that would have clued you in before the stock took off? Concepts such as persistency, acceleration, trends, and a stock’s general ability to trade “cleanly” will begin to emerge. Bigger-picture patterns, such as double tops/bottoms, cup-and-handles, head-and-shoulder tops/bottoms, and others, will become obvious.

  
Anyway, the point wasn’t to bore you (too late?) with my “come to Jesus” on charts. My point was to lay the groundwork for how I learned to accept “what is.” Greg Morris said it best: 

“Remember: All of the financial theories and all of the fundamentals will never be any better than what the trend of the market will allow.”

A comic book or a classic car is worth whatever someone is willing to pay you for it. Stocks are no different. It all boils down to supply and demand. 

So, What Are The Charts Saying?

I’m always amazed at how the simplest indicator of all, the net-net price change, can be one of the most powerful. If you didn’t know anything about technical analysis, simply ask yourself: “Is the price higher, lower, or about the same as it was?” With that said:

The S&P 500 hasn’t made any forward progress in nearly two months. Ditto for the Nasdaq and technology in general (XLK).

MAGS has lost 15% of its value since its May peak.

Belwheter Apple (AAPL) recently imploded out of a “Micro First Thrust.”

See this recent Trading Service: https://youtu.be/P-sViGQTn7c

BTC/USD remains in a serious downtrend. Although there’s no positive correlation to stocks, this action suggests that the risk appetite is waning. Recently creating complex derivative products that’ll “work until they don’t” (STRC) is another sign of the times here.

Software, which recently took off, has come all the way back in.

Oil Service and Energies overall have topped out.

Telecom remains in a downtrend.

The 13 major S&P groups have become a mixed bag.

Other Signs

Taking the biggest IPO in history public and bending a lot of rules in the process is a classic “feed the ducks while they’re quacking” (Raschke) type of move. I’ll leave it to others to pontificate on the “money grab” aspects of this. No judgment! Kudos to them! I, too, seek to make the most amount of money off of the “greater fools” (and, unfortunately, occasionally get left holding the bag as THE greater fool).

I know, I’m starting to confuse the issue with facts. So, let’s look at the chart. It has retraced 100% of its post IPO rally. The bloom is off the rose. What I’m wondering is what’s going to happen to the “lucky” investors who got the stock pre-IPO when it drops below the pre-offer price ($135).  

Man On The Street

I’m a man on the street kind of guy. No, you can’t time the markets on this, but it can serve as a microcosm of what’s really out there.

As mentioned recently, my 87-year-old gym buddy started day trading. He was also excited to tell me that he put in for SpaceX shares pre-IPO.

Another gym buddy (71) is lately proud to tell me that whatever he withdraws from his retirement account, by the next statement, his balance "never goes down." He thinks his financial planner, who dumps his money into an index fund (likely one with high fees!), is a genius.

So, Is The Fat Lady Singing?

Well, sometimes you get a little caught up in the weeds and need to take a 30,000-foot view.

The good news is that the TFM 10% System is still in the “don’t worry, be happy” zone (within 5% of the 50-week closing higher). So, based solely on this metric, the market is still okay.

New leaders have begun to emerge. Examples include Biotech, Banks/Other Financials, Transports, Healthcare, and Major Drugs. Some old leaders, such as the Semis, have lost momentum but are “not dead yet.”

So,  there’s a lot of rotation in the works. Will that be enough to keep the bull market afloat?

In the meantime, we follow along. Some of these new areas might not be as exciting as prior leaders like AI and Quantum computing, but what is, is.

The fat lady might not be singing, but she’s squeezing into her fancy dress.

May the trend be with you!

Dave Landry

How To Master Trading (and pretty much anything else)

Here's an article I wrote on the aforementioned deliberate practice.

To become a master, you have to practice deliberate practice. You have to work to get better. Let’s break it down and then apply this to the trading process—before, during, and after the trade.

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