Monday, September 26, 2011

When Bears Attack, Is It Coming? A Risk Grid I Watch

While today was a good day for the bulls there are several charts I keep on a Trade Grid that I use to help determine how I want to adjust my holdings.  I see this as my "Risk Grid".  When a majority of these charts are showing bearish I start to reduce my exposure through my trading account and my retirement account.  Below are the charts with a brief description along each explaining what it is showing me.  You will also see links with the referenced author to where I got these collaborated ideas from and encourage the reader to visit them for further in depth information.

Appetite for Growth
Nasdaq - SPX Ratio(screen capture around 2:45 EST)
I first learned about this ratio chart through @BigTrend.  This chart compares the Nasdaq Composite to the S&P 500.  I like like this chart as it shows if there is an appetite for growth among investors.  When looking at this from a long-term perspective you can see a lower high and lower low indicating a downtrend.  Also in recent days you can see the relative weakness of the Nasdaq vs. the S&P 500.

Consecutive Quarters Lower Study
SPX Quarterly Chart
(shows notes from chart I posted in Aug to, still represents 3rd Quarter)
This chart a study that was first brought to my attention by @SPYder_Crusher.  It shows that in a bull market there have never been 2 consecutive closes lower.  This is a current driver for me for reducing risk in that the end of September represents the end of the 3rd quarter and if we close lower than 1320.64, then this study shows that the bull market is over.

Going For the Safe-Haven
US Bonds - SPX Ratio

This is a chart and study read about that was explained by @gtotoy.  It compares the US Bonds to the S&P 500.  Bonds are considered the safe-haven so in times of uncertainty investors rush to bonds for the safety aspect and reduce their risk to the market.  This chart & study plots a Weekly ratio with a 65 period moving average.  Simply states if we're above the moving average bonds are favored and below stocks are favored.

Currencies & the Carry Trade
Weekly DBV chart w/highlighted Key Levels
Now I will be the first to admit that I have not studied the carry trade in depth and would advise traders to seek further advice to fully understand it.  Also this is a subject that could alone be an entire post.  But in a nutshell a trader would do a pairs trade selling the lower yielding currency and buying the higher yielding currency.

The first chart shows PowerShares DB G10 Currency Harvest Fund.  In watching @Stocktwits Brunch hosted by @stevenplace, he talks about this as being a risk on - risk off trade or a proxy for the carry trade.  In a previous edition he emphasized the key levels of 21.50-22.00 and 24.00-24.50.  Right now I use the levels as a reference to where traders are willing to allocate to risk assets (lower highlighted level) and where they become more risk adverse (upper highlighted level).  Also a drop below the lower highlighted level would be an unwinding of the carry trade and a flight to safety would ensue.

Daily chart of Australian Dollar to Japanese Yen
The next two charts show common examples of the carry trade to include the AUD/JPY and the NZD/USD.  Since the carry trade tends to trend I show the prices with the Heiken-Ashi Candlestick (a trend following candlestick).  In these charts I also plot a 42 period moving average.  Simple rules:

1. Bullish - Price > SMA, SMA moving up

Daily chart of New Zealand Dollar to United States Dollar
2. Bull-Neural - Price < SMA, SMA moving up

3. Bear-Neutral - Price > SMA, SMA moving down

4. Bearish - Price < SMA, SMA moving down

These are just some simple indicators that I follow that shows me when to reduce my risk.  I like the diversity here as it shows: appetite for growth, movement to safety, and world currencies and their appetite for risk.  I encourage readers to go to the references below for more information on these indicators that I use.

1.  @stevenplace ; ; explanation of DBV 13:10 min/sec into video 

*Disclaimer: While I provide links with some to services, they are for reference only and in no way are these intended to be advertising as I receive no compensation, discounts, or gratuities for listing them.

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