Primary Trend: DOWN
Intermediate Term: ~ Seven Sentinels Downtrend, 8-02-19, SPX 2933
LOLR Trend: ~ Downtrend – 10 AM, 7-30-19 SPX 3011
2018 Tracking +58% versus SPX -6% Outperformed SPX By +64%
Trades:
Trading Position: 20% SPXU, 23% SQQQ, 7% TVIX 50% cash
Stops: SPXU 24.88, SQQQ 30.38, TVIX 16.78
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ALL TIMES EASTERN
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Friday 4:00 CLOSE:
SS LOLR STS
Down Down Up
0/7 6/1 5/2
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In the humble opinion of your author, of all the hurculean traders that have ever lived, one stands head and shoulders above the rest – for reasons we’ve discussed many times. In my studies of Jesse Livermore, one TRUTH stood out beyond every other gem of wisdom, he imparted through his many writings and interviews:
“There is only one side of the market, and it is not the bull side or the bear side, but the right side.”
Refining that a bit, he also said:
“Do not use the words “Bullish” or “Bearish.” These words fix a firm market-direction in mind for an extended period. Instead, use “Upward Trend” and “Downward Trend” when asked the direction you think the market is headed. Say: “The line of least resistance is either upward or downward at this time.” Remember, don’t fight the tape!”
And he said of this TRUTH:
“It is literally true that millions came easier to a trader after he knows how to trade then hundreds came in the days of his ignorance.”
And he knew, of course, of which he spoke and wrote, as he amassed over 1.2 Billion in 2019 US Dollars ($100,000,000 in his 1932 dollars) by aligning with the Line of Least Resistance through the entire 1929-1932 Primary Bear Market.
I mulled over these gems of trading wisdom for decades. Then in the early 2000s, after returning to stock trading again after a departure into the mortgage business through the ’90s and into the 2000s, it occurred to me that there must certainly be a way to quantify that “Line of Least Resistance.”
That’s when and why I developed the Seven Sentinels. I had for decades understood and benefited tremendously from the guiding principle in markets that External follows Internal just as night follows day. This recent article entitled “The Most Powerful Trading Concept On Earth. Period.” explains that concept in some detail.
“Price Follows Breadth.”
Of how one measures Breadth or NYSE Advance-Declines, no method has rivaled the utility of the McClellan Oscillator. Below are two examples of how the McClellan Oscillator as our proxy for “Breadth” LEADS the S&P 500 Stock Index, our proxy for “Price.”
First, though, let’s dispel the immensely misguided “crowd” concept that the McClellan Oscillator identifies “oversold” areas so that the trader can “buy at the right time.” Also believed was the mirror image, that McClellan provides “overbought” regions so that the trader can sell (or much worse, sell short) “at the right time.” Though these concepts are widely accepted, they are pure nonsense – and very dangerous.
We’ll show examples. We could pick any period in the last 100 years, and the result will be the same. We chose a couple of cases in the very active 2008 and 2009 market era.
This first example shows that when breadth surges to the downside, this is LEADING a prolonged decline in the market:
First, consider the myth of September 17, 2008, being a “great time to buy” because of the “oversold” McClellan Oscillator at -80. Now consider the TRUTH, that this was a great time to stay or get short because the breadth was leading SPX LOWER. Price FOLLOWS Breadth. SPX FOLLOWS the McClellan Oscillator, and SPX dropped over 25% in just the 28 sessions from September 17 to October 27, 2008.
This second example shows that when breadth surges to the upside, this is LEADING a prolonged advance in the market just a few months later:
Next, consider the myth of March 18, 2009, being a “great time to sell or sell-short” because the McClellan Oscillator was “overbought” at +102. Now consider the TRUTH, that this was a great time to stay or get LONG because the breadth was leading SPX HIGHER. Price FOLLOWS Breadth. SPX FOLLOWS the McClellan Oscillator, and SPX rose over 15% in just the 36 sessions from March 18 to May 8, 2009.
External follows Internal. Price is produced from breadth. SPX develops from the McClellan Oscillator. This TRUTH is the most potent trading concept on Earth. Period.
Now take a close up look at the two images above. Do you see the 13 and 34-day moving averages of the McClellan Oscillator? Do you see that the in the first image, the 13-day moving average of the McClellan Oscillator crossed below the 34-day moving average of that McClellan Oscillator back on September 9, 2009? You just witnessed above what became the first of the Seven Sentinels individual elements entering a downtrend.
Do you see the 13 and 34-day moving averages of the McClellan Oscillator on the second image? Do you see that in that second image, the 13-day moving average of the McClellan Oscillator crossed ABOVE the 34-day moving average of that McClellan Oscillator back on March 12, 2009? You just witnessed above what became the first of the Seven Sentinels individual elements entering an uptrend.
Again, this is the application of the most powerful trading concept in the world. Full stop.
In the first example above, a sober trader would short the market on September 9, 2008, and (s)he would later BUY the market on March 12, 2009. Here is why:
Price follows breadth. SPX develops from the McClellan Oscillator. When the short-term (13-day moving average) trend crossed below the longer-term MA, then the McClellan is falling. SPX will follow — LOWER. The trader needs to align with the market by getting SHORT.
When the short-term (13-day moving average) trend crossed above the longer-term MA, then the McClellan is rising. SPX will follow — Higher. The trader needs to align with the market by getting LONG.
Our goal for this series is to divide this relatively complex information out in “bite-size morsels” so that readers can digest complex concepts relatively easily. Accordingly, we’ll stop here for today- and move on to Sentinels Two (The McClellan NASDAQ Index and the McClellan NASDAQ Summation Index) on Monday Night.
But we will provide one “spoiler” today: The above Sentinel is just Sentinel #1. A Signal only occurs when ALL SEVEN produce a sell or a buy signal at the same time.
Further, we only looked at the daily Sentinel#1 today. We will have a lot of explanation yet to come in this series about which Sentinels specifically drive our trades as well as, separately, our level of commitment at any given time.
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Below is a look at the path of SPX over the last six months. From the above explanation, one can see on this chart where Sentinel #1 produced it’s last two BUY Signals, and it’s last two SELL Signals and that the trend is currently down for Sentinel #1, as External SPX) follows Internal (McClellan Oscillator).
But those were not the dates for all Seven Sentinels in unison- which together produced the Signals. We’ll review those after this series takes us through all Seven. Then we’ll discuss the five sets of Sentinels and how two of those sets combine to drive our positioning and sizing.
To jump ahead and summarize, though, the Monthly, Weekly, Daily, and the Two-Hour (LOLR) Sentinels are all in downtrends. The short-term-sentinels (ten-minute) are still in an uptrend, but a quick review of Friday’s close shows that they were moving quickly towards their SELL Signal. When that SELL completes, we’ll move back up to about 100% short from the current 50% short level.
White House Economic advisor Larry Kudlow went on five networks to jawbone markets higher. We’ll soon see what effect that had. Kudlow’s efforts will likely succeed in producing a higher opening tonight, but we’d look for the “Kudlow Effect” to be short-lived over the next day or two.
We will update our Seven Sentinels, LOLR, and STS tomorrow every time a significant or actionable change occurs in real-time. We’ll publish signals as they materialize and tracking trades, including time and price, as they arise- and advise members on Twitter as these occur in real-time.
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