Wall Street Idiots Manifesto: The Wake Up Call

Warning: The post below is a bit out of character for me as I usually do my best to post neutral observations on the markets based on technical analysis. Now that I'm beginning to see our economy unravel at the hands of Wall Street's incompetence I felt compiled to state my case that losing the inept Wall Street brokers is a blessing in disguise, and hopefully this is a WAKEUP CALL for Americans to finally make the decision to manage their own money. It may mean picking up a book and studying rather then drinking a beer and playing video games, but how did it feel to watch your 401k just plummet to 2003 levels in 3 months?

With a simple moving average trading system, a computer, the internet and two dollar commissions there is simply no more need for brokers.

Brokers are a dinosaur.

You only need to check your position once a month. It would take about 2 minutes a month, 5 minutes a month if you needed to put on a trade. That's 33 minutes a year if you place and average of 3 trades a year.

Ask yourself this, "Did the money I had in the markets grow over the past 10 years?"

If the answer is no and you have a broker that is suppose to be a professional at making money in the markets you need to fire him/her today.

If the answer is yes you'll want to do a comparison to the chart we're going to look at below and then see if a simple system works better then your broker. If yes, why do you need a broker?

If the answer is no and you manage your own market positions you will also want to study the chart below carefully.

The CLEAR winner over the past 15 years is the disciplined trend trader who took signals on the monthly charts using entry and exit signals based on the 20 period moving average. This system does not require an MBA or degree in finance, it only requires 3 grade math skills and the ability to follow simple instructions -- that's it.

The unfortunate loser over the past 15 years has been "Wall Street" who proved their incompetence by their self inflected extinction, AND the American public who for years have listened to their rhetoric about "buy and hold" for the long run and their bull s*&t line about cost averaging when the markets are "down trending". I DO believe in cost averaging as long as the trend itself is UP trending. Unfortunately most Wall Street Brokers don't have clue about timing as self evident in their demise. There is always a time to be long the market and a time to be short.

It's likely your broker has no clue which is which. If they did you'd be making tons of money in this current bear market.

Seasoned investors like Warren Buffet have done very well with buy and hold strategies but those have been with carefully researched companies. Unfortunately for Joe Six-Pack his retirement 401k money is in Mutual Funds which for the most part are going to rise and fall with the S&P 500. Buy and Hold did not work over the past 10 years as clearly seen in this chart. If you have the patience to wait another 20 years it "may" turn around for you -- good luck.

Here's the problem.

Most mutual funds rise and fall with the broad market as measured by the S&P 500.

Trading "buy and hold" style makes the "Assumption" that the market will continually rise.
That is the fallacy that undermines everything. This ignores the fact that Bear markets exist and that we are very likely entering one now.

Wall Street collapsed because they made the same "Assumption" about housing values.
Their assumption put 100+ year old companies out of business, tens of thousands of out of work and our economy in a tail spin.

The Basic Rules of Investing:
1) Manage Risk
2) Trade Trends with a Proven System
3) Be Disciplined
4) Be Patient

Wall Street did none of the above because they failed at step one. Without step one you will fail. Part of managing risk is understanding the worst case scenario of your position. I won't even comment about Wall Street on the others because they imploded by the lack of discipline to follow rule number one. And these are the brilliant minds? I was really hoping that the smartest ones in the room were still in prison after Enron, but as I can see greed still has he ability to undermine the weak and soulless.

The Winner:
The winner is the man woman or child that decided that they could do better then any financial advisor, broker or CNBC guru by trading a simple, sensible long term wealth building system based on long term trends in the market. They also realize that they can pick investment products that are able to increase in value in a bull market and products that will increase in value in a bear market.

The winner decided that he/she would be in this system for the long haul and would follow the system with extreme discipline.

The entry long would be 2 consecutive monthly candles closing above the 20 period moving average and the exit from that long position would be 2 consecutive monthly candle closes below the 20 period moving average. Additionally when he/she got an exit signal they would enter a short position on the market to take advantage of the bear market. 2 consecutive closes above the 20 MA again would get them out of the short position and back into a long position. This process would continue for years as illustrated on the chart below of the S&P 500.

Investing is not gambling, if you're a gambler your better off letting your useless broker play with your money as he'll probably lose less then you would.

Growing wealth requires a proven system and the discipline to follow it.

The system below works as is clearly illustrated below.

Don't be fooled any more by the suits and skyscrapers, they have outlived their
usefulness.

Green circles are entries to go long, Red circles exit long and enter short.
The 20 Period Moving Average is the Purple Line.

S&P 500 15 Year / Monthly Chart (Each Price Candle is One Month)

Volatility: Where did we end up today?

Yesterday the VIX and RVX both formed topping tails on the daily charts. We wanted to see how today's candle's closed to see if the topping tails were confirmed.

Today's candle on the RVX did clear and close below yesterday's candle which so far is confirming yesterday's topping tail. (Mildly short-term bullish)

The VIX was not so lucky, and today's bar closed above yesterday's "body," but not above the entire candle. (Neutral)

Both charts remain above the 8 period moving average, so the uptrend is still intact for both of these indices suggesting that high levels of fear are still in the market.

RVX Daily Chart:




VIX Daily Chart:

VIX: All Time High Today

The VIX hit an intraday high today of 81.17, which is nearly DOUBLE the 40 to 50 spike levels over the past 20 years. That includes the dot.com bust and 9/11.

Lets hope that this was history today and that the 81.17 stays in the record books for the next 20 years.

Below is a monthly chart to let you see visually what an anomaly these levels are.

The big question moving forward is what kind of range we end up with for the next few months. Now a VIX of 40 looks like a walk in the park. Even in the dot.com bust the volatility was contained after a few months and levels then hung out in the 25 to 35 range for a while.

One thing that I learned from this entire volatility event was that VIX levels DO have a basement of about 10 since there will ALWAYS be some fear in the markets, but there is NO ceiling on VIX levels despite the low probabilities of going there.

The one thing we do see on the charts is that the spikes have always gave way to lower VIX levels over time, so now it's just a waiting game.

VIX 20 Year Monthly Chart:

RVX: New Historical High...Again

The RVX hit and exceeded our 84 target and hit an intraday high of 87.14. The RVX formed a topping tail on the daily chart and closed at 75.68 (within a point of yesterday's close).

The topping tail at the 423.6% fib level is a sign that the move up at least paused today. We'll be looking for a close below today's candle to hint at the start of a pull back.

Historically the RVX and VIX "spike" at highs, form market bottoms and then rally until met with new levels of resistance. These last few weeks were very tricky as there was no historical precedence to think there were probabilities that we could reach an RVX level twice as high as a normal spike of 35 or 40.

We'll continue to watch the RVX and VIX levels to see if they'll start there decent back down to a lower range or if the economic crisis keeps us at these inflated volatility levels.

At some point the market will calm down again, but we are best to refrain from predicting when that calming event will occur. Keep your eyes on the RVX and VIX for some insight on the volatility.

RVX Daily Chart:

RVX: New Historical High

The RVX closed at another all time high of 75.74 today and we had to bring out the Fibs in order to give us a projection of the next level up. The 423.6% fib at 84 seems to be the next target, but at this point I won't rule out a RVX 90 either. We are at unprecedented levels and the technicals with the all time high close today are not showing any signs of retreating yet.

The relief bounce Monday so far was just that, a temporary bounce before a retest of the lows and possibly another leg lower.

Now that this crisis is global it's adding some additional fuel to the fear fire.

Lets see how long it takes for the RVX to break below 60...

RVX Daily Chart:

RUT Monthly: The Warning Signs Were There

Pulling out to a Monthly Chart on the RUT, lets see if there was anything we can learn from the evidence the charts had been giving for the last 12 months.

First, lets agree that we all know and love the 20MA on any time frame because this is our bread and butter moving average to define our current trend. If price is trading above the 20MA we're happy to trade long. Better yet, we love to see pull backs to the 20MA as it gives is low risk entries to the upside.

Note that on the monthly the price stayed above the 20MA from May 03 to Oct 07 (that's 53 months).

When the price closes below the 20MA for 2 consecutive periods it is "significant" and should send WARNINGS up all over the place, especially after 53 straight periods staying above the 20MA.

The next significant sign we saw was the 8MA crossing over the 20MA to the downside. This signaled that the end to the 53 month uptrend.

The 20MA then flattened out and became a "ceiling magnet" for the price to test and retest in August and September. When the price was rejected in September the price had no where to go but down.

The 200MA is generally a magnet, and even on this monthly chart we can see that it worked as a magnet yet again pulling the RUT all the way down to within 2 points of the 200MA (RUT low 467.92, 200MA 465.90)

If you were to put the 8, 20 and 200 MAs on an intraday chart and back-test it, you'll see what I mean about the 200MA being a magnet. A flat 200MA will also act as strong support and resistance. So far this month it has been strong support.

In summary, it is important for us to always use multiple time frame charts so we understand the bigger picture. It is also important have criteria for determining our trend bias. In this case we've used the moving averages to help us define our trend.

In using the moving averages, we agree that we are bullish if the 20MA is uptrending and the price action is staying above the 20MA. Additionally we use pullbacks to the 20MA as low risk entries to trade with the 20MA trend.

If there is a 8/20 crossover we agree that the past trend has been negated.

We always want to know where our 200MA is as we understand that it can act as a magnet if the price is heading toward it.

So what did I learn from all of this?

Once the 20MA breaks and a 8/20 crossover occurs, I want to locate the 200MA and understand that, as unlikely as it may be, it is the target.

RUT Monthly Chart:

RUT Levels

The markets experienced a relief bounce on Friday and Monday and today we saw the expected pull back. On the daily chart the price closed today just above the 50% mark of yesterday's candle, so despite the ugly intraday action the bulls still hung on via the daily charts. A close 55% below the top of yesterday's candle would of had much more of a bearish tone.

Notice that this mornings open pushed up to the 38% fib but then quickly slipped back down. On just about any move whether it's drastic or not, the probabilities of a 38% retracement are EXTREMELY high. Now we just have to see if the market is ready to march toward the higher Fib and MA targets above:

- 50% fib - 616
- 20 MA - 640
- 61.8 fib - 650
- 200 MA - 704

650 is the high target for now as it should act as both a magnet with the 20MA in that area and a brick wall with the 61.8% fib and multiple areas of old support (old support turns into new resistance).

The RVX (Russell 2000 Volatility Index) closed again at near record highs of 65.59 so the intraday mega-swings will likely continue for the rest of the week. Until we get some relatively "normal" levels below 35 it's going to be more suitable for intraday trade rather then swing trading.

RUT Daily Chart:

Software Sector Index: Head & Shoulders

Head and Shoulders patterns abound everywhere and many are closing in on their targets. Below is the Software Sector pattern we talked about several months ago on our conference call. The neckline did break and the pattern is working out nicely.

We also pointed out that there was no short term support below 560, so when the price cracked that level there was nothing to hold it up.

Dow Jones Software Sector Index Weekly Chart:

RUT: Long Term Head & Shoulders

The RUT has made unprecedented moves in the last few weeks, but when we pull out to some longer term charts we can see that there were some patterns forming to alert us to these drops.

On the 10 Year Monthly Chart, we can see that a Head and Shoulders Pattern has been forming for the last 3 years. Once we had a neckline we are able to project a price target should the price break below the neckline. Our target based on this chart was at 525. Since this pattern took almost 3 years to form, under normal circumstances we might expect it to take that long to hit the price target... 2 to 3 years. Obviously these are not normal times and we have hit and exceeded the target in 7 trading days.

The RVX has hit new ALL TIME Highs and closed at 65.52. The VIX closed also closed at an ALL TIME High of 63.92.

The trend is down, and despite the record high volatility indices there is still no evidence of a bottom. History shows that high volatility levels eventually give way to lower ones and those rallies start to develop, but this is no time to be a hero. Best to trade what the market is showing and to be nibble as can be if trading in this environment. It's also 100% okay to be sitting on the sidelines in CASH right now!

The one thing to keep in mind is that volatility at these levels works both ways, and there are likely to be some very large and fast intraday rallies to catch the shorts off guard. On the daily charts you can also see that historically there can be sustained rallies after moves to go "straight down" like this one.

RUT 10 Year Monthly Chart: Head & Shoulders Pattern Completed

Internet Sector H&S Revisted

A week or so ago I posted the Internet Sector Index Weekly chart showing that the neckline of the Head and Shoulders pattern had been breached and that the target might take several months to reach.

This morning it was actually half way there! Keep an eye out for these patterns as I have yet to see a Head and Shoulders or Reversal Head and Shoulders work lately. They are very strong patterns with high probability of reaching targets.

Internet Sector Index Weekly Chart:

Boy Was I Wrong!

The RVX hit new ALL TIME highs again this morning and the bottom is still no where in sight.

It will bounce someday, but we don't know with this global financial turmoil if it will be days, weeks or months.

Trade safe, be prepared for anything. Plan your trades and trade your plan.

$RVX Daily Chart:



RUT Daily Chart:

RVX: Why the RUT is likely Bottoming

The RVX (The Russell 2000's version of the "VIX") closed at it's all time high today at 49.40 after hitting an intraday high of 50.11.

This extremely high level of "fear" as measured by this index is showing us that we are close to a reversal as high RVX and VIX levels are historically unsustainable.

We are certainly in a bear market, but even in a bear market there are sporadic rallies to create lower highs. We are likely getting close to a short term bottom.

Below is a chart of the RVX showing that it has technically reached the target predicted by the Reverse Head and Shoulders pattern on the daily chart.

RVX Daily Chart:

Internet Sector Index (H & S - broken neckline)

We've been talking about a few Head and Shoulders patterns showing up on some of the sector indices and this week the Internet Sector broke the neckline. The target is just over 200 on the index and since it took about 17 months to form the pattern it may take that long to hit the target, but given the volatility of this market it could hit it lot sooner.

Internet Sector Index Weekly Chart: