Tharp's Thoughts Weekly Newsletter
: Market Type Suddenly Went to Strong Bear with Normal Volatility by Van K. Tharp, Ph.D.
: Early Registration Discount Ends Next Week For Forex!
: Our First Market Correction Since 2011—Why It Matters by D.R. Barton, Jr.
$700 Discount Expires Next Week, September 2nd!
FOREX and FOREX LIVE TRADING workshops
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A Trend Toward Forex
Over time, Van has seen that the majority of traders taking his courses tend to focus primarily on one market. In the 1980s, most of Van’s clients were commodity traders. Then there was a shift to equities—where most traders have focused for a long time.
Van has seen another shift underway for the last few years and this time traders are moving to currencies. In fact, most of the attendees at several recent workshops have been Forex traders—something Van has never seen before this year.
These people probably perceive the benefits from trading Forex caused in part by countries around the world trying to use their currencies to gain economic and strategic advantages; China’s central bank's recent move to devalue the Yuan is a perfect example. Actions like that promote trending prices which follow through for the longer term in currencies. The liquidity and 24 hour market make price gaps largely unheard of in Forex trading.
To help traders transition to Forex, we have developed an outstanding workshop in Forex trading. The trend oriented systems you will learn in this workshop are applicable on multiple time frames from intra day to moves that evolve over several months. You pick which time-frame works best for you.
Join us September 11-13, 2015 in Berlin, Germany for our next Forex Trading Systems Workshop and walk out the door with three individual forex trading systems! We typically hold workshops in Europe just once each year, and Berlin has proven to be a great central location for many of our European clients to attend. Register soon while you still qualify for the $700 early enrollment discount. After you have learned these systems in the first workshop, you may also consider staying for two additional days, September 14-15, to trade the systems LIVE with Gabriel.
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Market Type Suddenly Went to Strong Bear
with Normal Volatility
by Van K. Tharp, Ph.D.
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This is not my normal monthly update but we rarely change two market types within a five day period. On Wednesday, August 26th, we are in a Strong Bear Normal market type. The market shifted into this type at the close on Monday August 24th after a 3.94% drop in the S&P 500. Over the weekend, I mentioned on my Facebook page that the market type had moved to bear and that the market could either plunge or just deviate quickly and go back to sideways quiet. Monday made it look like the beginning of a plunge, yesterday was inconclusive, and we’ll see what we get today. Either way, the bears are now playing.
As of the close on Tuesday, August 25th, the S&P was down 9.64% over the last 100 days. We have had six straight down days and the change over the last six days was -11.17%. Normally when the S&P drops 10%, that’s considered bearish, but we did that and more in just five days.
Volatility has spiked up and it looks like my suggestion to buy the inverse S&P 500 ETF (SDS) or volatility (VXX) was a good one. Over the last five days, VXX went up 66%. That would have been good protection if your position size was big enough to offset your portfolio decline.
While I have no idea what will happen today or tomorrow (although I’d guess an up day is coming) or over the next few months (I guess the bear could continue), I think the strength of this move should give you a warning. Go to cash or at least hedge your portfolio.
Whatever you decide to do, think about the following story. Two woodsmen went into a trading post and saw a sign, "$20 bounty for dead bears.” These woodsmen knew a forest with lots of bears so they hatched a plan to get some. They went deep into that forest where they set up their tent and slept for the night. The next morning they woke up to a lot of growling sounds. One of the men looks outside and sees 100 ferocious upset grizzly bears. The other woodsman says, “What’s happening?” The first guy says, “We are going to be rich!”
Next week, I’ll follow up with the regular monthly market update newsletter.
Combo Discounts available for all back-to-back workshops!
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Our First Market Correction Since 2011—Why It Matters
by D. R. Barton, Jr.
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Throughout the fall of last year and this spring, my market analysis has supported taking a “business as usual” view that the grinding bull market we have had for a long time would continue. Then over the last few weeks, my last three articles have presented the case for being on guard—the “wheezing bull” could turn into a bear.
||On July 29th I showed you a breadth chart that gave us a look at how poor the participation levels have been as the NASDAQ hit new all times. I showed that same chart back in October 2007.
||On August 12th we took on the Chinese currency devaluation that was one of the biggest shots fired in the ongoing global currency wars. About China’s devaluations, I warned—
||“Reverberations could grow dire quite quickly. This has the potential to be the straw that breaks the proverbial global-economy’s back. If there was a trigger that could finally lead to a 10% correction (or more), this has all the hallmarks.”
||And last week, we looked at how quickly the catalysts for “tail risk” of outsized moves had changed over the last few months but concerns now were all about China.
The outsized move came, and it came very quickly.
Not Since World War II …
Many people are writing about the magnitude of the market’s current drop, however, I want to focus our attention on the stunning abruptness of the shift from slow grinding bull to bear. To do this, let’s use a statistical tool that tells us how far the market moves outside of a more “normal” range—the price move stated in terms of standard deviations away from the average.
Institutions and traders broadly watch the 50 day moving average because it represents a good intermediate-term market trend. The down move that we just had drastically pushed prices away from this benchmark. Take a look at this chart and note that the Bollinger Bands are set at four standard deviations width, not the default setting of two on many platforms. We’ll dissect the chart a bit more below:
Click Here to View Larger Image
Quite simply, the S&P closed lower more than 4 standard deviations away from the 50 day simple moving average for three consecutive days! That’s a pretty darned impressive stat! Read on to find out how impressive this kind of move has been.
Last week, I was on a CNBC’s Closing Bell segment with Paul Hickey, the co-founder of Bespoke.com. I have the greatest respect for Paul who is a great thinker and incredible researcher. After exchanging pleasantries on the show, I reached out to him via email—and found out that he’s also gracious one-on-one! Yesterday Paul’s group tweeted:
In the middle of May, 1940, uncertainty ruled the globe as the tide was swinging wildly in the Axis Powers’ favor during the early parts of World War II. I thought the price chart for the market move then might be interesting to see and I also wanted to know what kind of follow-up happened after that kind of drop. The chart below shows the 50 day moving average and Bollinger Bands with four standard deviations for the Dow Industrials index:
Click Here to View Larger Image
Are you wondering how long prices took to recover after the May 1940 drop? The market didn’t reach its pre-drop price again until June of 1944.
What We Can Learn
Because this kind of event has happened only once before in the last 75 years, a sample of two is not even remotely statistically significant. The 1940 move could inform us, however, that this drop may not be over yet. Regardless, the last week has brought us a structural change in the markets on several levels. For now, rallies are suspect and volatility will continue to be the rule of the day.
Please let me know your thoughts and opinions on the article. Send your comments to drbarton “at” vantharp.com—I always enjoy hearing from you!
About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured analyst on Fox Business’ Varney & Co. TV show (catch him most Thursdays between 12:30 and 12:45), on Bloomberg Radio Taking Stock and MarketWatch’s Money Life Show. He is also a frequent guest analyst on CNBC’s Closing Bell, WTOP News Radio in Washington, D.C., and has been a guest on China Central Television — America and Canada’s Business News Network. His articles have appeared on SmartMoney.com MarketWatch.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".
NEW! Swing Trading Systems E-Learning Course
We are excited to announce that our new Swing Trading Systems home study course is now available! Learn with Dr. Ken Long as he teaches his Swing Trading Systems Workshop via streaming video!
This new e-learning course includes Ken Long's Swing Trading Workshop, 5 swing trading systems and a bonus workshop featuring Van Tharp on Tharp Think principles. The course also includes extensive downloadable files to support your learning.
You can complete this course at your own pace, from the comfort of your own home or office, and access the materials as many times as you wish during your 1 year subscription period.
Take a look at this video from Ken to learn more about this course.
We have extensive information about the Swing Trading System e-learning course, including how to purchase...click the link below!
In the following 5 minute video, Ken highlights his swing trade of the week. Recognizing the broader trend in price, watching the regression line crossover, and getting a 5 days down failure signal generated a short entry in EWZ on July 22. Ken goes on to detail how the trade has been working out through this most recent Monday—August 24th.
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August 26, 2015 #748
Van's Top-Twelve Favorite Trading Books
Van's Favorite Non-Trading Books
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