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Tharp's Thoughts Weekly Newsletter (View On-Line)

February 10, 2010 - Issue #461



New Zealand Workshop Discounts Expire Today


Australian Market Update by Van K. Tharp Ph.D.

Trading Education

How to Develop Peak Performance Trading Results

Trading Tip

PIIGS in a Poke: Why Traders Should Care About European Debt Trouble by D.R. Barton, Jr.

Mail Bag

Value of Trading to Society, A Follow up by Tom Basso


What Type Trader Are You? Take 3 Minutes to Find Out


Ask Van Your Questions



$700 Discounts Expire Today, February 10th.

Van Tharp Workshops Are Coming to Auckland, New Zealand

In February, Van Tharp will bring three extraordinary workshops to New Zealand.

Attend all three and save an additional $150 each.  

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The Australian Markets: An Update


Van K. Tharp, Ph.D.


I’m about to go to New Zealand to do a series of technical workshops.  Most of the attendees will be Australian, so I thought it was time to update myself (and you) on what the Australian Markets are doing.  The U.S. Markets look like they are about to collapse, some of the Emerging Markets have already started that collapse, so let’s see what’s going on in Australia.

First, here is a diagram of the relative strength of the world’s markets from our normal update.

The countries of the world are all in the top half of the table.  You’ll notice that there is no green, which means there are no strong countries.  There is a sprinkling of yellow with scores in the 50s, but nothing impressive.  And a lot of countries are brown and red, which is very weak.  The Australian ETF, EWA, has a score of 39 and is close to very weak territory.

Now let’s look at the market type in Australia for 2010.  We’ll show the 200 day, 100 day, 50 day, and the 25 day SQNs™ for Australia.  Again, the picture is not encouraging for anyone wanting to invest.

Date Daily Close Daily Change % 200 Day  100 Day  50 day  25 day  20 Day ATR ATR% of Close Volatility
2/9/2010 4,520.70 -0.4 Bull Neutral Bear Strong Bear 63.94 1.41 Volatile
2/8/2010 4,538.80 0.14 Bull Neutral Bear Strong Bear 63.25 1.39 Volatile
2/5/2010 4,532.50 -2.4 Bull Neutral Bear Strong Bear 63.19 1.39 Volatile
2/4/2010 4,644.10 -0.62 Bull Neutral Neutral Bear 58.09 1.25 Normal
2/3/2010 4,673.20 0.96 Strong Bull Neutral Neutral Bear 56.58 1.21 Normal
2/2/2010 4,628.80 1.85 Strong Bull Neutral Bear Bear 56.64 1.22 Normal
2/1/2010 4,544.80 -1.13 Bull Neutral Bear Bear 53.68 1.18 Normal
1/29/2010 4,596.90 -2.15 Bull Bull Bear Neutral 52.33 1.14 Normal
1/28/2010 4,697.70 0.59 Strong Bull Bull Neutral Neutral 48.67 1.04 Normal
1/27/2010 4,670.00 -1.54 Strong Bull Bull Neutral Neutral 50.35 1.08 Normal
1/25/2010 4,743.10 -0.6 Strong Bull Bull Neutral Bull 48.32 1.02 Normal
1/22/2010 4,771.90 -1.6 Strong Bull Bull Neutral Bull 47 0.98 Normal
1/21/2010 4,849.60 -0.93 Strong Bull Bull Bull Bull 44.8 0.92 Normal
1/20/2010 4,895.10 0.11 Strong Bull Bull Bull Strong Bull 44.86 0.92 Normal
1/19/2010 4,889.60 -0.94 Strong Bull Bull Bull Strong Bull 45.72 0.93 Normal
1/18/2010 4,936.10 0.13 Strong Bull Bull Bull Strong Bull 45.09 0.91 Normal
1/15/2010 4,929.50 0 Strong Bull Bull Bull Strong Bull 44.3 0.9 Normal
1/14/2010 4,929.40 0.6 Strong Bull Bull Bull Strong Bull 43.74 0.89 Normal
1/13/2010 4,900.10 -0.64 Strong Bull Bull Bull Bull 43.33 0.88 Normal
1/12/2010 4,931.60 -1 Strong Bull Bull Bull Bull 42.86 0.87 Normal
1/11/2010 4,981.20 0.79 Strong Bull Bull Bull Bull 42.68 0.86 Normal
1/8/2010 4,942.20 0.24 Strong Bull Bull Bull Bull 44.2 0.89 Normal
1/7/2010 4,930.50 -0.33 Strong Bull Bull Neutral Bull 44.49 0.9 Normal
1/6/2010 4,946.80 0.15 Strong Bull Bull Neutral Strong Bull 46.22 0.93 Normal
1/5/2010 4,939.50 1.02 Strong Bull Bull Bull Bull 49.37 1 Normal
1/4/2010 4,889.80 0.15 Strong Bull Bull Neutral Bull 48.14 0.98 Normal
12/31/2009 4,882.70 0.74 Strong Bull Bull Neutral Bull 50.55 1.04 Normal

The long term picture (200 days) has moved from strong bull to bull.  The long term picture is usually too long to be valuable for short/intermediate term trading, but I wanted to point out that it has changed.

The medium term picture (100 days) has moved from bull to neutral.  It’s been neutral for 7 daysenough to signal a clear trend change from bullish.

The short term picture (50 days) has moved from bull to bear in the space of 13 days—a very ominous sign.  And it’s been bearish for six of the last eight days.

Our shortest term picture (25 days) has moved from strong bull to strong bear (the maximum possible move) in a period of 14 days.  Clearly, this is not a positive sign for the Australian markets.

Volatility has also started to move up, going from normal to volatile in the last three days.  Bear markets tend to be volatile and this could just be the start.

This market type exercise is not a trading signal in itself.  Instead, it tells us that the market environment is changing.  That means that trading systems that have been working in the recent bull/normal conditions may stop working well now.  It looks like systems appropriate for trading bear markets are now in order.

In simple terms, any kind of buy and hold system is totally inappropriate for this market.  You’ll probably lose your shirt.  But for people who know how to trade bear markets, this is a great opportunity.

Here’s what will likely work in this emerging environment: short term systems that like volatility and short systems that work in volatile conditions.  We’ll be teaching those kind of systems at the upcoming Bear Market Workshop in Auckland on Feb 27 through March 1st.  My son, Robert Tharp, will teach that workshop (and I’ll be there, too).  He’ll teach five different systems that work well in bear markets.

The first one is a system that kicks in only at bear market bottoms.  That might be a long way away, but you’ll tend to know because at bear market bottoms you’ll find good trades.  Even before the market hit bottom last March, Robert found 8 trades with this system.  As of mid-December, the average return of those trades was 45R.

The second system has been sold as a black box strategy for as much as $7,000USD.  However, Robert improved it so it works really well.  It’s a day trading system that could produce as much as 10R per week for you.  You will learn the rules too so you won’t have to trade it as a black box.

Robert calls the third system Rocks and Rockets—meaning those stocks that are falling big time and taking off big time.  You’ll find some of each on most days.  Robert shows you how to really capitalize on those signals.  Again, you could produce 10R per week with this system in a falling market.

Robert has a fourth system that’s more for long term shorting, in case your temperament isn’t suited to short term trading.  It shows you how to spot good shorting candidates and when to get out.

And finally, Robert will teach a swing band trading system that looks for stocks with declining volatility and then trades any subsequent volatility breakout.  With the recent market activity, this system has had lots of setups lately.

For those of you in Australia, New Zealand, or Asia, we’d encourage you to attend the Bear Market workshop.  For those unable to visit Auckland we’ll present the Bear Market  workshop again in May at our North Carolina office.  We’re starting another bear market, so the conditions are right and the US dollar is relatively weak compared to your currency. 

I’ll be seeing some of you in Auckland soon. 

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his outstanding Peak Performance Home Study program— a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com. 

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Trading Tip

PIIGS in a Poke: Why Traders Should Care About European Debt Trouble

D.R. Barton, Jr.

It’s fitting that our title phrase (an acronym takeoff on “pigs in a poke”) had its origins in Europe because we will focus on Europe today.

In the Middle Ages supposedly, meat was scarce but cats were not, which played into one common marketplace scam. At the market, vendors would offer for sale a suckling piglet squirming in a bag. After getting the bag back to the cottage, the poor peasant would discover that rather than containing a piglet to raise and feed the family, the bag actually contained a valueless cat. 

The ruse was so prevalent or at least so infamous that several other phrases besides “buying a pig in a poke” (to make a purchase without proper inspection) arose from the practice. “Let the cat out of the bag” (reveal the secret), and “left holding the bag” (receiving nothing for your efforts or stuck with the final responsibility) point to the pervasive nature of this con game.

In modern day Europe, some countries are playing out a different kind of “pig in a poke” game. In the modern case, the PIIGS are Portugal, Italy, Ireland, Greece and Spain. All of these sovereign countries run the risk of a government default on their national debt. (More on that PIIGS acronym later.)

Many are blaming the European Union for accepting these countries prematurely, their own macro version of accepting a pig a poke. With 20/20 hindsight, that may indeed seem to be the case, but it’s hardly helpful now. More important is that the EU allowed these countries into the union on promises that they would shore-up their financial woes instead of waiting until they were financially sound.

Greece is the poster child for this problem and hence the first to face serious risk of default. Their profligate spending, especially as it relates to labor unions and publicly paid positions has left the country with a debt burden from which it has little chance of recovering through normal economic growth. At this point, no one wants to lend Greece more money to feed that insatiable deficit spend/borrow cycle. The problem has grown to the point where lenders are demanding a 4%+ margin of interest versus the much safer German bund. 

The Wall Street Journal has a very informative visual depiction of the debt problem and how the perception of the ability (or inability) to repay has grown in the PIIGS countries.

Since this graphic comes out pretty small in the newsletter, allow me to provide a brief summary: the red represents Government debt as a percentage of Gross Domestic Product. The blue represents the credit default swap spreads, indicating the premium that institutions are requiring now to insure sovereign debt.

So What Does This Mean for Traders and Investors?

Every so often, something will embed itself so deeply into the markets' psyche that every little flinch causes the market to react. This was the case with crude oil in the spring and summer of 2008. Every little speck of news relating to oil made the oil price jump. The same is happening now with the PIIGS debt crisis. The mere fact that Germany is considering a plan to offer Greece loan guarantees caused Tuesday’s markets to spike upward (the Dow rose 150 points).

Until this crisis is resolved, news speculation and rumors will have a big effect on the currency, bond and equity markets. So it’s critical to understand that no matter what your technical indicators say, if Germany balks or otherwise equivocates on guaranteeing Greek debt, markets are going to dive. Conversely, positive news will cause a pop. This is certainly going to keep volatility and uncertainty high.

Some are opining that France and Germany are going to let Greece default. Those two countries, however, are the number one and two top foreign holders of Greek debt with $75 and $43 billion respectively, so this seems unlikely. 

Because the European Central Bank is not permitted to provide direct assistance, such aid will have to come from individual countries (acting in concert with the EU), or perhaps, though less likely, from the International Monetary Fund itself. All of these moving parts makes the Greek debt relief situation a very complicated undertaking, which in turn leads to much “will they/won’t they” speculations and rumors. Are you ready for the volatility? 

In short, these conditions make for a traders’ market as opposed to a trending market. Expect snap back rallies and quick dives to be equally likely. Consider which of your systems thrive in these kinds of conditions and which tend to be hurt by them. Taking profits quickly and protecting against overnight and weekend gap risks would be a prudent course of action until there are more concrete commitments out of Europe. 

And now back to that PIIGS acronym. In an instance of political correctness run amuck, Barclays Capital and the Financial Times, among others, have been forbidden to use the acronym! The use of the porcine reference has been called pejorative and hence the PC police have stepped in at those organizations to prevent possible offense. Orwell’s 1984, here we come…

Great Trading,
D. R.

About D.R. Barton, Jr.:  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 guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  “drbarton” at “iitm.com”.  

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Value of Trading to Society

A Follow up by Tom Basso


Regarding the question on the value of trading to society [in the newsletter a couple of weeks ago], I would cite a study I did long ago showing hedgers laying off risk to speculators that would, by taking positions, take the risk off the hedging community. For the risk the speculator takes on, he or she is paid a reasonable profit over time. The hedging community pays a price for reducing their risk and that is earned by the speculators. Without the traders of the world, the market for hedging would sometimes be one sided and illiquid, and their cost to lay off risk would increase. Businesses would be more affected by market swings and planning would be difficult. 

Then, there's the money manger aspect, which I was for 28 years. Being a trader with other peoples' money means trying to add value to their net worth, so they can send their kids to college, afford retirement, etc. Most of my clients appreciated what I did for them.

All the best,

Tom Basso


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