March 20th, 2012

URE: A possible rocket ride

As regular readers here know, I’m a frequent critic of Tom Knight, creator of the Slope of Hope blog.  For example,  on February 14, a guest blogger to the site commented that the the market has risen too far and diverged too far from its 400-dma such that there’s no questions “if this debt-filled balloon will disintegrate, but when“.  The writer’s premise is that the several times in the past when the Index has diverged as far as it has from its 400-dma have all been followed by a drop or correction.  As of today, the S&P 500 is approximately 4.0% above the 1350.50 close that day.  According to my analysis,

“The S&P 500 Index is currently 6.38% above the 300-dma.  In the 12,089 trading days between March 12, 1963 and March 11, 2011, a spread between the index and the 300-dma of 5.00-7.99% occurred on one out of every 6 days, or 16.89% of the time.  One could almost say that this spread is “typical”, not large or overbought or stratospheric.”

Today, Slope of Hope featured the following chart on URE and Knight writes:

“Below is URE (the double-bullish on real estate ETF) with three nice inverted head and shoulders pattern. On one hand, yes, there was a lift in each of these instances, but on the other hand, the lift was either very short-lived or, if it did persist, was choppy and not especially profitable. Past behavior on specific instruments with certain patterns can be helpful in anticipating what subsequent patterns on the same instrument will do in the future.”

What?!  There are two continual problems with Knight’s chart analysis: 1) the time horizons and trading style are usually too short-term and 2) he makes a conclusion and looks for chart images for proof rather than looking at a charts from a range of time horizons and then drawing a conclusion from them.

It’s truly amazing how different the same information in a chart can appear when one changes the scaling and looks at it from a number of different time horizons:

I arrive at a totally different conclusion that the Slope because of my longer term perspective.  I see dozens of pivot point areas over the past 4 years at four key levels: 35, 51, 64 and 115.  These levels aren’t “Fibonacci” levels; rather they are key areas where the ETF has reversed direction (either up-to-down or down-to-up) several times.  The balance of control has changed hands from bulls to bears or from bears to bulls.  Even more importantly, when it hasn’t changed hands at one of those levels, the ETF has launched a longer and more extended trend.

The ETF is at 61.27 and approaching 64, the level where it reversed twice before.  The more important point that I would have focused on (a point that Knight didn’t comment on at all), is that a cross of 64 would carry the ETF into near a near void, territory through which it passed like a meteor through outer space.  During the worst of the Financial Crisis Crash from October1, 2008 to November 20, 2008, URE declined 86%!  If it closes back above the outer limits of its current atmosphere, which I estimate to be around 64, then it will reenter a space where there it will face little friction.  One could easily say that had it not been for the Greece and the Euro crisis last year that derailed it, URE could have been on its way to 115 last year.

There’s no way to predict what will happen to URE above 64 but to not mention it, to not see that event as a potential quick and dramatic profit opportunity is a huge oversight.  Rather than a very short-lived or choppy and not especially profitable possible outcome, I see a potentially huge, longer-term windfall profit opportunity. But of course, if you are a day-trader, or a trader who looks for a quick 5-10% profit, then you can be excused for not seeing those rare, 100% multi- month or year trade opportunities.

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