Long TNA

As I explained it in the weekly comment, the market is overextended on the downside and could easily bounce from here.

This is the case of the Russell 2000 (and its leveraged ETF TNA.)

We can see that TNA is at the bottom of its envelope. For the past six months, such a position has led to interesting buying opportunities. The buy zone is shown below. It is interesting that the optimal holding period is 15 days, with a target to $85.31

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With the second Yuan devaluation, we can adjust our long oversold buy entry price at around $77-$77.5. Not higher


Pascal

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Pascal,

As I read China's Yuan policy, the FX price band setting can/will be adjusted on a daily basis and is contingent on how the previous day FX trades.

How will you adjust the TNA buy entry point for this?

Adam

[QUOTE=adam ali;30173]Pascal,

As I read China's Yuan policy, the FX price band setting can/will be adjusted on a daily basis and is contingent on how the previous day FX trades.

How will you adjust the TNA buy entry point for this?

Adam[/QUOTE]

Hi Adam,


I did not adapt the TNA entry price to the change in FX band, but to the fact that markets were weak overnight AND that the 5MA on TNA is trending down. This means that that the lower section of the envelope is also trendng down.

Also, I do not think that the CNY exchange rate adaptations will continue having a strong influence on US equities, especially on small caps, which do not export to China. In fact, small caps should gain from this move because US rates are forced down.

The Breakout Calculator calculates its entry point as a percentage above or below the 5MA calculated at the close of the previous day. This calculator is telling us that buying just outside of the lower section of the envelope has led to pretty good returns in the past 150 days (even in a down market)



Pascal

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Thanks for the thorough explanation, Pascal.

A bit off topic, I've been surprised that the MF for the S&P 500 doesn't appear to show much selling, i.e., the line isn't heading down as much as I would expect given price action. Do you take this as a sign the big boys aren't selling into this decline, OR, is there much more selling to come?

[QUOTE=adam ali;30176]Thanks for the thorough explanation, Pascal.

A bit off topic, I've been surprised that the MF for the S&P 500 doesn't appear to show much selling, i.e., the line isn't heading down as much as I would expect given price action. Do you take this as a sign the big boys aren't selling into this decline, OR, is there much more selling to come?[/QUOTE]

I would say that this market is well controlled for now.
The epic reversal of today tells us that there is no real fear of a collapse.

The weak US$ is even a relief for investors (that was the major issues for future earnings)


Pascal

[QUOTE=Pascal;30177]I would say that this market is well controlled for now.
The epic reversal of today tells us that there is no real fear of a collapse.

The weak US$ is even a relief for investors (that was the major issues for future earnings)


Pascal[/QUOTE]

Well controlled is a great way to put it:

From Jeff Hirsch a day or so ago:

Following yesterday’s solid, one-plus percent across-the-board gains, today’s across the board loss of nearly equal magnitude is a clear reminder that volatility tends to really begins to pick up in August. In an average year, VIX typically reaches a low in July and then begins to steadily climb toward a high sometime during October and then to decline once again.

Since VIX does not measure actual volatility (daily price moves), let’s compare it to actual daily price swings of the S&P 500 since 1950. August has the third highest percentage of days +/- 1%. October has the most which matches the 1-year seasonal pattern above.

This historical data suggests the market has just begun its most volatile four-month span of the year, August through November. There are likely to be many more days like today, and yesterday, in coming weeks.