Thinking Out Loud

By: Erik Swarts | Wed, Jun 29, 2011
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If you interact with investors or money managers on a regular basis you typically get the pull-string question, "So what is your edge?" It is a valid question I suppose - considering the stakes, but I tend to almost have an involuntary grimace that would imply, "Really?"

In today's binary trading realm of computer knows best, part of "my edge" is that I don't operate on auto-pilot. I can think like a quant - but I don't have to always act like one. I have free will. I recognize the algorithmic and systems presence, understand how it interacts with the markets and can put it into context in a broader sense.

Along those lines, the macro-backdrop - which arguably has never been as crucial to get right as it is today, is the ever changing scene in which you need to juxtapose the immediate settings. It is also the well that many economists and pundits will drink from and pour tall to keep you up at night. You might hear something along these lines of this - which holds certain truths glazed in hyperbole:

"You might not realize it at the time - but that snowball that started in a small municipality in Spain could eventually show up as an avalanche on your doorstep."

With that said, Greece - and by extension Europe, was never the primary driver for my cause of concern, as noted in - Taking Shelter - at the end of April. Once the market digests the near term positives out of Greece - it still needs to get through the unwinding commodity trade and a firmer dollar. What has occurred is more than one catalyst has hit the market at the same time creating a wider and deeper effect. It is the same dynamic that I noted in my Constructive Interference Theory.

When a crest of a wave meets a crest of another wave at the same point, then the crests interfere constructively and the resultant crest wave amplitude is increased. Interference (wave propagation) - Wikipedia

One of those "waves" is the commodity sector - with a focus specifically on silver. The quick takeaway was that silver was a proxy for momentum in the system - and it went parabolic. I calibrate that risk by appraising the reflexes that are most prevalent in the market and interpreting the scale through similar market environments - as in June 2006. It is a way of guesstimating where you are in the movement. Just like with the 2007 fractal study - it is a reference guide for similar trading environments.

Interestingly, the 2006 time period is very likely the mirror (shoulder of a H&S top) of the CRB's present trading environment as noted in my previous notes.

Reuters/Jefferies CRB Index
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And just like today - silver led the broader market lower by several sessions during its 2nd leg down. Coincidentally, the equity market is trading along very similar price points to today.

2006 SPX SLV Chart
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I believe once the market digests the near term positive developments out of Greece - the market will again have to deal with its own inertia - which will likely be following commodity prices such as silver and oil lower.

2011 SPX SLV Daily Chart
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Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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