Beware the False Breakout


Deja Vu-lez Vous Coucher Avec Moi!

Pardon my French, but the market wants you. Tonight. The American index S&P 500 is telling you to buy. At least if you believe in classical technical analysis. We’ve had a breakout above three years of stock market action.

S&P500 Breakout

S&P500 Breakout

Source: Yahoo Finance

And breakouts are good news, because they signal new up trends.

Of course, that’s just according to the principles of ‘Classical Technical Analysis’. Our own technical expert Murray Dawes is a chart contrarian. He ditched standard technical analysis four years ago after years of using it in the Sydney trading pits. Why? Because it doesn’t work, according to Murray.

And that’s where the deja vu comes in. The last few years of price action looks eerily similar to 1965-1980.

S&P500 Since 1950

S&P500 Since 1950

Source: Yahoo Finance

Back then, there were a series of breakouts that came to nothing. The market was flat for a decade and a half. By the time the true breakout finally came in 1983, your editor would probably have packed up and learned to grow potatoes.

Where the S&P 500 goes, the ASX often follows. So is this a time to buy stocks? Or sell them?

We asked the man whose trading methodology has achieved consistently impressive results in the recent range-bound market. Murray Dawes is a Sydney Futures Exchange pit veteran, cult YouTube star and editor of Slipstream Trader. He’s also one of the only guys I know who made more winning trades than losing ones in a terrible market in 2011…

Nick Hubble: Even I’m getting bored of Europe’s debt problems. But last week was a particularly bad one for the embattled monetary union. Credit experts reckon Spanish and Italian banks are trapped with such massive losses on sovereign bonds that they must have a bailout. And soon. What’s the technical picture for the weeks ahead?

MD: The technical signals are mixed. Can the world’s stock markets really be kept afloat forever purely on the back of more money printing? This is one hell of an experiment they are doing at the moment. It really is the first time the world has embarked on a money-printing frenzy of this magnitude. So finding answers in the charts is hard. Hard, but as we’ve seen over the last year, not impossible.

NH: If analysing markets has turned completely on its head, what kind of trading opportunities, if any, are on offer right now?

MD: If I could give you one piece of trading advice with recent developments in Europe, it’s this: we could be staring down the barrel of a large down move in the euro. We’re getting close to major levels that I’ve had staked out for the last month. I told viewers on my YouTube channel that if the euro closed below 1.325, which was the March 29 low, it was a great sell signal.

S&P500 Since 1950

Source: Slipstream Trader

As you see in the chart, we then saw a nice down-move in the euro. So the rally that we saw over the last week was actually what I call a ‘false break’. Anyone who bought into that rally made a mistake. As demonstrated in this video, I try and grow my subscribers’ capital primarily by spotting and exploiting mistakes made by other traders.

The early April euro rally is an example. As I predicted, it has failed and moved back to the downside. I now think the euro is lining up for a BIG impulsive move down once it fails, to the lows of 1.250 in early January. So if you want to get a trade on, you could do worse than shorting the euro right now.

NH: Alright. But from a wider perspective, what are the charts telling you about the markets over the next one to three months?

MD: Nothing. It’s a big mistake to trade based on those kinds of projections in this market. Look, I’ve never seen a market like this one in my whole career. We have a few powerful men literally pulling the strings of the market and driving it higher via money printing. Bad news becomes good news and normal analysis is turned on its head.

So trying to predict the market is silly. Instead, try and pick off individual opportunities. For long traders I am looking at a couple of great smaller-cap stocks that I think will fit into a long-term investment plan very nicely – no matter what the market does. They have great technical set-ups. When we do get a bit of selling in the market I will be jumping on those stocks at the first good opportunity.

NH: And if you’re going to trade shares in the weeks ahead, what advice can you give?

MD: My job is first and foremost to protect my subscribers capital. I did that last year. You could have grown your trading account following my trades in a market that fell. So my first piece of advice: only risk 1-2% of your capital on any one trade. The power of central banks to move the market regardless of the fundamentals is nothing short of extraordinary. So never have too much in the game at any one time. That way your winnings aren’t as huge if you have a string of them. But having a few losers in a row is not a disaster.

NH: You had an awesome start to the year if I remember. 40% in a fortnight from OneSteel. How have the last two months been for Slipstream Traders?

MD: Not as awesome. March was a hard month. These things happen. At one point last year we had 17 winners out of 20, a strike rate of 85%. I warned my readers about getting too carried away. If I was to give one more piece of advice it’s this: don’t get emotionally caught up in day-to-day market events. Don’t get caught up in the latest win or loss. Stay focused on your overall returns. Stay focused on the overall profit and loss of your trading account. Chart it. Not just over days or weeks, but months. If it’s steadily going up, with a few draw-downs, you’re OK. Forget about the noise.

NH: While markets have steadily fallen you’ve achieved a risk-reward ratio on your trades of 1.72. What’s your secret?

MD: I’ve actually laid out the secret behind my trading methodology for the very first time here, in this newly recorded video. But in essence, my method is built around capitalising on other traders’ mistakes. One big mistake in this market is to try too hard. Mediocre opportunities end up being taken for lack of any alternatives and all of a sudden, when the market breaks, you can be caught holding a bunch of positions that you didn’t really have much faith in.

With this in mind I’m currently applying a sniper approach rather than a shotgun approach. Wait for a really good opportunity and then attack it. Once the market has given you some money, take what it gives you and don’t get greedy.

It’s given us some wins so far. And now that we have sat in this range for so long the coke bottle will be well and truly shaken up. We can expect to see a good sustained move out of here once enough traders are in the wrong position. That move might be up, but it will probably be down. Either way, when the market breaks I plan for our wins to come bigger and faster. It’s all about patience.

To check out Murray’s trading method in action, click here.


Nick Hubble and Murray Dawes
for The Daily Reckoning Australia

From the Archives…

Fake Savings, Detached Investments and the Mining Boom
2012-04-06 – Nick Hubble

Catch QE-22
2012-04-05 – Greg Canavan

How to Avoid Investing Idiocy by Ignoring the Fed
2012-04-04 – Dan Denning

Warren Buffett Scorns Gold. Bad Move!
2012-04-03 – Addison Wiggin

Heralding the Unsung Benefits of Frontier Markets
2012-04-02 – Joel Bowman

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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3 Comments on "Beware the False Breakout"

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4 years 6 months ago

We’ve done extra-European carry trade plays off the back of the free ECB liquidity to banks but now we can do the intra EU capital flight. Look at those Italians chasing after the relative safety (maybe or maybe not) of Germanic piggy banks.

4 years 6 months ago
For the weekend, some here may wonder at my obsession with the AUD-Kiwi cross and the AU bank balance sheet lending that created their real estate bubble. Some of those that wonder migh actually agree that deficit spending does nothing to lift an economy past the immediate period of market panic. And here we have The Economist saying that NZ is protected by its ability to devalue its kiwi and inflate away its debts (to AU banks and now lesser so the EU bondholders). And at the same time here in OZ they talk about a currency union between… Read more »
4 years 6 months ago

They’re absolutely doing the nasty in their duds. Norris will have emigrated to take up rsidence in a retirement village bunker in Kosovo by the end of the week.

From Banking Day …

NOHCs needed to cater to trans-Tasman strife
16 April 2012 7:09am
Australasian banks need to separate their main businesses either side of the Tasman into subsidiaries of a non-operating holding company, an academic group proposes.

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