Tuesday, May 30, 2006
This past weekend I had a very strong feeling a good size selloff would happen today. As it turns out, I was right. I had a few possible sell orders for the S&P, but unfortunately, none of them seemed likely to trigger.
I spent hours researching the pattern, to see if my strong feeling had any basis in fact. Were there any other possible short sale entries in play? Even though I did find an "edge" toward the downside, I was not able to find any additional sell patterns, that meet my parameters for a trade.
When this happens, what do you do? The answer is, nothing. As can be clearly seen, the market did in fact have a very strong down day. This would have been a huge profit, but it was not to be. At times this will happen. A very big part of being disciplined in trading, is knowing when to trade and when not to.
Sometimes this will mean being on the sidelines on big days like this. As a trader, you simply have to move on to the next opportunity. I have warned here of additional downside action, so expect to see more of this type of action over the next several months. There is nothing on the horizon that I can see, indicating the downtrend is at an end.
Monday, May 29, 2006
Now that some of the suckers have been cleared out, notice how the commercials are starting to shift back to the long side of this market (Green Line) in the bottom graph. They are not quite to the point where a long side entry is worth looking at, but this bears watching.
What I would suggest, is to keep an eye on this and when the commercials get more aggressively long, look for a breakout to the upside. Due to the significant downtrend here, at the very least I would wait for that trendline to be broken.
For those of you that are longer term players in this, you may want to try and catch the falling knife. I advise against that, but if you think the price is going to $1000 like some do, there is no need to be picky over this technical setup. This setup is geared to create a favorable situation for an immediate profitable move.
Friday, May 26, 2006
Alot has been written about the precious 200 day moving average. It is the panacea of retracement levels, or so it is said.
The black line through the middle of the chart of the S&P 500, represents the 200 day moving average. As the pundits would have us believe, it represents a magical support level. As you can see the price is now straddling it, having gone below it, and not rising back above it.
We will monitor this here in this forum, live, to see if in fact this provides some support to current prices. Again, notice the heavy short position currently in place with the commercials below. My research has not identified any significance of any kind to this moving average. If you are a discretionary trader, maybe you can use it to your advantage.
I would argue, that whatever else you are using in addition to this, would probably be more valuable. However, let's just watch this over the next few weeks, and see if the market magically stops here.
Thursday, May 25, 2006
Recently, I had another buy signal yesterday, that upon further review of the setup, I did not take. I am a systematic trader, so how could this be? Isn't that a discretionary decision?
Well, yes and no. Trading is a very fluid business. It is important to keep in mind when your black box trading system is firing off signals, the basis behind each one. There are a number of components that can go into a setup to buy or sell. In my view, each one of these needs to be supportive of the same premise.
With this most recent signal, additional research revealed the following. Large gap up opens, with the rest of this setup being the same, had not had good results. This premise is fundamentally consistent, going with gaps just straight up, does not provide an edge in trading.
As a result, when this large gap presented itself, and the history of large gaps on this pattern, was not good, I modified the trade setup for future use. Time will tell if this resulted in a winning trade being missed. However, I have no mental baggage on that. I do know that over time, this setup with a large gag up, cannot be expected to do well. As a result, I have no interest in it.
Tuesday, May 23, 2006
Please go to the achives to see the original post. Now that we have tumbled sharply, what is next. We are very short term oversold at this point. As a result, a rally could happen at any time.
However, the pattern I mentioned was a larger picture pattern, which historically has preceeded very large drops in the market. Be very careful committing anything to the long side of the market here. It is likely that this selloff will continue for a bit, setting up a buy point in the fall.
The commercials, have gotten more heavily short during this drop. This is not a good sign for a rebound from this.
Monday, May 22, 2006
Anyone out there think these charts look similar? The first chart shows the all time high in Silver made in the early 80's. The second chart shows the most recent price action.
Does anyone think these look in any way similar?
This is the type of thing that is not sustainable. "It's a new bull market in commodities." Perhaps, or is it simply another speculative blow off top? I trade shorter term than this type of analysis requires. However, I do not consider this to be a high probabilty continuation setup the way it looks presently.
I am sure there are some out there who cannot believe the overnight implosion of this market. This price has dropped $80/ounce in 7 trading days! However, those of you that paid attention to what I was saying about the commercials getting to the short side of this market, were prepared for this.
This, along with the recent selloff in the stock market did not "come out of the blue." We had the proper advance warning from the insiders, that they were exiting their longs.
For those of you that still think GOLD is a solid long term investment, this does not necessarily invalidate that. Those are big picture economic views that may or may not be correct. The point I have been making all along, is as follows. Do not just run out blindly, and buy something after a parabolic move, reversions are almost a mathematical certainty.
Friday, May 19, 2006
As I had mentioned in a prior post, the commercials were exiting the long side of this market. This was a bearish sign. I took some heat on that comment. Who are the commercials? What does one line on a page mean? My favorite was "there is alot more to it than that."
Was there really alot more to it? Look at the chart, and tell me if you think there was? Did the Chinese, just in the last few days decide to buy alot less jewelry? Did they abandon their big plan to load up on gold? The whole point of all of this is, that when you buy into the hype of things, just be careful about chasing extended price moves. This was not fundamentally setup, to continue in that same direction. It was clear to me that at the very least, you did not want to buy this market until a pullback occurred. I also openly stated, that I was looking for a short position setup.
I showed grahically, in the prior post on this subject, the difference between buying blindly, and buying on a pullback. Now you can see in real time, the virtue of not buying blindly.
Here is the final outcome of the OOPS post from a few days ago. On the chart here, it can be seen that the new trade entered yesterday was exited today (red carrot that is tough to see).
This trade resulted in a 30/32's profit, more than making up for the 9/32 loss that the original "What a dummy" trade.
The moral of the story, just to restate it, is the original entry on the short side that appeared to be a poor entry at the time did in fact turn out to be.
However, by following the same system that generated that entry, and reversing to the long side, a profit of more than 3 times the loss was achieved. This was not great for the ego, as 1 out of 2 is not a great ratio. However, I trade for a profit, egos need to be left at the door. A profit of triple the loss works out very well in the bank accounts.
YTD the system is now 15/18 and over $4,000 per contract in profits. It would be hard for anyone to convince me not to follow the next signal without question!
Thursday, May 18, 2006
I know I have had a few phone conversations regarding that post with a few viewers of this.
The main points to get out of all of this are as follows.
First, as you can see on the updated chart, that short position has been switched to a long position. This shows that it is important to be on the alert to changing market conditions. I had spoken of a few bullish forces that were surfacing. It is too soon to be sure, but they may be exerting themselves here.
Second, even though my opinion of the short position I took the other day, that became a small loss, was that it was not a good entry, do not trade on your opinion. I don't know what it is about our psyche, but we always remember when the mistakes we make, actually create good outcomes.
In trading this is a dangerous behavior pattern. The proper action here was to take the short trade I took, and reverse it to a long position if the trading system said to do so based on changing market conditions. Any other approach, is just incorrect.
The proper approach here resulted in a small loss of 9/32's on the original trade, with the new long trade result pending. Considering that the stop loss on this system is 48/32's, this is a loss we can live with.
YTD this system is now 14/17, with a greater than $3000/contract gain. Remember, taking losses at times is part of this business. If you are not prepared for that, you should not be trading.
This is why we have systems, to get us past our emotional baggage in decision making.
Todays Topic - Phony Baloney on CNBC
I have to admit that at times I tune in to CNBC in the mornings. Occasionally, in the midst of all the wall street shills, they have a Bill Fleckenstein type of person on. Bill and others of his caliber are worth listening to.
Most of the others are either completely dishonest, or clueless. I am not sure which is true. Yesterday they had these twin brothers on who have been money managers for a number of years. They were extolling the virtues of buy an hold. They displayed a graph that showed something along the lines of returns from 2000 to present buying and holding the S&P 500.
Their pitch was that there is not much of a difference between buying and holding and "timing" the market. As a result, the average person should not be trying to do it. Too bad, they did not mention that it also helps their management fees when funds are not going in and out often!
The table displayed above shows the results of buying the S&P 500 futures contract on the first trading day of November each of the years, and selling it the following first trading day of April. The only caveat, is that the commercials need to be long the market, on that first day of November. If they are not there is no entry.
This is very simplistic, but just proves a point. These two brothers had indicated that buying and holding the S&P 500 during that period (2000 to date) , gained a smidge over 2%. My math shows that buying on the first trading day of 2000, and holding through yesterday, yielded a smooth -22% return, not a 2% gain.
So compare the -22% to the above +15% with that very simple plan, and tell me that timing has no impact on returns. Even if you set aside the lie about the 2%, and accept that as accurate, you can clearly see that basic timing, far outperforms buy and hold.
Make no mistake about it, trading is an insiders game. Here is more proof of it. It is unfortunate that people like this all allowed to perpetuate this fraud on the public. Further, this inaccurate information dispersal, is condoned by a major cable network. However, it is what it is, so just be aware of it. Do not listen to what these people say PERIOD!
Tuesday, May 16, 2006
I have been sailing along with one winner after another for awhile now and all of the sudden I find myself in a bad situation as portrayed to the left. I am short the bonds( red carrot) at very close to the low of the year, what a dummy right?
I don't think so, here is why. This may in fact be a losing trade. My stop is above and may be taken out, time will tell. I have very strict rules for trading and investing my money, and I address this on my website. Trading does involve taking losses, it is part of the business. I have an appropriate risk % on this trade, so one loss will not wipe me out. If someone cannot accept that, this is not for them. My track record for this system YTD is 14 out of the 16 trades prior to this have been wins. Am I smart enough to arbitrarily guess that this one might be the next loss, ignore the rules, and exit early cutting my losses?
The answer is absolutely not. I wrote previously about general things that did support a possible bond market rally. The commercials are long, and we are in the range of the typical seasonal low. Other fundamental things have not lined up with those two other things as of yet. However, those are general overview conditions. When it comes down to actual trading, I rely on my trading systems that have served me well in the past. I will do that here as well, win or lose.
Moral of the story - nobody wants to lose money in a trade, but sticking to your plan will result in this happening at times. If someone gives in to the emotion of the moment, they will never be successful as a trader.
Monday, May 15, 2006
Keep in mind in the futures this is $100 per contract for $1 per ounce movement. This is the kind of thing that happens when moves get very extended like this.
Click on the chart to enlarge it and you will again be able to see the short position the commercials took just by coincidence right before the market highs.
This does not mean to just run out and short a market due to that. What it does mean though is be very careful blindly buying it. Whether this is a significant top or not cannot be known at this point. The blue trendline is still clearly intact, indicating an uptrend. However, what this does is just substantiate the point I made the other day about when to buy. Buying a pullback is much better than chasing a runaway market blindly. Some people bought at this high and are taking major heat on their trade, if they have not exited and taken the loss yet.
It is in vogue in the media to buy gold for various reasons. I think I have made my point about that, timing is everything.
I will trade according to my systems, but this is what I am thinking is likely to occur. Notice the heavily short position of the commercials. This is a sign the insiders were going to the sidelines during the recent rally.
Saturday, May 13, 2006
The following two tables examine two different ways of buying gold, and the results of them. The first table shows buying gold on the opening every day since 1975, and exiting the first profitable open. It utilizes a $10/ounce stop loss. Keep in mind that over that period there were several rallies and declines in price.
Clearly this is no way to make money investing in gold. Let's make just one change and examine what happens. The second table buys gold the next day's opening following a close that is the lowest close of the last 20 days. As you can clearly see, this is a much better way of making a profit trading the gold market.
The point of all of this is, be disciplined about how you choose your entry point.
Friday, May 12, 2006
What does this mean? It means that the long term uptrend in bonds (downtrend in rates) is on the verge of breaking. However, there are many who feel the fed is close to being done on their tightening program. Notice also that I have displayed the rise in Gold overlayed in blue.
This clearly shows the inverse relationship that exists between these two markets. Also, notice at the bottom, that the commercials have gotten long this market as evidenced by the Green line on the bottom graph, and we are close to the seasonal low (the graph above). All of this tells us the following. We are at an inflection point potentially in this market. Commercials are often early, but when we combine that with the seasonal effect, and a long term trend line, we do have a possible low being set up for longer-term players. If the trend in Gold were down, which would be supportive of bonds, I would be leaning toward the long side big picture here.
I will continue to watch this to see if the Gold fundamental changes, supporting these other things.
Today, I have sell signals in my short term bond trades, which will be followed, but we do have to be on the lookout for a possible low here. If we were to break through these levels sharply, then the setup for a possible low would be negated.
Thursday, May 11, 2006
You can see that both of those instances preceeded a price correction. We are approaching that level again now. This is more reason in my mind as to why someone would not want to chase this price move right now. You can also notice the same general occurence in the large speculators in the other graph. The only conclusion that I can draw is that a pullback is coming soon.
This is an example of a pullback in price that was accompanied by a shift in the commercials from short to long. It is an ideal setup to go long when this occurs.
If you just take note in general of times when the commercials shift to long, a price rally generally occurs. When they shift to short, a price drop generally occurs.
Presently you can see the commercials are moving to the short side of this market, kind of like what occurred at the end of the first quarter of 2005. Notice what took play after that, a sideways to lower price move. There is a feeding frenzy in the media about this at the moment, does this remind anyone of the Naz at 5,000?
Parabolic moves like this can extend, but in general they are unsustainable. At what price a pullback occurs is anyone's guess. My view on trading is that I want to be a player when as many things as I can get line up in my favor. When they do not, I will pass. Many great traders more accomplished than I am have said, that they trade when there is an opportunity. This would not constitute a high probability opportunity in my book with the commercials sneaking out of there longs.
I will post some other charts that show parabolic moves like this, and what occurred aftwerwards. In general, this demand stuff being written about might be true. It might be true about housing. This does not mean that price will rise straight up at a 70 degree angle indefinitely. This current move is speculation.
Wednesday, May 10, 2006
Although money is currently going into stocks, the Dow is far outperforming the S&P 500 as a whole. This is also a bearish sign in my opinion. The momentum is good right now, but the commercial are also short the market now.
I strive to be in when all the forces are lined up in one direction, which they are not right now. In fact, they are more lined up on the short side than the long side.
As for gold and oil. They are both driven by different groups of commercials and they have different technical pictures right now. Gold is just in a blow off move now, and these moves are often reversed as quickly as they have moved up.