Saturday, October 31, 2009
We have finally had a short term break in the market, so what next?
This is a daily chart and as you can see even though we had an ugly day yesterday, and many bears might be celebrating, we have just retraced back to the trendline. Reviewing the COT report this week did not shed much light on things. Commercials were buyers in some indexes and sellers in others. The Naz in particular has the most bearish Commercials position.
The commercials in that market were the ones that tipped of the crash back in late 2007. However, in reviewing the track record of commercial buying and selling in the NAZ alone, it has not been a great harbinger of things to come, way less accurate than the other markets. As a result, it is not prudent to base a whole market call on what they alone are doing.
The chart above does have a green arrow on it a few days back which is one of the Vix buy into decline signals that I watch. I do not trade these but use them as just an indicator of when volatility swings are telling us we could be in a short term high or low. They are generally early like this one is. There are a couple other things I look at that will not be revealed in this forum, but the summary is that they are saying at this point to look for "short term" buy signals.
What does all this mean? I think we have to look to buy this dip from a short term perspective but only using whatever buy techniques you might use. I personally am not just going to buy into the weakness without some short term show of strength returning first. We are at a critical level in price, if we move sideways here then break down I think the party is over. We are long overdue for some type of retracement, this has been a crowded trade with the whole world in it. At the very least the tree needs to be shaken a bit.
As with all other retracements in trends, they all look the same when they happen, even the ones that wind up reversing the trend. We can never know in advance which ones will hold the trend and which ones will not. As a result, you just have to play them with proper risk management so when the trend changers come around, it is just one small loss and you move on.
This is not a spot for a major long term commitment from a retirement account standpoint in my opinion. It is a short term trading opportunity. I expect any bounce from here to generate a bigger picture sell signal. Also I caution people not to make stock market judgements based on what they view the overall economy is doing. These two things can diverge substantially from each other for long periods of time as we have seen this year.
Thursday, October 29, 2009
We will have to see what the commercials have done on this decline when the COT report comes out on Friday. If they are buying this then we potentially have a nice buying opp setting up. However, in the Naz which led us down in 2008, there has been big selling recently by the commercials, which was the tip off last year that something was wrong. It appears to have been pretty timely again this year so far. It is unlikely that there would be a large enough reversal of that selling this fast, which is what is required to turn this bullish.
You can see as I have labeled it, how worthless the seasonal has been this year, just been dead wrong at every turn. This does happen with seasonals at times and it is why it can not be solely relied upon for anticipating swings. It is a tool nothing more.
Here is what bothers me the most about this retracement. When I scroll through individual ETF charts for various sectors as well as countries, I find no buy setups, only sells on a bounce situations. There should have been some leading sectors or markets if we were strong underneath, but they almost all look just like this chart.
Here is what this tells me. This market as well as individual sectors is a bit on the defensive now for the first time since March. I plan on shorting bounces in almost all markets here and then watching the things I watch as we drift into weekly support which is in the 1010 area. At that point I will look to see what the fundamentals are as to whether I get in aggressively long or conclude that the game is finally over here.
This has been one of the strangest rallies if not the strangest one I have seen in my years trading. Many conventional things that have typically been good tools for picking swings have not worked at all, Sentiment, Seasonals, Weekly retracements with comm activity matching them, I could go on and on. I also think the earnings statements we are seeing and the spin about a recovery are all an insult to everyone's intelligence. There is just so much dishonesty out there in the world right now it is shocking. I know from my other business interests that once you go outside of the government sectors that virtually nothing at all is happening.
I will state what I have before in here, and it is nothing more than my opinion. It is my contention that funny accounting is once again back on Wall Street, it only left for 6 months if it did at all. Even with all the cost cutting, some of these earnings reports only make sense in the context that bonuses were earned based on them. I suspect if bonuses were not tied to them, they would not be reported as they have been. We don't want this "recovery" to get derailed right now.
You always have to think about who with the most power has the most to lose by negative events being reported, then assume those reports won't happen.
Wednesday, October 28, 2009
Here is the chart of the Silver trade I entered the other day just exited for a large profit. It certainly appears at the moment that my call over a month ago for a top in the metals by Mid oct might be one of the best calls I have ever made. We will of course have to see now what happens, we are drifting into an area that if the trend is going to stay intact on a weekly basis, needs to hold.
I also have displayed in a sloppy fashion another short trade a made last week in this market that was a loss of about $1900 per contract. It is always easy to just post everything you do right, and too many phonies out there do that. To be credible, I felt I needed to give the full picture of what I actually have done here. I still came out $4,000 per contract ahead on the 2 trades and that is the goal, to make a profit, not be right in a blog call.
The stage is set for a massive washout in this market if we do not hold right here based on the above comments about weekly support. Based on the fundamentals I have clearly layed out here, this could be the beginning of a substantial downward move in the metals. Alot will depend on the stock market and the dollar here. Many currencies appear to have topped here and the dollar is close to giving a buy signal, so this is all falling into place here. I do not expect the bulls to give this up easily, but with this being month end, if the funds cannot rally stocks here in the last few days with the standard window dressing skit, this does not bode well for the next couple of weeks in any of these correlated markets.
We are right at the 50 day moving average in stocks which from my testing does not mean anything, but it is a widely watched support area. If we are going to hold, we need to do it right here or fund selling will occur.
Monday, October 26, 2009
The Precious Metals took a hit today, maybe they are not so precious, we will see. Anyone reading here knows I have been calling for a top here in Mid Oct, so far so good.
I shorted this today at the indicated level, whether or not this is the precursor to something big or not, there is no way to know yet. It is a short term break of an uptrend. I mentioned this weekend that there was no sell signal in sight. There still is not from a long term perspective, this is a short term trade. We will have to see if it turns into something bigger. I have been saying now for a month or so that the largest trap that is out there is a long dollar short metals trade. The whole world is leaning the other way, or at least the individual investors are. As you have seen from my charts, the insiders are not leaning that way at all. They are leaning toward a downward move here and up in the dollar.
It will be interesting to see what happens bigger picture with this. This above entry is a short term trade, but has a decent sized target. However, if it were to leg down a large amount I would trail a stop and stay with it. There is no way to know at this point if this is anything more than just a short term break of a trendline, that will go nowhere or not. In trading you can never know that, you just have to take the trades and see what happens.
Saturday, October 24, 2009
Here is Cash GOLD which traded sideways this week. As you can see the commercials have thier largest short position ever in this market. There is absolutely no question this market is in an uptrend, and no reason to short it yet. However, this condition is unique, so since I have spent 20 years studying how well commercials have tipped off big moves in the market, I have to be looking for a short here.
I mentioned in a prior post the possibility of a commercial capitulation in this market, similar to what occurred in the energy markets last year. Although there is no sign yet, I did read the other day that the worlds largest mining company was considering taking off their multi-billion dollar hedge. If this were to happen, it would likely cause a very large spike upward, followed by a larger decline.
As volatile as this market has been, this would make it off the charts volatile, and would prove the Gold Bugs right for a time. My call was for this month to be the top, so it is too soon to tell if I am right or wrong since we are trading in a trading range as evidenced by the daily choppy action. So far the Gold Bugs are right and I am wrong, but it is a nine inning game so we will see if we go to 5 or 10,000 here or back down to 500.
The one thing I feel needs to be stated though is that with the very tight correlation between stocks and everything else, if you think stocks are going down, gold will go down. So, a bet on Gold here at this level is the equivalent to buying the SP500 right here. Although not common, there have been other periods in history albeit brief, where this very tight relationship between stocks and commodities has been in play. It will end eventually, but it is anyone's guess when that might be.
Friday, October 23, 2009
This of course is a phrase from an old song and the theme today. I hope this chart is readable, if you click on it to enlarge it, everything should show up properly.
This is a current short trade I have been sitting on in the Yen with my trailing stop and profit exit displayed. This market has diverged from all the other foreign currencies who have been in space orbit recently. I will get hit on one of these two orders soon for a profit, it just remains to be seen which one. Hopefully the lower one.From a valuation and sentiment standpoint, this market is actually setup for a buy, but the shorter term technicals dictated a larger pullback first, so I was looking for a short entry.
You can see the significant divergence in the oscillator at the bottom of the screen as this market soared to it's recent highs. Timing is always another matter, but when I see this I begin to look for reasons the market will change direction. One popular pattern that is used is what is called a 1-2-3 high or low. This would be one of those although that is coincidence, it is actually a quite different pattern by things I have not displayed, but by chance it looks the same here.
Many years ago I tried the 1-2-3 pattern and found through losing money that it has no edge in the markets. However, the basic lower highs concept of it is sound. You just wind up trying to fade too many trends if you start by looking for 1-2-3 patterns. It should be the last component of an entry, not the first. Once you are setup for other reasons, it would then be ok to use that technique to use an an excuse to pull the trigger on something.
Wednesday, October 21, 2009
In 1929 there was the crash which represented a .618 retracement to a significant low made in 1921. In 2009 we completed a close to .618 drop also to a prior significant low point. At the end of 1929 into 1930 we had a very sharp rally that retraced a bit more than 50% of the drop and it took about 5 months. We are currently in a 7 month bounce that has retraced a little more than 50% of the drop.
The 1929 recession was the result of a Real Estate Bust, so was our current recession. Government patterns of intervention are also very similar to what occurred back then. Unfortunately, having just one prior occurence to compare to does not a lock prediction make. I have seen hundreds of patterns that repeated almost identically for many years, that now have no predictive value. As a result, even though the chart patterns and events surrounding these things are eerily similar, I am hesitant to conclude that this pattern will repeat. If it were to as you can see on the chart, we have a waterfall coming very soon.
With all of this aside, I am treading cautiously here because it is just impossible for me to believe some of these earnings reports that are coming out, especially from the banks. From some friends I have in commercial real estate, I have an expectation that we have some difficult times around the corner, and banks do not appear to be fully anticipating that in their write offs they are making. Also we have seen some commercial selling in the NAZ in particular, and Sentiment is creeping up to very bullish levels in advisors, which is bearish.
The net of this post is this. If you have been able to hold on through this bounce, I would suggest having close stops on what you are long. If we keep going then you stay in, but if we start to roll over, you can take your profits and be out in case we really roll over. By any measure this move is very extended having virtually no retracements. As much as it is great to see the account balances rising, these types of moves have a tendency to have a big air pocket in them. There is really no support points at all, so fund selling could hit the streets all at once if this starts to roll over.
I think this is mostly to all the market manipulation we are seeing by the government. It would have been much better if some decent sized retracements would have been "allowed." This way there would be meaningful support points to hold declines. I do not see a single one on the chart.
Sunday, October 18, 2009
Here we have a market that I think is setup for a possible entry on the short side if we get a little bounce here.
We have broken the uptrend as evidenced by the green live on the left, and along with that we do have divergence in the oscillator at the bottom. We do have a very strong tendency for a rally to occur at this time of the year in this market. In fact it is one of the strongest seasonal tendencies out there. I have this marked with a red arrow in the second graph. However, seasonals at times can go awry, evidenced by this years stock market rally. It has completely ignored the seasonal tendency for a late summer decline.
So, this means that we need to be aware of them to look for possible opportunities, but not swear by them. I think a trade is best when it is also supported by seasonals, but if everything else is lined up and this is lacking, that does not stop me from making a trade.
There are some things that I look at that are not displayed here that dial this in a bit more for me, that should setup a possible sell entry with a day or two of a rally here. If we just sail upward from here for a week or so, it is likely my short term indicators will turn back up and invalidate the setup. As a result, look for a one to two day rally, then sell weakness if that takes place for an entry.
Saturday, October 17, 2009
Let's revisit my call for a major top in GOLD now that we have reached the time period I designated. One of the distinguishments that needs to be made for those who might have stumbled upon this site for the first time is as follows.
I am a trader not an economist, so all of the trades I make are based on what I consider to be the fundamentals of a market based on what I have learned over the years through Hard Knocks University. I do not represent in any way that people's gloom and doom theories about our currency are right or wrong, and what if correct effect it would have on this market. Those opinions may well be correct, I really do not care. Trying to make big picture calls like that based on just arbitrary opinions is not how I approach trading.
It is much easier in my opinion to look for the next 3 months move in prices than the next 10 years. So lets again revisit why I am so bearish on this market. As you can see from the chart, we have the largest long position of small speculators in history. The horizontal line marks the old prior peaks. As you can see as clearly as can be, each time we have been at these levels, there has been a major decline in the price. At the same time you can see with the green line the heavy selling the commercials have been doing here. Also, Sentiment is in the bullish camp. You can also see what generally happens with sentiment bullish, declines.
Why is this true? After all I could just be drawing a line on a chart and be data mining for a result? In general small speculators are driven by emotion, commercials are driven by very detailed market information, they actually mine the product. As you can see recently, this whole run up has been driven by small speculators buying. There is just simply not enough purchasing power numerically for people buying one's and two's to hold up price in the face of selling by deep pocket players. Also individuals tend to be late to the party and wait wait wait, ok now let's buy now that we are sure it is going up. That was real estate in 2005. I cannot tell you how many people said, "well I am buying it as in investment." Some investment it turned out to be, a 50% decline in two years!
Since commercials have the most knowledge of the real supply and demand situation, they are the most informed. The one asterisk is that they are by nature hedgers, so they are often opposite the trend like this. This is why timing just using them alone is not enough. They can be wrong for months at a time, but in the end they are most often proven correct. Now the burden falls upon the individual investor to keep prices up here while the deep pocketed people are selling into this strength. At some point this will give way.
There is a seasonal tendency for a decline right now which is why I chose this time frame to make this call. However, if we were to go sideways here then roll over in a month I would still consider my call to be pretty good. Of course if we go up another $200 then the call is lousy.
I am looking for short entries every day here, but likely in Silver since it has been weaker. It is basically the same trade.
Friday, October 16, 2009
GROUND HOG DAY
Here we go again with the early morning weakness that has been evident often in this monster up move, it has typically been reversed into an up close by day's end.
I have projected on the screen what things would look like if today we close below yesterdays low, again it will require a minor miracle, but just for fun let's say it happens. After all the day most likely historically to have large down closes is Friday in the stock market, with Monday being the runner up. We once again have the 5 point megaphone pattern that has formed and as I have written about previously, these patterns are more significant when they occur after an extended market run like we have had here.
Along with that we have a 3 point divergence in the Pro Go Oscillator, a Long Time favorite indicator of mine created by Larry Williams. Again for the trade to be legit, we need a close under the prior days low not just an intraday penetration of it. Some times when I have used this I have entered intraday front running the close in case the market runs away from me, and just exited at the close for a loss if it does not close below the low. This time, I am going to wait due to the number of fakeouts we have had intraday during this run up here. There is really no reason to believe this market will top right here other than it is so incredibly extended by any measure to the upside, that a waterfall could happen at any moment. We have seen recently heavy commercial selling in the NAZ, which does tend to lead things. Also that index if you look at it vs the SP 500 is lagging considerably. This is not what we want to see in a up trend, and it is a warning sign that we are on thin air here.
We seem to be making an inordinate amount of V tops and bottoms in markets nowadays. I suspect this is due to electronic trading and it's influence on the markets. As a result we get moves like this from March that just go straight up with no retracements at all, hence no real support points to help when declines start. There is major resistance in the 1121 - 1154 area which are Fibonacci retracement targets. The first is 50% of the whole down move from 2007 and the latter is what we called an AB=CD leg which projects symmetry from the rally from March to June, then adds that to the minor low in July, and projects a completion of this leg at that level.
I am not a huge Fibonaccci fan simply because all they do is project numbers in space, but alot of the big boys on Wall Street watch these levels so at times they can become self fulfilling. If we keep going up and you have had the guts to stay long this whole time, take some money off the table in the 1120 area, unless you think we are heading to new all time highs.
Wednesday, October 14, 2009
Here are my recent posts and how things turned out:
Gold - I have been calling for a top about Mid October. We are here now so it is too soon to tell whether this call is any good or not. I did post a sell for Silver, which was a great trade that I personally did very well with. Grade A for the trade, and ? on the call, too soon to tell
Bonds - I said there were short term buy signals due to the seasonal. Well that lasted one day and we have gone down, D - on this one.
Crude - I mentioned if anything there were buy signals on the daily chart, we have gone straight up. I also said long term I expect us to go way lower. A on the daily chart comment, and ? on the big picture comment, too soon to tell.
Dollar - wrong about this no two ways about it. Took one short term trade that I exited wisely for a small loss and pointed it out live right when I exited. F for the call, B + on the trade. The trade was terrible, yet I made a great judgement on pitching it early. This is how you prosper as a trader, keep your losses small.
Cotton - No grade here really. I said we could be setting up a sell if were saw a reversal in the next couple of days, which did not happen.
Market correlation comments - A + they have continued incredible as it is and being aware of them saved me a bundle of money this week in both position size, and screening short trades.
Overall - very marginal, my analysis has been worse than it typically has been, C -. The only reason it is that high is that one Silver trade made a bundle, and net dollars is the bottom line.
Tuesday, October 13, 2009
An annoying talent less punk who " sings" but also possibly our currency.
As I post this the dollar is close to making new lows again in this bear market it has been in. As you can see from the chart, we are entering a seasonal up period on average, yet we have a big down trend, and also many oscillator readings are also bearish.
Once again I will state that it is my view the stock market is driving this down and not vice versa. Tonight we get the "bullish" earnings report, then the dollar declines. That is the sequence we have at hand. When you watch the markets tick by tick, the SP 500 always moves first, then there is a hesitation by the dollar, as if to say, are you sure you are going there. Once the dollar seems content with the SP move, it then moves in the opposite direction
At the end of the day, it might very well be that the government is pushing this rally ultimately to lower the dollar. A dollar decline is really the only way out of Barry's policies that won't ruin us for 50 years. However, I still maintain that the way to bet against Barry and his attempt to really fundamentally change this country, is to be long the dollar. A bet on the US is a bet on the dollar. Now, with that being said, timing is something else entirely. I really think that no one man can really ruin this country either by intention or accident. So the long term bet is on us, but I am a trader and there is no way that I can see to bet against him in a big way just yet.
It won't do me or anyone else any good to just buy into this meltdown blindly, just because I have a certain bigger picture view. We have retraced such a large percentage of the up move off the lows from years back, that a full retracement is now probably likely. I did take a swing at it the other day as discussed in here. I will also look for other entries. It could very well be that the real entry is a long ways away, we can never know the future. For now the trend is solidly down, so I will require a perfect setup to try again. I trade mechanically so I will take the setups when they come, but will filter them to some degree in this market until something changes.
This is the short squeeze of all time waiting to happen just like GOLD is a knife down in the making. Timing those moves though is the whole ball of wax, because they are both very strongly moving opposite of where I think they are ultimately going.
Monday, October 12, 2009
Here is a market I have not covered before in here. This is the December Cotton contract which is potentially setup for a short sale. As you can see the seasonal tendency is for a decline at this time.
We have had several days with higher lows and higher highs, yet we still have not taken out the prior pivot high. The "secret" oscillator at the bottom is indicating a possible failure here of this rally to have a break out.
If we get a break down from this pattern here prior to taking out that prior high, or right afterwards, and a reversal, this will be a good short opportunity. This does seem to be a market that marches to it's own tune and is not caught up in the upward vacuum the stock market has created. As a result it could go down even if stocks keep climbing.
Most markets are so tightly tied to stocks now, that they will not decline as long as the stock market keeps rising. As I have discussed here previously, this relationship makes no sense, but it is what it is. This is taking place and has to be considered when making trades until it ceases. Here we can trade this market on it's own fundamentals and not have to worry about a stock market influence.
On a separate note, I will be re-entering the dollar long side trade tomorrow on strength if we get some.
Saturday, October 10, 2009
I went long this market on Friday where the red arrow indicates. As you can see we are at what in the past has been a seasonal low point, and there is divergence between the price and the oscillator. I have no idea if this market is actually going to find any traction, but I do not trade on my opinions. This is a buy setup for me so I took the trade, PERIOD. If I am wrong I will get stopped out and move on to the next one. There is a little bit more to this entry pattern than just what I explained, but I am not going to delve into it here.
In general, buying in steady downtrends like this is not a high odds probability. Often oscillators will diverge like this for months, and the price will just march steadily on. I do still maintain that this is a short squeeze in the making at some point. I know of nobody other than a few fellow traders that are looking at the long side of this market. The bears have been right, and I have done 2 different short trades on the way down that have profited. However, by and large I have missed the boat here being too bullish too early.
Thursday, October 08, 2009
Last years runup was one of the all timers with the head of the CFTC inspector Clouseau "not understanding" how it could happen. That idiot of course was involved in classifying speculative funds as commercials allowing them to run the price. Thank God he demanded an investigation!
Here is how Texas Tee looks on a weekly chart. Notice how incredibly closely correlated to the Dow average this market is. This market has no historical basis for this, and in fact I did a comprehensive study on that relationship when I used to write my newsletter. I did it because I was so tired of hearing CNBC, one person in particular, explain equity swings based on the price of Crude Oil. Of course the study found absolutely no basis for this claim whatsoever. He is one of the hosts not a guest commentator, in all fairness to the guests.
Notice how well this market has followed the seasonal pattern, making the drop on schedule, then the low on schedule. We are due for a decline based on seasonals now. Also notice how well the commercials have done in picking buys on dips for us here since the low. All three red arrows spotted good buying opportunities for us when we were able to see they went long.
At this point this markets fate rests in the hands of the stock market. It has been lagging a little, but still almost moves up and down tick for tick with the Dow. I have been calling for a decline in stocks, so by association that would mean a decline here. I do believe that is the greater probability, but really do not see a trade opportunity here right now. If anything, the daily has buy signals right here. I am not taking them due to the seasonal down bias.
It is unclear here whether stocks will ramp up again, the recent high that was made if it were to get taken out decisively could launch the rock and roll show again, and this will likely get pulled along. If stocks do decline, this will likely go down. Big picture, I think Crude is going way lower than these prices before it is all said and done, but there is nothing to justify a trade right now.
Wednesday, October 07, 2009
Here we have the 30 yr T Bonds weekly chart. We are nearing one of the better seasonal dates to be long this market as indicated by the arrow furthest to the right on the chart. Our friends the commercials have not really been of much help recently in helping us call the swings ( red line in third graph ). What has been of good value is one of my custom versions of COT study. Notice with the 3 Gold lines how well these sharp changes forecast the next move well. Unfortunately, there is not a good indication right now via this indicator.
We have had some commercial selling net over the recent weeks and months, so that does support a potential sell here, but the daily shows up short term buy signals right here on this dip into the seasonal period. In this unique period where so many markets are inextricably linked in ways they have not historically been, it is imperative that we view things in relation to these other markets.
So in summary here is what I see. A panic rush to the metals, gold specifically by small investors, the big players selling with both hands there. A stock market in a very strong uptrend and even though I have been calling for a decline, no meaningful one has happened yet. We have the dollar getting pummeled. Energy prices relatively weak.
In deciphering this it seems we have somewhat of a decoupling of the energy tie to stock prices, which never made any sense to begin with, a good thing. Metals tied at the hip to stock prices, with the currencies right there with them, of course the dollar being there in an inverse fashion. Bonds are decoupling a little also, as they are stronger than what I would have thought considering how strong stocks have been.
Net net, where the stock market goes is going to determine the fate of many of these other markets so in my personal trading any position in any of these I treat as the same as the others. If short Silver for example, that is basically the same as shorting the stock market. Being long bonds is also like being short stocks. Long currencies would be equivalent to long stocks. As a result, take this into account when determining position sizes in trades. If you were to be long the Euro, Gold and the SP 500 and short Bonds at the same time, that really represents one position times 4 in risk. All those trades will likely work or fail together, so you would need to take 1/4 of the risk in each one to have the same overall risk.
This has rarely been the case in the past, but it has always been the case that you need to know what the correlated markets are and adjust your risk accordingly.
I am trying to get long bonds and short currencies today, and long the dollar. I always buy above the market and sell below it, so I need moves in the desired direction before entering. So far none of the orders are filled so we will see what transpires. I have adjusted the risk as per what I just explained. I hope to get a more clear read on the Bond market overall soon but in the abscence of a clear sell on the weekly, I am deferring the the seasonal buy zone for long entries.
Tuesday, October 06, 2009
Gold is exploding this morning continuing its upward trend. This does not change the fact that it is setup for a decline. Being setup for a decline is different from a sell at the market call. We will have to see when the COT report comes out if this is the small specs again, but I suspect that it is. As you can see from the seasonal, mid month is about when the seasonal high kicks in, so this is par for the course here so far.
I have labeled a 5 point megaphone pattern that is in effect now which is a trap pattern I have written about previously that has been around for a long time. I did not create it, just learned of it. What is required for a short entry is a close below the prior bars low, so if that were to occur tomorrow, it would be a sell by this patterns rules.
Silver is a much weaker market by price pattern, and why I did the short trade I posted there this past month that worked out so well. That is also where I will be going to short this when I take another swing at it.
There is one possibility I can see for this market to really take off here and I will state that now. Rarely but occasionally, commercials ramp up the hedging they do like they are in this market by building a huge short position. They try and contain price will all their might. However, at some point they wind up losing more in this hedge than they can afford, so they capitulate, and give in. When this happens they go in and buy covering all of their shorts which causes a monster spike upward, that is quickly reversed. This is kind of like a rocket booster firing, it creates huge momentum for a burst, then fizzles out and a roll over of epic proportions happens. This is what occured in Natural Gas last year. It is very rare, but has happened a few times over the years so something that could happen here.
This is why it is very important to have entry and exit techniques that are sound. Just because we have this wonderfully setup market, it does not mean you just go out and short it, there must be some shorter term patterns to support the entry. Fundamentals are hard to time, you just have to watch them and be aware of them. The Gold bugs have completely different logic for their bullish view than this, it is not based on commercial positions but more on a gloom and doom economic view. They could be right, I am just a dumb trader.
If you think about it, so far my call for this market to top has been wrong, although I have said that this is a zone, not given an exact day for a top. However, I have made quite a bit of money on the short side in Silver over the last few weeks, while the market has basically gone sideways. This is what trading is all about.
Saturday, October 03, 2009
One of my favorite songs by Randy Newman, also the topic of the day, the US Dollar.
Here is a very busy chart, so let me dig into what all of this is. First of all the chart is that of the weekly dollar index, with the Black Line overlayed which is the closing price of the DJIA. I have green lines marking the very tight inverse relationship that has developed between these two markets. As you can see, they are trading in very tight correlation. Which is driving which is the subject of alot of debate and as per usual, I have a different view than most on this.
First of all, this inverse relationship is something that is not typical historically between these two markets. There has not really been a consistent relationship of cause and effect between these two markets. It is my feeling that the dog is the Dow and it is wagging the tail ( Dollar ). When I watch these markets next to each other, it is the DOW that moves first, which is then followed by an opposite move in the dollar index. I have never seen it be the Dollar first followed by a stock reaction, not one single time even on an intraday chart.
It is my belief that the reason this relationship currently exists is that really the only piece of good news in the world economically has been the stock market rally. When stocks are rallying everyone just generally feels a bit more optimistic. Individuals see their decimated retirement accounts increasing, and they become a bit more optimistic about the future. It allows a little more wiggle room for many bad things too happen.
One of the things the PPT has done over the last 10 years is to "arrange" for rallies in certain places that allow people to make some money while other things crumble around them. The Tech boom, the RE bubble, stock rallies etc. While inflating certain things artificially and doing this on a rotating basis, it has basically built the house of cards that fell last year.
Now we find ourselves in a quandry that the ammunition to inflate something else right now is being found in things that are obviously going to cause larger economic problems in the future. So, in the midst of all of this, a relationship between the dollar and stocks has developed that is more a sign of the times than really based in economic fundamentals. This could decouple at any time due to this, but it has persisted for awhile. Enter the PPT. They know that inflation risk is potentially out there yet we are in a deflationary spiral, so that risk for the moment is nominal at best. They can stimulate all they want without worrying about this. They have engineered this stock market rally and kept it up for awhile now which in turn has kept the dollar weak. However, if we do get a significant stock market decline, assuming this relationship stays intact, we are going to get a big dollar rally.
We are at the time of the year where seasonal peaks in many currencies have tended to occur, which is another supporting element for a dollar increase. The commercials have a fairly heavy long position in the dollar, but their buying which is the red line in the third graph was not able to stop the dollars decline earlier this year. I also look at GOLD as being a market setup for a huge decline as I have written about recently, which would also be bullish for the dollar. I think the stock market is making a significant top right here, again bullish for the dollar. We will know this week whether the stock decline last week is just a retracement, or the beginning of something bigger on the down side.
As a result, even though some direct dollar fundamentals are there for a rally and some are not, I have to lean to the long side of this market for the reasons just reviewed. It is hard to find anyone anywhere who is bullish the dollar other than a few traders who are some of the worlds best. That is the company I want to keep, not that of the armchair economists thinking that the dollar is going to get crushed.
I am a short term trader so I do not always trade in the same direction as the big picture views I have, I take what I see when I see it. I have made some money on the short side of the dollar recently even though I have been looking for a rally. As a result I still could do a short side trade in this market. However, for the big move, I think it will be up not down.
As I always say, I could be wrong and that is what stops are for.
Friday, October 02, 2009
That buy signal is a short term mechanical timing signal based on the Vix and a few other things, it is not a long term entry. If you look at the bottom of the chart, you will see the oscillator turning down confirming the down momentum we are obviously seeing in price. Bigger picture for a downside move this is what we want to see. However................
The gap down open we are about to get could very easily be reversed for a short term bounce, again the idea I have previously discussed about trapping the most people. I will be taking short term profits in some of the short positions I put on the other day on this open. This does not mean I am bullish, it means it is time to ring the register a bit on a big trade win. I will not be taking this buy signal and going long.
I was listening to one kid on CNBC this am after the number was released, who was essentially being consdescending to Bill Gross about his future outlook, when Bill Gross has been dead on correct with what he has done in recent months is so typical. I do not know why people can't set their ego's aside and just believe what they see. I know personally that when my ego gets in the way in trading, I lose money virtually every time. Who the hell is he but another liberal on the spin band wagon? The report was not good, any moron can see that. I would like to see his account statements to see how much money he makes or likely loses in trading with his profound insights that make him superior to Gross. Better yet he is probably an economist who does not even do any investing at all, and is wrong most of the time and it does not matter.
Gross has been right, why not give him his kudos and respect his opinion, even if you disagree. After all he has made billions from being right over time.
Thursday, October 01, 2009
Why in the world did I exit so fast? Trading is a thinking man's game and you have to react to what happens. Yesterday was quarterly end, so my logic was that when we got the quick sell program move down, the institutions would do everything they could to rally the market to preserve what was a great qtr for them. They did not want a 400 spot layed on them in the Dow.
I got a bit lucky on the exit, it was somewhat of a guess. I did not expect to see it move down that sharply and had intended to hold this trade when I entered. However, when that sell program just crushed the price that quickly, I "knew" a reaction of some type was likely.
I did re-enter a short position in the SH when the SP 500 bounced back up to 1058 toward the end of the day, which is a position I plan on holding for a bit.
Sometimes you have to take what the market gives you regardless of what your plans were entering into something.