Friday, April 30, 2010


Is there even going to be a small retracement that will be tradeable? We have 16 of the last 20 days now being up closes that has resulted in a megaphone pattern at the top. These expanding patterns have led to major tops and bottoms in the past, will this one?

The one thing that has changed without question in recent times is the level of manipulation by the government in the stock market. As a result, many patterns are not working as well as they once did. If you look back to March of 2000 you will see a 5 point expanding triangle or megaphone type pattern that looked similar to what we have here. That is not to say that I am predicting the same future from this. It is just me pointing out something for your study. As always, patterns are tools that need to be used properly at the right time. If you just blindly trade every megaphone pattern you probably would come out a net winner but the win loss percentage would be marginal. You would catch a few big ones and lose nickel dimers here and there.

Ideally one of these would form around the 200 day moving average for a buy entry into this bull market and that would be a higher probability play than shorting this one. However, we are just incredibly extended and this has been a picasso by the PPT to contain even the slightest retracement from happening. In all the years since learning of their interventions I have never seen them be this active or pull of something of this magnitude. As a result, it is very hard to play against the house.

I will be shorting this where the red arrow is if we trade down that far today which I doubt. It appears that they have already saved this as I type this. If by some fluke this does get away from them and yesterdays lows go, I will also be looking for individual stocks to play. As bullish as this is up here, I just do not have buy signals in the patterns I trade to get long. I guess I just have to be a party pooper until something changes.

Gold Bugs I think must be dancing in the streets right now as we head back up to test the highs. I will be very interested to see if this is Small Spec buying which it was the last time, or big money buying. It appeared last week that the Small fries were the ones doing the buying. If that is true we will setup a potentially great shorting opp at the prior highs. If it does happen to be large players buying then we could have an explosive upward move if the old highs get taken out. I really have no stake either way in this other than ego having to admit it is not a bubble if it keeps going. However, the one thing to keep in mind, the guys most outwardly pushing the marketing campaign for Gold do not have good track records of being good traders. Schiff to name one.

Bubbles can inflate for a long time as we saw with housing and stocks in prior tops. This is still no different to me. The situation in Greece is helping metals prices except Copper in the near term. However, one thing many people should try on for size just to see how it feels is this, "Maybe I am wrong?" I cannot remember the last time I heard an "expert" on something say this. Maybe we are going to $5,000 in Gold? I don't know the future better than any of you.

Thursday, April 29, 2010


One sharp day down now back up we go. The beauty of this is if we go on to cascade higher, is the way they broke the trend line just with one close first. This is a classic trap pattern, where they took the price just far enough to trap a few bears who were aggressively looking to short the market. If you look at the Strong Trend comment with the long term momentum line, you can see the main reason I exited that VXX trade quickly. With the VXX the trend is as equally strong on the downside as it is here on the upside. As a result, when I got that sharp move against the trend I took the money. I am not trying to be hero in front of this stampede. For all I know we are going to new all time highs before this is over, and if you think that is crazy you might want to build more flexibility into your thinking. That is not a prediction on my part. I still feel this is a bubble and even if it is not, extremely overbought by many measures. However I consider all things and try to be flexible. I have even considered that Gold is not the bubble that I have thought. You just can't get too stuck in any one view, what if you are wrong? You need to be able to adapt on the fly to trade well.

I respect trends, and so far this is just not one to get overly exuberant about trying to play reversals other than short term trades. In terms of short term trades, there is something brewing here now. If you notice, there is a 3 point divergence that has setup on the trend oscillator and that same oscillator is showing a downtrend. As a result, I am looking for a short entry on this move up here. If we just go straight up and blow out the highs and keep going, some of this will "undo" itself. In other words, this condition will work itself off and the trade would be nullified. What I would ideally like to see is a new high that gets reversed the very next day, where I would be a player at the low of that new high day. Second on the list would be a lower right peak, shy of the new high. I like traps better so that is why I am rooting for the first one.

The one day wonder has still not been conclusively voted on by the jury. If all we do is bounce as far as what we have so far, the one day wonder may be followed by another one. If we just go up here and take off, I do not mind missing the run because I trade patterns in price and momentum, and long patterns are just not there at the moment in my playbook.

Below is the British Pound trade I exited last night. I sensed potential problems with this due to the rising long term momentum line crossing up out of OS territory. I can't display that line do to current technical problems with my Genesis software. The one negative with Genesis is the program is very unstable with live data, and it just blew up on me which happens a couple times a day typically. As a result even though the weekly trends are still down, not everything was speaking the same language. There were conflicts between short and long signals. Once I need an interpreter, I don't bother hiring one I leave the meeting. This meeting I left where indicated by the arrow and took some decent profits. I had 7 contracts here so about $7300.

Let's hope for a good short setup in the next day or two in the indexes.

Wednesday, April 28, 2010


The main topic today will be the hearings from yesterday, but first to the charts.

Here is the waterfall from yesterday which we "knew" would lead to a bounce today at the beginning as we are seeing here. The question is will the bounce be sold or bought. I thought sell initially which is why I have it labeled as such. This has already happened now that I am posting this. The comment on the chart was for day trading not holding. We went down and are now rising so I think we probably have our answer that this was a one day wonder. We had light rain here in San Diego and my Satellite internet always goes out due to rain fade anytime there is any moisture in the air. As a result, there was a lag in me getting this up today.

Whether or not they sell this hard or not at all will give us a good guage of whether yesterday was a one day wonder or not. Most of the things I watch say to look to short rallies up towards the highs now, so that will be my approach. This house of cards may not yet tumble, but is it one of the biggest if not the single biggest air pockets I have ever seen in stocks. Even if you are of the thought that the economy is improving some, stock prices are very extended upward right now.

You can see how well that VXX trade I did worked yesterday that I mentioned here below. We certainly had a timely return to volatility. I hate taking profits that fast, but when you are trading against really strong trends and get a move than returns way more than double the risk, you need to take the money. This is true even if it happens in a few hours. Had this been a trade that was in sync with the larger trend, I would have held it longer. It was about 5k in profits, so not bad for being an idiot trading against the trend for a few hours trouble.

I do think there is more downside to come for the overall market but I have no idea if it will come today or we will bounce first. It was ironic that yesterday the very executors of the PPT transactions were grilled by those lazy fat assess in congress. I would love it if just one wise guy would break rank and ask why they are not equally critical of their futures buy program trades that were ordered by them during the fall that lost money and required tax payer money to cover?

Here is what I would have said to Carl Fatvin ( Levin ). So you say this was a shitty product and we misrepresented it to the public, how is that different from what you did with the healthcare bill? When you ran an investment bank and sold products to the public, how did you structure them and market them? Oh, you did not run an investment bank? What would qualify you to evaluate one's practices a textbook you read Cliff Notes on? What about the Dunkin donuts or Twinkies you obviously eat every day, who pays for those, taxpayers?

It would be nice if just one of these guys would have some guts to tell these jerkoffs to kiss their ass. However, the reality of all of this is Barry's folks had a talk with all of these guys and told them to just bite their tongues, take the tongue lashing, then it would be back to business as usual once the pubic has been deceived again. They have to appear to be doing something to attack these god awful people that have the nerve to make profits. The bonuses will still be there as long as you keep quiet about our little arrangement etc..

At some point people have to be responsible for what they do. If you lost money betting on mortgages you were greedy and stupid, PERIOD. There has never been a more obvious bubble in history than the housing bubble. You are responsible for being stupid not someone else. I have a friend who runs a mortgage fund that has been successful for years. He had encouraged me to invest in it and that he had taken into account what was coming. I told him I just could not in good conscience put money into an area that I knew was going to get wiped out. Ironically, his fund did survive and only had it's returns drop down a couple of % points.

The point is that it was so clear to me not to touch real estate, and I know Jack s.... about real estate. It was just obviously an overdone price extension and that is something I know a thing or two about. Net net, investors who bought these products from Goldman regardless of what else went on were greedy or stupid or both. It is not Goldman's fault or yours or mine that they lost. There is risk in almost anything, deal with it. So what if someone said behind someones back the product was shitty, or course it was. Fast food employees spit into food also. There are people in the world that do and say the wrong things. You need to be careful with your money, dont let people decieve you. If something seems to good to be true it most likely is. Greed will clean you out 100% of the time, no exceptions. It is not easy to make alot of money, yet we all look for the shortcut to doing so.

Don't be greedy, I was not yesterday in the VXX trade. Yes I could have made more money if I held on but I followed my plan to exit at certain levels and surprisingly those levels came up in one day instead of 3, so much the better. That does not mean since it happened so fast I would go for more. it means I have a well executed trade in the bank, done, on to the next one. It is hard to trade after a day like that so there is not alot new to look at for today. I do have a couple of shorts in stocks left over and am short the British Pound, that is all I have going right now.

Tuesday, April 27, 2010


One of the things we know about trading and life in general, is the rule of alternation. Bad periods beget good periods, calm begets wild etc.. In other words there is a cyclical nature to most things from one extreme to another. In this case we have had very low volatility for an extended period of time which is typical of bull markets. The ETF for the Vix is the VXX. Although this has it's limitations, it is the best thing I know of to play volatility. I am betting on volatility picking up some, so I went long in this ETF yesterday. I was asleep at the wheel and did not know my orders were even filled until late last night. Of course the odds on even one single down close in stocks are not good right now due to the incredible run we are on, but this was a valid setup for me so I pulled the trigger. The odds are even lower with the PPT manipulating prices around Barry's legislation pushes on things.

One thing to also note here is the Flat Lining of the blue line in the first pane. This confirms what price obviously does, a very strong down trend. Until this trend breaks, stocks will not break. We got a gap up open here this am which all else being equal I would have exited due to the downtrend, but it did not meet my ratio requirements of $won to $risked, so I decided to just stop below the low and let it play out. As I listened to Barrys 9 millionth script read this am, it became very clear to me he is laying the ground work for the VAT. That will be an economy killer when he pushes that through after the mid term elections. If they can get the economy humming enough by then for it to be able to take the hit this will bring is anyone's guess.

Bigger picture though, it will definitely be time to look to allocate most of your money outside the US if this happens. I do not believe there is any way even the PPT can keep this up in that circumstance. However, we have plenty of time before we reach that juncture. I continue to believe that although the trend up in stocks is very strong here, this is not a place to allocate new money on the long side. It is a time to reduce long side exposure. We are starting to see the list of stocks with ADX > 60 grow. Along with that, many individual stocks are now exhibiting blowoff patterns. This is not sustainable and will not hold. I do not know how much farther we push before it all comes down.

After listening to a conversation on CNBC this morning with Bill Ackerman, and at the same time thinking about Paulson and the money both these guys made, the plan is obvious. Determine where the bubbles are, and position yourself. There will be some big money to be made when the stock bubble and Metals bubbles burst. I do not know exactly when this will happen, but here is a quote from legendary trader Bruce Kovner. "You need to avoid crowd judgement." Just think about where everyone is leaning one way, and that will be where the opportunities for a big move the other way will be. I am not sure stocks are quite there yet, the sentiment indicators are not extremely bullish. However, when you see individual stock charts like the AAPL chart I posted previously we are getting near. Also here is one that to me is even more telling.

This is Whirlpool and not a stock that trades like a tech stock typically. This is a top not a buying opportunity when you see old style boring companies start to trade like this.

Monday, April 26, 2010


Why bother with G Gordon Liddy and his investment advice, lookee here. Apple has more than tripled since the March Lows. Why bother with the Gold Bubble when there are so many others that we are inflating more quickly at this point. Nobody builds bubbles like we do, and they offer tremendous opportunity to make money. What happens to most people though is once they happen to get in on a bubble move early, they get way too greedy with it. One thing today that has changed from the old days, is the tremendous amount of money that quickly chases the latest great idea. Technology has allowed this to happen. That creates bubbles and also inflates them longer and further than before. It is purely momentum chasing an idea, often for too long.

Here is one of the world's great companies, no doubt. They are also releasing hot new products along with producing great earnings ( the bottom pane ). This is all well and good and should support a price rally all else being equal. We can also look at the PE ratio and see it is still only half of what it was back at the peak of 2007. ADX is also strong but not over 60 yet, although getting very close. It is there on a daily chart currently reading 70 as I type this.

So why do I call this a bubble? Very simple, the Orange line on the screen which is a 6 month 3 standard deviation reading. You can see what happened the only other time this stock has ever hit that level of upward price extension back at the end of 2007. This chart looks more like a pork belly chart than a equity stock chart. Could this keep going? Of course and it probably will as long as the overall market remains strong. However, once we do get a decline of some type, I would be very careful holding this on the long side. When trading or investing, the price has to match up with the fundamentals. When you get something that is fundamentally strong and the price is weak, it is undervalued hence you buy it for the reversion. You have to also do this with profits. This price has gotten way ahead of the rest here.

You could argue that you are a long term holder, this is great company, I am never going to sell it blah blah blah. In my opinion that is not conservative but actually a tremedously risky way to approach this. The concept of paper profits is ridiculous. This is money you have in your account that could be cashed now. The notion that you have not won or lost anything until you exit is poppycock. Whatever you have in your account balance at the end of the day is how much money you have. There are tax ramifications of course pertaining to when you buy and sell. Of course one of my favorite stories is the one about the guy who lost everything because he held a portfolio of stocks for too long because he did not want to pay tax on the gains he had. If your mortgage is due tommorrow and you need 4k to pay for it, you take it out of an account of some type that has 4k. You cannot take it out of something that has less than 4k can you?

If you are long a stock like this, you have to have an exit strategy. It could be an options strategy on the put side if you do not want to sell the stock. However, if you do nothing and this gets halved which it will when the market finally turns, you have nobody to blame but yourself. If you miss the last $20 or $30 on the upside who cares. You have doubled or maybe tripled depending on where you got in, your money on this trade. Take it and move on.

Saturday, April 24, 2010


Here is what I see coming for next week

One of my favorite markets to trade is Silver due to how much volatility there is in this market. I have diagrammed the exact trade I will try to make Monday here. We do have to travel a ways to get filled on this since yesterday was a big up day there. Sometimes I like these the most because it will take a strong move to get me in. You can see if we get down there we will also break the dominant trend line in place here that is containing price. On my wish list I would prefer to have move accumulation/distribution divergence ( green and purple lines ). However, that is not a requiste for me to take action.

Big picture in the metals, I still do not have a great feel either way. The historic bearish fundamental setup that was in place when the top was made has been worked off some without price completely crashing. That was no small feat. However, you will see in a second on the next chart what bothers me about this rally. Maybe this is the trade that Dr. Laura, G Gordon Liddy, and Glen Beck and a few 9 yr olds all get right. However, I just can't make a habit out of taking investment advice from that Motley Crew. The end of the world as a premise for a trade is not likely to be one I will ever pull the trigger on. That is what bothers me the most bigger picture here. I just don't like the company I would be keeping on the long side of this market for a run to $3000 or whatever the latest target they have is. They might be right but as I have stated over and over, this is the most crowded trade in the history of the world. The markets have not historically made a regular habit of proving the majority to be right.

This is a GOLD chart not Silver, but the two basically trade together. As you can see from this chart, the buying that is going on is once again the Small Speculators, while Commercials are selling. We are now approaching again the record levels of the positions in these two categories again. I continue to think that there is something amiss in the COT data lately as I have stated in here repeatedly lately. Although I do think it is Small Specs and not big players hyping and buying this, something just feels very wrong about the COT picture here. All else being equal, when we hit the historic positions at the end of last year, we should have cratered in this market. There should have been a much larger drop than what we have seen and historically with this data this has been the case. In fact I cannot recall one single example of where historic positions were achieved like this that did not represent a major top in prices. Not one single time.

Since I have seen other markets where this has also happened recently ( Lean Hogs to name one ) it makes me very suspicious of who is getting categorized as what here. I have no idea why anything would have changed in this regard and maybe it has not. However, when something that is a fundamental indicator that has worked for decades all of the sudden stops working, while at the same time we have record dishonesty from the government on so many fronts, it makes me suspicious they are playing with these numbers also. In addition to this, the great readers and experts of this report can't pick a winner to save their life in the last year using this information. That tells me something is definitely amiss but I do not know what it is. For now I am looking to short this market in the next couple of days. If we explode up through here more than a couple of days, my sell signals will be invalidated. If it is going it should go right now.


Here is another market that I think is setup as a short but needs to go in the next couple of days.

Here is a weekly chart showing the Flat Lining down trend. This is kind of surprising in that the price chart does not appear to reflect the same thing. This momentum line is derived over a long period so as not to move too quickly. As a result, it does not show trend changes on wiggles. This situation tells me to still look for sells on the daily charts. Now to the daily.

Most of the trend indicators are saying down here and we have a bounce. A sell below Fridays low will be an entry for me here. If we were to blow through the recent highs on the Weekly chart, this market could really be off to the races. Until that happens, and my indicators say to sell, that is what I will do.


There is alot of talk about rising interest rates, but as you can see here they are not rising, they are dropping the last 3 weeks. This is the 30 yr bond chart and we have a nice little rally going on here. We have now had a couple of down closes which has setup a buy opporunity. All the trend indicators are up and the accumulation/distribution indicators are racing ahead of price a bit. This looks good as a buy to me right here if we trade above Friday's high. We are right into a weekly sell zone here, so this is a critical level that needs to be broken for bulls to be right. If we just roll over from here, the downtrend obviously stays intact on a weekly basis. I kinda wish we had a sell signal here on the daily becuase it would tie into the weekly better. We never seem to get everything we want!

That is all for now, we will see if any of these play out next week.

Friday, April 23, 2010


We did get the reversal bar up yesterday as I had commented I was hoping for, now what?

You can see my sell order resting in the market below the current price level. This is for today only and follows up on what I said yesterday, that I would sell below if we got a reversal bar up, which we did. I doubt this order will be filled, and there are not alot of other things I look at that tell me we are going down here today. It is a setup so the orders are in and I will also play the SH etf with it if it fills. As I have stated over and over, set your negative economic views aside. Right or wrong we have a major uptrend and the market does not care about anything else.

It is probably time for the Elliot Wavers to send out another email about the end of the world. This is where Macro views can mess you up with short term trading. You have to have the two come together to be successful. The problem is if you are shorting into this rally at what point do you say uncle? A 10% loss, 20, 30%, 80%? There has to be a trigger for entry and that also gives you a logical stop loss point. If you look at the chart it is just all higher highs and higher lows, so there is no bigger picture entry setup that I can see anywhere. I do state in here possible bigger picture things going on, and there are some right here, that could potentially cause the market some trouble. It is imperative that you understand that there has to be some shorter term evidence that ties the two together to take action. We have not had that yet.

These types of market situations are very difficult to trade because there are just no pullbacks at all. The only way you can do it is to just wait for the sideways ledges like what we have here to form. Then you buy the breakouts of them. I do not trade in that way nowadays, although I used to. It is a good way to trade because your stops are small and it keeps you in sync with the trend. Trend fighting can be a quick way to ruin if you are not careful. There are alot of markets to trade so my suggestion is trade something else instead of something that is moving like this. If you insist on trading this, trade with it not against it.

My short term trade above although not likely to fill, is probably a losing trade anyway so I would not be in any hurry to follow me in it. Why would I have the orders in if I think it is a losing trade? That is a very simple answer. The orders are in because it is a signal with my methods. I never know which ones will be any good so I trade the setups when they show up. Often trades I think are terrible become big wins and that is why I always try to discourage people from trading based on their opinion. I sure as hell cannot do it.

I repeatedly mentioned buying the dollar on a dip and below is a chart showing that we have rallied there. I did not get long on that dip because my patterns did not set up. No regrets but hopefully some of you made some money there.

Thursday, April 22, 2010


Well I have to say this is a tough call to make here. On the plus side we do have the trend indicators saying down, but they have been saying that for 2 months and been wrong. We also have some divergence in the Pro Go indicator up here. We do also have the dumbest president in history talking alot which has often been a negative for the market. The VAT is a country killer, and if he gets that through there will be no reason to be anyting but short until we hit 3,000 in the DOW. That will without any doubt ruin this country and create a depression. How many people do you know that live so fat that they can afford to pay 17 to 20% more for everything they consume but food? I do not know many. It will bankrupt 100 million people overnight literally, maybe more. The sad part about it is that it appears that is his plan, that way he can control the masses. I can only imagine what history what write about this dude 100 years from now. I am sure it will be along the lines of the man who single handedly put the country on the brink of ruin.

That has nothing to do with today, but it is part of the background that has to be considered now that we are reaching into price levels that could be major turning point numbers. Also, yesterday was a reversal bar. Contrary to what many write, these are not great bars to sell below. I trade them at times, but usually try to avoid them unless everything else is perfect in a setup. I lose more than I win selling below or buying above reversal bars. I have caught some big wins doing so but I really hate trading them. I do like selling below up reversal bars that reverse back down the next day and that is what I am hoping for today.

When I look at individual stocks now after the few days of rally, I do not find many that appear to be ready to go down based on my patterns. Also, the NAZ is not setup pattern wise for a sell with my methodologies. Also I don't think the Russell is either and it has been the strongest over the last week making a new high when the others did not. I think what you do here depends on your big picture plan. If you are rally chomping at the bit to short this market, then you have to keep playing these setups until one hits. I am not of that mindset, so for me I am not going to short this today. I am going to hope the PPT saves this and reverses it back up as they have done so many times. Then if that happens I will sell tommorrow below todays low or thereabouts. I also do not like the fact that this price action is well above the trend line I have drawn on the chart. This would mean that we could move around for a few days above that line and still be in an up trend. I like the breaks to break trend lines on the day of entry if at all possible.

I have no idea if we will get a reversal bar back up or not. We have seen the PPT very active in the last hour on a consistent basis, so unless we get a day where the horse gets out of the barn early and big, we are not going to get a big down day. We need volume to overcome these manipulations they are doing with the late day buy programs. Keep in mind they could just as easily be doing it through big firms by guaranteeing the money to them on any losses as they could on doing them directly. However, what we do know is that there is probably an 80% probability that the last hour of the day will close quite a bit above the hour that preceeded it. That is a tremendous edge to have on the long side, and a very tough one to fight on the short side.

In summary, I am not shorting this today. I do have sell orders in for the British Pound as per the setup I posted yesterday as well as Sugar buys above yesterdays highs. I am also looking at Silver on the short side. I am not going to short the SP 500 today other than on a day trade if I see something. Early on here it looks weak but we have seen this before and it has not lasted. Volume will be the key. Will there be enough and consistent enough throughout the day to have a down close? Will the PPT save this once again? Below is the conclusion of my ABT long, which took away about half my profit yesterday before I got out. I did have a stop below the prior days low to take profits, and that was hit basically right on the open. Still a profit but half what it was going in. So be it, they do not all work out the way I intend. Still got a grand out of it, so I can pay 1/3 of my next vet bill with it!

Wednesday, April 21, 2010


Here is a trade I am sitting on hoping for it to develop, a short in the British Pound. If the price today were to stay where it is now, I will likely short this Thursday at the spot indicated above. We are at a critical juncture in this market. It has been one of the weaker currencies vs the dollar. It has also now rallied enough and for long enough off the lows, that it could be making a trend change. If we were to stabilize here or just a bit lower, this could take off upward. However, for the moment in my mind this is a weak currency on the verge of being tipped over once again.

I do not reveal all of the things I use to determine trades for a couple of reasons. First, this is a free blog, and I have worked incredibly hard developing things over the years. I will not give them up for any price much less free. However, at the same time I do not believe that there is necessarily any magic to how I do it anyway. I know many traders and no two have the same exact style. There are so many ways to succeed in this business. There are probably readers of this blog that have better techniques than what I have any way.

Trading is a process of constantly fine tuning and or improving what you do. If you sit back and just do the same thing over and over it will work well for a time, but the time will come where you will need to step up your game to stay ahead. One basic rule that I always use that serves me very well is selling the weak and buying the strong. If am looking at currencies for example the Canadian Dollar is the strongest one, so if I think there will be dollar strength and want to sell currenices against that, I want to sell the weak ones like the Pound not the strongest like the canucker. This does not mean I would not short the Canadian dollar because there is a possible sell setting up there What it does mean though is if that does set up I will look to see if another currency might have a better sell setup that is also weaker.

In these instances, the weaker one almost but not always, will move more in the desired direction. There was a recent exception to this in the Wheat and Corn markets. I went long Wheat because I was bullish on both Wheat and Corn, and thought Wheat was stronger. It had moved much further up off it's lows than Corn had. It was very clear on the chart. Yet once I went long Wheat, Corn moved up way more. This is rare, but does happen at times. It is not a perfect world. If it was we would not have that pinhead in the oval office.

Next, we have a possible sell signal setting up for the SP 500 for thursday if today closes higher. Here it is displayed below. If that is set up after today I will go over it tommorrow.

Tuesday, April 20, 2010

Macro Economic Top Down Approach

This is the last of the trading/investing styles I am going to cover in my review series. First, a couple of notes.

1) Anyone who read the few comments by one poster about Arbitrage needs to be aware that he/she is a complete fraud. I did some searching on the internet and discovered that this person if they even exist, just cuts and pastes that same little excerpt everywhere they go. There is never anything more or anything less, just those exact words. Just be careful when you run into claims like what was represented there. I will be blocking all future attempts by this jerkoff to get things in here. Always trust but verify, but also do not automatically trust. Anyone representing there is no risk in any investment strategy is just simply lying. This person has developed no such thing and is trying to scam money out of people. Also, arbitrage strategies do not make those kinds of returns.

2) I entered and exited 4 shorts yesterday in individual stocks shown below. One actually entered Friday ( AIZ ). I decided that even though patterns in these stocks were there for shorts, there was not one for the indexes as a whole, and it was just not quite time to be short. Two of those trades won and two lost, and I came out about 1k ahead net. You can see the 2 losses were exited very close to where I entered them. This is not bad considering I was against one of the great up trends we have seen in recent years. I do think we are close to a sell signal in the indexes, and it could happen this week. If that develops I will load the boat with individual stocks as well. Patience Grasshopper.

You will see the great exit I had in JWN, this was actually a gut call, something I do not do very often. I got short early yesterday and this stock just fell out of bed, a very large move for a stock like this one. When I looked at how large the range of the bar was and the fact that the indexes were stabilizing, I reasoned that I should take the money. Obviously, as you can see that was a great decision.

I did also in the spirit of the great ole' american rally, go long one stock yesterday which I have held, ABT.

I do not have any futures trades on at the moment, but do have buy orders in for Natural Gas above where we are currently trading.


This is probably the single most difficult way to trade/invest, and make consistent money. With this approach, you develop a big picture economic view of what you think will happen, then try and position your money in accordance with what you think the financial market ramifications of your economic theories will be. A prime example would be the Elliott Wavers. They have been spreading the doom and gloom view as we have moved up 1100 points in the Dow average. Since their structure has told them financial armageddon is coming, they are positioning themselves on the short side of basically everything. They are currently being clobberred but hold things very long term, so it could eventually work out for them. They sit on huge drawdowns often.

They may well be right, I have no idea. The trick though with these approaches is both one of having to be right about the big picture, right about how that big picture will move markets, and right about the timing of such moves. This basically requires a hat trick to do well. An example of where people have done this and it has paid off, is in the metals markets several years ago. I know several people that got very bearish on everything and concluded that would result in a rise in GOLD prices. They then positioned themselves accrodingly, and did very well.

This was no small feat. History would have shown that this macro-economic view has not typically resulted in rising gold prices, this was an exception and not the norm. In this case they developed a big picture view that was actually historically incorrect, but correct by the way it played out. This accurate analysis paid big dividends. Had I been investing that way I would have lost money because I study history, and never bet on the once in a lifetime scenario coming true. I always bet on the odds on favorites, so I would likely be a losing trader in this approach. This leads me to the main challenge with this approach.

You can be right about your view, no small task. You could also use correct historical market movements in reactions to prior such conditions. Next you could lose all of your money. Look at the people that are bearish on stocks and have been for months. Some of these people have taken tremendous losses. They probably have the macro view right, yet what they have wrong is that there is not the relationship between short term stocks prices, and big picture economics that they have factored into their model. They have part of the equation right and part wrong. There are so many moving parts in this type of approach that if any one of them goes wrong, you lose money and potentially quite a bit.

You can do everything right, and then have the outlier event happen that kills you. In the GOLD example, the outlier event was what they bet on and it came in, a home run. Like putting all your money on one number in a roulette wheel. Longshots do happen at times, but it is not the way you want to bet over a large sample size. Life is full of random activity, and the older I get the more I think there is.

This is an approach that also requires tremendous patience as well as confidence that you "have it right." It will often take quite awhile for all these things to come in line for you to find out if you are right or wrong. You have opportunity cost that your money is tied up for a very long time, you better be right or you have foregone alot of other possible things you could have done to make money.

Some people do this well, it is not for me.

Monday, April 19, 2010


The next in this series of reviewing trading styles is the age old adage of buy and hold. This of course is the running theme of the brokerage and money management business in the US. "You want to be a long term investor." Stocks have far out performed other asset classes so "you should just buy good solid companies and over time they will outperform." These are amongst the comments made by people who push this approach.

There are some merits on certain levels to some of these comments. Warren Buffet and all of his incredible success can hardly be challenged. He is one person. You cannot judge the whole lot by one individual. However, investing in solid long term companies, the brick and mortar so to speak, does have it's merits. If you have the foresight to know when all of these dips are coming and can buy only on the weakness, then just hold them indefinitely, you could have some success. Here is the problem with all of this. As you can see from the chart above which is a monthly SP 500 chart, since the early 80's we have had some incredible price swings. Very few individuals have the fortitude to buy into these types of declines, and even for short term timers like me, getting the lows is very difficult if not impossible to do regularly.

Due to this, most people do not buy only on these dips. If you do not your average price may not be so good with this type of approach. If it is not then you can find yourself 20 years into an investment, without much of a gain. There are dividends that can be factored in which do enhance returns. However, during periods of extreme stress, often those are suspended. When that happens it can dramatically effect the bottom line of your portfolio. If the time comes around when you need your money when one of these dips is happening, your whole life could be ruined. We certainly saw some of this the last 2 years.

The other thing that can obviously happen is the GM scenario. There are not many people who would have advised you 20 years ago to stay away from all the auto makers. I personally would not have even though I hate unions and grew up watching them support bad workers with low productivity. Yet had you had GM as a stalwart of your portfolio, that portion of it would have been wiped out. The problem with using indices like the DOW for example in computing historic returns, is that it's composition is always changing. Companies come and go from that average, and the values going back cannot always be refigured because some of the new additions did not exist 50 or 100 years ago. Due to this some of the %'s used in comparing stocks to other asset classes are not really accurate and can be very misleading.

One of the best ways to buy and hold is an approach based on some basic market timing techniques combined with buying value stocks at those times. For the most part, buy in the fall, Mid Oct or thereabouts, and pick 5 to 10 undervalued "blue chips" and hold them until May of the next year. At that point you sell them and buy a new group in October. This is a modified buy and hold approach, which can far out perform the basic approach. I did trade this way for a period of time with about 100k just screwing around, and did have some good success. However, the returns which were often in the high teens, were just to low for my taste.

I would rather miss a move, than sit through a wipeout like we saw in 2007. The truth be told, I got my Dad who is 82 and could not afford to lose any money, completely into cash in all his retirement accounts when the DOW was at 12,832. This saved him from having his life literally ruined and being a dependent on me. In summary here, the Buy and Hold approach I really think is fraught with danger. It can produce good returns over time, but is a very dangerous way to trade, not a safe way. Alot of people make excuses about being too busy etc to bother with their investments. Make the time! I am too busy to listen to you complain when you lose all your money because you "were too busy."

Employ some basic timing techniques to this theory and I think you will be pleased with how you can enhance your returns pretty nicely.

Saturday, April 17, 2010


We have had some breaking news stories in the last two days that need to be discussed. My review of trading strategies will be resumed Monday.

The Goldman Sachs story is a big story in many ways beyond just it's on the surface impact. On the surface they developed a product that was sold to the public and buyers of that product lost money. I guess I am just stupid because I do not understand why investment vehicles are now guaranteed to make a profit. The whole idea of investing is risking your hard earned money in a way you judge to fit your own investment goals. Risk by definition means there is a possibility the outcome will be a loss. If we are going to move into an era where there is no risk, the returns will be no good. You cannot expect to get an above average return without taking any risk.

If people were dumb enough to not see the most obvious bubble in US History, the housing market, they deserved to lose money investing in it. Is it Golman Sachs fault that people are stupid? Apparently so. Crafting a product for people to invest in a market that was the talk of every us citizen who could speak english, was something done by many investment firms. Guess what, most of those investments that were sold to the public for the real estate sector lost most of their principal. I personally sold my Newport Coast Mc Mansion at the end of 2005 and rented for 2 years knowing the market was going to crash. I made over 1 Million dollars on that buy and sell, and it was the easiest decision I have ever made. It is not my fault or anyone else's for that matter, that many people did not see what was so obvious.

Here is what I think is really going on here with this suit. This is a shot across the bow by the government to a few groups of people. I have been aware of the PPT for quite some time, and I think now many people are now seeing what those of us have been barking about for so long. Recently a trader from JP Morgan has brought forth a story about how the PPT guaranteed their losses shorting the metals markets in an effort to keep prices down and the dollar up. What a coincidence that he was at the last minute taken off the witness list before the congressional hearing. They certainly would not want that type of information being thrown out in a televised hearing would they? Think about that, these guys could short like drunken sailors and have the comfort of knowing that all the losses on short positions would be made whole by the PPT. Guess what, these guys get bonused based on profits, so essentially they have guaranteed profits, hence guaranteed bonuses in a sense.

This is not a bad situation is it? Not a bad incentive to keep your mouth shut is it? One other thing to consider is that two main sources the PPT operates through are rumored to be Goldman Sachs and JP Morgan, along with one other place which I won't mention. Again these are rumors. However, when you now put all this together here is what becomes clear to me. We have an insiders club in virtually everything in our country today. The trail of GS to the whitehouse is pretty well traveled. Life is good for all of these guys/gals, mostly guys. GS reports earnings soon and we will see that they will dwarf what a 1.8B suit from the SEC is bringing to bear. We also have had a break from the ranks here with the JP Morgan guy ratting them out.

It is my contention that this suit is a warning to people to keep their mouths shut, plain and simple. The suit itself is ridiculous, but there is a hint that the government is not going to allow anything to get out. It is more than interesting that they are not charging Paulson of anything. My suspicion there is that because he is a wealthy hedge fund manager who is not part of the club, they really have no leverage over him like they do with GS. He could decide to just give a legal team 20M bucks and just tell them to have at it with the government and cause them all kinds of problems. However, I do not think they are going to be able to keep this quiet forever. Once one person breaks the code, it is going to be hard for these guys to contain this. It will be fun to sit back now and see where all of this goes. Does this effect the stock market? No not in my opinion but it depends on whether it winds up bringing an even greater discontent with the government. If that were to happen it could have a large negative impact eventually.

Now let's look at yesterday, was this break the beginning of something bigger?

Looking at the daily chart here, we have both the momentum oscillators in up trends. As long as this holds, dips are buys. If we were to continue down enough to get these back under their trend lines, then rallies would be selling opportunities. This out of the blue selloff once again had a chance to get going and was saved late in the day. This has to be 50 late day saves it seems like since the lows were made last March. Call it what you will, but the reality is the market forces are just not going to let this sucker break without a real fight. Deal with it. I do not like one way markets, they are very difficult to trade. 38 of the last 50 days have closed up, 76%. This is not a market to short in general from this standpoint alone, but as we all know, you cannot always look at things one just one dimension.

Let's look at something very significant that has just developed.

Tom Demark who is a well known brilliant market technician, has methods for picking major highs and lows in markets. My favorite tool of his is his Sequential pattern. You can read about it elsewhere on the web or buy his book that desribes it. This method gave us a sell signal beautifully on Thursday of this past week. This does not mean on that day you just short the market. It means that the pattern is now in place, now you look for a break to enter. Had my trend oscillators been in sync with it I would have been selling with both hands on Friday. Since they were not, I am still dancing carefully here. This has been an incredible run here spiking up into what does appear to be a blowoff top that is forming. Blowoff tops can form over a long time, GOLD last year to name one recent example. The market extending vertically for months before finally peaking. It was 2 days from a Sequential sell when it finally peaked. Net net, these are good areas to look for reversals.

The other thing I like about this is that it came out of the blue just when everyone was waving to the crowd. We also had a sequential buy in the Vix about a week ago ( again this is a sell for stocks ). So, we have alot of things telling us this could be more than a small pullback. Sequential is designed to pick major highs and lows not just wiggles, which is why it does not speak too often. Now the last piece of this discussion is Larry Williams market forecast. He has a few that are a bit different from one another, but there is one that had 4/16 as a high point for a significant decline. Keep in mind that date was thrown out by Larry in this forecast released in January, and here we were with a big down day right on that very day. Incredible is all I can say.

He had several different forecasts, and one that actually was a composite of all of them which has a 5/28 peak. In that forecast he has the low in Feb much more dead on than this one has, so that is the one I had been following. However, this still shows a move up during this recent period. The way to use these is to watch markets that are following these maps closely and ignore the ones that do not. Since this has now pegged this last decline right to the exact day, it is time to favor this one. If we get new highs I will defer to the late May time frame which I have alluded to in other posts.

When we look at all of this together I think this tells us it is time to be looking for short trades. One day can change alot of things. In this case that one day served as confirmation of alot of other things that are out there saying we have trouble now. We are also basically in the price zone I have been talking about for awhile now, 1229 - 1235. Yes we are shy of it technically, but just a rounding error basically. There is not any magic to that number, it is just a price zone.

Since I need patterns to back my setups, I am pouring through my charts to try and find some places to get short. As far as the indexes go, the patterns are not there yet so I am sitting tight waiting with them. I doubt I will buy a dip now based on these other things I have just discussed.

Have a great weekend

Friday, April 16, 2010



It was represented in here the other day by someone that Arbitrage Trading is the holy grail of trading, is it?

Arbitrage trading is basically looking for very small price differences in securities that should not be different and are therefore temporary. Once you identify those, you put on a position to benefit from it coming back into line. Generally since these moves are miniscule, you have to trade huge volume on these types of trades to make a small amount of money. The argument is of course that the accuracy of the trades will be very high. What you wind up doing is a ton of large sized trades to make a few grand here and there. Annual returns due to how small the wins are, generally are in the 8 to 12% range for those who do this well.

As with everything, some do it better than others. I have a chart of the Premium above, which is the difference between the cash and futures prices of the SP 500. It is a daily chart, but can still serve as an example of how someone might go about trading using this concept. You can see that the values are contained in a range, this is typical. What you would do using this concept here would be to buy stocks and sell futures when the premium gets too high, and do the reverse when it gets too low. These are how buy and sell programs are triggerred on Wall Street. This is why you can see quick snap backs when large moves happen. They are known to happen at certain times during the day. This is also how you can tell when the PPT is at work. When these programs show up without any real discrepancy in this value, it is very likely a government sponsored move.

This is somewhat of a variation of true arbitrage and really just using the concept. Strictly speaking true aribitrage would be finding the exact same security that is traded in more than one place, trading at different prices. You would then buy it in one place and sell it in another to take advantage of it coming back to par.

The biggest negative with doing this type of thing is the amount of money required to make any real money doing this. In reality you need hundreds of thousands of dollars or more in margin money to be able to do trades like this. Also if for some reason you get an infamous "electronic death spike" you can get wiped out in one trade. I have always believed that to be consistently successful your avg win has to exceed your average loss. That will not be the case with this style of trading. Your average loss will be bigger and you make money by high frequency and high accuracy. A large loss will at times wipeout profits from many trades, I think that is very dangerous.

The second negative with this is that it is very high intensity, you need to be glued to the screen every second of the day looking for these minor edges to show up. You then have to act in a split second. You are competing against the smartest people in the world when you do this. They have very sophisticated models that are completely automated, that launch their orders the minute these little discrepancies develop. As time goes on it is more and more difficult to trade profitably doing this.

The benefit is that if you do this properly you should be able to eek out very small profits consistently and make slightly above average returns. If you are highly intelligent and very skilled in writing programs to take advantage of this, it is a viable way to trade. However, do not look for any home runs, there will not be any. You are in and out in seconds doing these types of things.

I am fairly sure that the two day span I had last month made a greater percentage return in my accounts than the lion share of arbitrage guys will make this year. However, if they are trading $100 million dollars and make 10% on it, that is alot of jack. You need deep pockets to do this and just be aware of the pluses and minuses of it before getting into it.

Thursday, April 15, 2010


Before I get to todays topic, some housekeeping on a trade I mentioned the other day

Here is that Sugar trade and it's completion. I have to admit that I had intended on holding this a bit longer, but as per usual, the market threw me a bit of a curve ball. We went up 4 straight days off the lows instead of making a higher short term low first. Often but not always, this will result in a retracement move back down testing the lows. I don't like riding those retracements after I have had a large paper profit like this. I do not mind if they happen right away where the trade had never really gone anywhere first. Sincee I prefer this to happen early, when it does not, and I am trading against a trend this strong, I tend to take profits faster.

As you can see it was $14,200 so not a bad tally for a few days work here. There was another trade I made in Natural Gas that I got some money out of that I did not post when I entered it, but it added to this sum above. Overall a decent chunk to take out of the market during a 3 day span. This exit and the logic of it leads into today's topic, which is Discretionary Trading.


I like to refer to this as Caddyshack Trading. The reason for this is at times it reminds me of the scene when the Caddies get loose at the pool in the movie Caddyshack. It is just total pandemonium. It is wild completely random unpredictable activity. This is how Discretionary Trading can feel at times, especially when you are on a losing streak. This style of trading basically means that you are using your discretion in applying whatever techniques you use to make your trading decisions. The progression in my career has been that initially I was a mostly mechanical trader than used some discretion. This was when I was just learning how to trade, and was studying various techniques to see what worked best for me. After doing it that way for awhile, I then decided that systematic trading would work best for me and be a better fit to my personality. I stayed with that approach for quite some time.

Eventually for some of the reasons I mentioned yesterday that are drawbacks to systematic trading, I decided that I could make more money using more discretion. I felt that I was just missing too much opportunity. Most of the worlds greatest traders are discretionary traders. It is kind of the old adage of playing chess against a machine. I don't recall the details exactly, but I remember a series of chess games between a computer and one of the worlds great chess players. The human as I recall won 2 out of 3, which should have been impossible. The bottom line is that you have to do some thinking in life, you cannot just blindly follow rules that may or may not always conform to the changing times.

I thought I would be able to make more money trading with discretion than mechanically, and that has turned out to be the case. In all honesty though, the transition was very painful, and it was during that transition that I came up with Caddyshack. At times it felt like I had no idea what the hell I was doing and also that I would never get the consistency in my results that I was used to. Trading systematically I had several years where 80% of my trades were profitable. It is very easy to be confident and click the mouse when you know that 8 out of every 10 trades will make a profit. It is another thing to have that same confidence when you are going through a period where 4 or 5 trades in a row lose.

When I define discretionary trading as just using your discretion with your decisions, that does not mean you just randomly buy and sell. I do have friends that do that and they have no consistency at all and just lose money month in month out. Trading in this fashion just means you develop and or apply techniques to trade  the markets using your best judgement as to when to do so. In the above example of the Sugar trade this is how I did that.

First, I judged that based on several factors including momentum indicators, accumulation distribution indicators, and cyclical and seasonal patterns, that the Sugar market was setup for a rally. Next I had to make a judgement as to how I was going to get long that market. I watched bar patterns until I saw a few that I thought supported a rally if certain levels on the high side were taken out. I placed orders for a few days with none of them being filled, until finally the one shown above was. My plan was initially to use a target of 18.39 to exit. I know from experience my best trades go right away, and this one did. I use my judgement on profit targets in different ways. In this case since we are still in a very strong downtrend, I was not going to be greedy and try and be a hero and pick the bottom of the whole move. Once we went up 4 consecutive days and did not get to my target I went to plan B of the exit strategy. That is basically to try and exit if I don't reach my target at a 2 to 1 ratio of what I risked. Once we had exceeded that and it was clear we were not going to reach the target yesterday, Plan B called for an exit close to the close.

The biggest drawbacks to this approach are as follows. First, you are open to making a wide variety of variable decisions that can lead to random results or worse. Second, emotions are completely in the open and can often influence what decisions get made. Third, it is very hard to go back and review a decision after the fact to determine what you could have done differently to avoid a bad result. It is just impossible to re- create that identical mindset that you would have had at the time of the decision.

The best way to get around some of these obstacles, is to develop an approach that is reasonably fixed and impart some discretion as to how to apply it. This is what I do. I know when I "stay home" meaning stick to my core setups, I consistently am a very good trader. When I get away from that core and start forcing marginal trades in an attempt to broaden myself, I often get burned. I think trading systematically first, then transitioning into discretionary trading is the best path. This way you will have a base of sound disciplined logic in your approach, then can use your experience to enhance the results.

This has been my path, and it is the one I recommend. I did not do it that way by design, but I think it is the best way to develop the best of both.

Wednesday, April 14, 2010


One comment made yesterday got me to thinking that I have never really reviewed the different approaches to trading that one can take. Today I will do a brief overview of different ways of trading/investing and their virtues and drawbacks. I will take one of the below approaches each day and discuss them.

Here is an equity curve of an SP 500 Mechanical trading system I have used in the past. You can see the huge gains, then the leveling off in recent years. What this represents is typical. A mechanical system which identified short term imbalances and sought to take advantage of them. It worked very well for awhile, then all of the sudden it's equity curve is going sideways. This is typical of so many different approaches that are mechanical, and the main reason why I do not trade with them anymore.

Here are the different ways you can trade/invest:

Systematic Trading

Discretionary Trading


Buy and Hold

Macro-economic Top Down


With this approach you craft a fixed set of rules for entries and exits and follow them without question or hesitation. This is a very effective way of taking emotion out of trading. The very best in this category can make 20 - 30% per year pretty regularly. There are years where the systems work exceptionally well and you do much better than that. I used to trade that way and did experience a few very good years well beyond this level of return. The challenge with this is twofold.

First you have to develop a good set of rules with edges in the markets. This is not easy. Over optimizing past data is a chronic problem and often leads to subpar out of sample performance.You have to have something to base your systems on, so researching what has occurred in the past is the best way to try and develop rules for buying and selling. I have spent many years backtesting various ideas for exploiting what I see as edges in the markets. I have often found significant results to some of my ideas. At one point after studying just daily seasonal tendencies for up and down closes in both Bonds and SP 500, I developed a system to trade that bias. Any bias over 85% I entered the market at the opening the next day and exited on the first profitable opening. I ran off 55 consecutive winning trades with that. To this day that is by far the best such run I have ever had.

This was a case where the actual trading far outperformed the back testing. Outcomes like this rarely happen, but occasionally you get lucky. However, I started to run into trouble with this approach, took a few losses, then realized this was a dumb way to trade and shelved it. That wound up being the greatest call I have ever made, because that system has not made a yearly profit since that time. I would have lost alot of what I made had I continued on with it. Ironically a judgement call outfperformed the mechanical here in the end. However, in defense of systematic trading, alot of that money made from that is still in my bank accounts so it was not a total loss.

Second, the single biggest drawback to this approach, ultimately almost every system I have ever developed at some point stopped working. They all became losing systems some after years of profits. There are a few reasons for this. First and foremost, there are a ton of smart people on wall street. Some of these firms hire one brain child after another out of MIT to develop systematic approaches to exploit market ineffeciencies. As a result, as individual traders we have very strong competition here on the idea front. We may discover something, but at some point these powerhouses also discover it. Once that happens, it gets "arbed" out. This means the edge is eliminated and no longer can be traded profitably.

You can certainly chase your tail on these types of things and as long as you can stay ahead of the game and accept that a good system will last a year or two at most, then this is still a good approach to use. You will have the pressure of having to constantly stay ahead of the curve here, developing new ideas over and over. It is unlikely you can develop an approach, then make a 10 year plan to use it. It will just not be effective for that long.

Being a martial arts guy and ex wrestler, I am one of the most disciplined people any reader of this blog would ever meet. This approach suited my personality very well due to this. I could follow the rules without question. Many or even most people, cannot do this. You have to understand that if you literally miss one trade, or do one incorrectly, or pass on one, etc.., you can ruin your whole year with this approach. That one trade you miss could be the single biggest trade of the year. When I had my trading service, we had a 5 month stretch without one single loss trading Bonds. This was an incredible run, 22 straight wins. It was completely mechanical, just log in to my site, get the orders for the trades, and click the mouse. I actually had a client at the time who cancelled his subscription because he had lost money! How the hell could anyone have lost money during a stretch without one single losing trade?

He was such a pin head that I never went far enough to determine how that could have happened, but obviously he did not follow the rules. Very few people can do this correctly. This person was typical of why this approach does not suit everyone. You have to match your approach to your personality or you will not succeed.

I will discuss Discretionar Trading tommorrow.

Good trading to all of you