Monday, January 31, 2011


There is certainly no reason to be surprised by today in the stock indexes. Once I heard Geraldo say over the weekend that this event in Cairo would be very bad for the stock market, I knew we would rally Monday. I covered in advance, what has happened following these Friday declines at month end during the FED era, and this was no different. Here is the best way to think about this. The market is not going up for fundamental reasons, so why would it decline on them? The market is only rising because it is being manipulated by the FED and they are being directed to do so by the Executive Branch. As a result, what you have to consider is whether or not the situation in Egypt will change the mandate. If you think it would it would cause the Fed to stop launching futures buy programs, get bearish. If you think it is more likely to enhance those buy programs, which supports the government "recovery" narrative, get bullish. As always it is up to you to decide.

I did find this commentary from one of my original mentors, Kevin Haggerty, on the Trading Markets web site. I cut a small part out of it. As I have mentioned in the past, he was the guy who first made me aware of the PPT and how they operate. There is great reading at that web site, I recommend it highly.

It is evident that QE2 is not working the way the Fed and most administration friendly economists thought it would in theory but in reality interest rates are on the rise despite the Fed and QE2.

Last week, Steve Liesman [CNBC] put that question to Bernanke, and said that both interest rates and commodity prices are rising despite QE2, so how can that be a success ? Bernanke`s answer was “We have seen the stock market go up, and the small-cap indexes go up even more” That is another example of Bernanke essentially admitting that the market is a tool and is being manipulated.

The Fed has two politically imposed mandates, which are keeping prices stable, and creating an economic climate for low employment, so I guess manipulating the stock market is now the third one. None of those three mandates was what the original Fed was intended to carry out. The Fed is now owned and essentially mandated too by the Politicians, so what can go wrong ???

Many professionals expect a pullback, although many remain in the closet about it because they work for institutions and money managers that have to keep the game going so they always have to hype the market. Insider selling is the highest in four years, and there are negative momentum divergences, as the major indexes are extremely extended on a 1 year STDV basis. The sell side brokerage firms are hyping 2011 for a significant gain in economic growth, in addition to the bullish scenario for the 3rd year of the Presidential Cycle. However the SPX is already +94.3% going into that cycle so that is a headwind to the 2011 exuberance.

As I have stated in here many times, this whole thing is not news anymore, since they have basically publicly admitted they are doing this. My question that I always pose is, isn't this a slippery slope? I wonder how much everyone would like it if they decided to do the opposite and manipulate it down? It is always ok when someone is doing something wrong as long as we benefit from it right? The minute that wrongful act starts to hurt us, we all cry foul.. With all this being said, and I have harped on this time and time again in here for 2 years, where does all this leave us?

First, as I said the other day, a trend does not a day make. One down day in this type of trend means absolutely nothing at all. We still have a very powerful uptrend intact. Regardless of what is driving it a trend is a trend.

Second, we do have some historically bearish signals flashing caution literally all over the place. The Vix, insider selling, cycles, sentiment, momentum divergences, et al. There are a ton of things saying to sell, everything except the price.

Third, nothing will happen in lines with those bearish signals without volume.

As we saw Friday, volume can over power the Fed buy programs. Just the sheer enormity of the market nowadays dictates that 100's of billions are needed to stop a big volume down move. Although it seems they do have unlimited money, there is a cap to what they can do and we see that on these big days. Keep in mind that it not only requires huge amounts of money to turn around these declines, but it also results in a loss when they cannot do it. The Fed is the Fed, but they cannot lose trillions without at some point this genie getting out of the bottle. I think the taxpayers would have a different view on this if they saw how much money they lost trying to stop the 08 - 09 slide. It is in my opinion the sole reason why they refuse to open their books to the public.

Due to cycles and my indicators, I am still looking at the short side here, and will do my best to notify readers when I try to short this thing. For the moment I am flat watching this Picasso being painted. If you look at the last two tops, you will see that they featured a sharp break like Friday, then a bounce to retest the high, then a rollover. That is how I am looking to play this one.

The currencies I find interesting right here. Many cyclical things call for tops about here and dollar rallies. However, they are for the most part in up trends and the dollar down. This is a dilemma for me. I do have some marginal buy signals in the Aussie, Pound, Yen and Swiss. Some of those have already triggered longs which I did not play. It seems to me that the Dollar Index is starting to diverge quite a bit against my momentum oscillators. Although this does not mean to run out and buy by any means, it also tells me not to press a short bet there. Of course the reverse of that is long individual currencies. As a result, I am standing aside at the moment which I hate doing. However, what I hate more is throwing money away on marginal trades.

We have not even had one higher low in reaction to the increasing values each day in the oscillator which makes this a marginal short to me. For all I know this just keeps rolling over, but that is the judgement I am making for the moment.

Most of the currencies will trade with the stock indexes, and the dollar opposite. Since I am not sure about the stock indexes but am leaning to the short side, it all fits for me. I am going to wait another day or two to see if more clarity develops here.

One last thought. Keep in my when watching Sunday evening market action that the dumbest of the dumb money is the first two hours in the SP 500 futures of this session. These players consistently have been trampled by pushing moves down, just for them to get the sharp reversals like we saw today. I implore you not to become part of this herd.

Saturday, January 29, 2011


Yesterday I made a blunder and I hope others can learn from this. This is not something I have done often since I am in general very disciplined. I ignored a perfect sell signal in everything I look at based on being influenced by something from someone else. This is a tough business and we all go through times when we are on and off our games. It is during the off periods that we need to be particularly on guard to stick to our guns. We are most likely to be vulnerable to questioning what we are doing during these off periods. The above chart is that of the ES, I would have shorted the Russell since it is by far the weakest of the 3 major indexes.

Last week my mentor sent out a video talking about an exceptionally bullish seasonal trade coming right at the end of this month. He is one of the greatest traders who has ever lived, so it was hard for me to take a sell signal in the face of that bullish call. Of course as luck would have it I decided to wait for a couple of days for a "better" setup and of course the market tanked. We had a news event Friday which got things started. The actual seasonal trade is to buy Monday morning so it still could work if we get a bounce. Due to that I would have most likely taken my profits at the close Friday had I been in the trade.

We could really tumble here so Monday is a very important day. The Emperor does have no clothes and has been on the runway for quite some time. At some point some heckler is going to be heard calling him out and everyone else is going to finally notice. Until that time the trend is still decidedly up and one day does not a new trend make. The lack of any real effort by the Fed to reverse that decline was a bit surprising, but perhaps they are waiting for Monday. There was almost 180,000 contracts traded right at 1:00 and 1:05 pm very suspicious, but could have in this case been short covering. The charts I showed the other day with that heavy volume, were not days when people would have been short going into the close. They do have to pick their spots, and this one would have required a very large amount of money. As I have said in the past, they can't stop heavy volume declines for this reason. It is a $100 Billion proposition to reverse a 150 point decline. Monday is must see TV for this reason. Will this start off gangbusters and erase alot of Friday's action, or will we just roll over?

There is a ton of divergence on my intraday tick charts, so I expect this to go up Monday for that reason. In the past we have gotten a quick move down in the Sunday night session, then quick reversals overnight and a big pit up opening. Notice on the chart below the huge amount of divergence in the oscillator I use. This  when it has occurred toward the end of the months on big down closes in both bonds and the SP 500, has indicated the move was a fake and the market reversed right back up the next day. Here we have news events involved so that could be a game changer we will just have to wait and see. If this is the break I have been looking for there will be a bounce for us to get involved on.

Here are a few markets I am looking for moves in here. First, Crude Oil. I called for a decline there and was dead on very close to the day of the high. We just free fell there for a couple of weeks. If you look at the differences between the energy markets here it is really surprising to see how much stronger Heating Oil has been than Crude. These two do not usually diverge to the extent they are right now. In looking at prior instances where these two markets have diverged by this much I find a mixed bag in terms of the direction they went. What was consistent though was a big movement in the price. This makes sense especially if we finally get some decline in stock prices. If that begins to happen volatility is going to really pick up in alot of markets. It still looks to me like commodity prices overall are setup for declines more than rallies, and I think this market is no different other than a bounce we may get here first.

The Currencies are an interesting collection of characters here. Often the easy way to play these is just the Dollar Index. This market has gotten clobbered recently but has attracted some commercial buying now. Since we are at a seasonal time when this index has usually rallied, I am looking for buy signals there.

This does not really jump out at me as a guns are a blazin' type of setup. It is only because we are at a pretty reliable time of the year for a rally, that I am more attracted to this. Next is the daily chart which on the surface does not look like much, but I have seen a number of sharp upward moves from these types of looks from my oscillator. It is diverging quite a bit, but does not have distinctive points. If you look across several markets the meats specifically, you will see some big moves coming off these types of situations.

Next week looks to be exciting, and looks to be down in most things except Bonds and the Dollar up.

Friday, January 28, 2011


From my perspective these last couple of weeks have been very difficult in determining a direction to trade in most of the markets. Obviously as the government insures that the window dressing of the Dow and SP 500 continue to climb, underneath they have been letting a few other things go. As a result it is making it tough to get an overall read on what to do. They for the moment have allowed GOLD and CRUDE to decline. At some point though, even though they have developed a strategy to inflate everything, the markets will eventually go where they want to go. The GOLD and CRUDE declines have been huge here and exemplify what I have been talking about in here ever since I started this blog.

When you have markets that are either manipulated to certain levels, or driven their by small speculators, you have weak hands underneath. In both instances you have prices at levels not are not sustainable, and when they correct they do so very sharply. I told everyone in here about Crude in a very timely basis. I warned of Gold also, but cannot take much credit there since I also warned last year on that at this time and was wrong. Being off by one year hardly counts in this business, neither does being off by even a month.

As we approach month end, there are tendencies for stocks to rally at this time, so even though as I type this we are seeing a selloff in the S&P, I doubt it is going anywhere. As you look at the chart above of the Russell 2000, we first had the break which at the time in my mind told us to sell the rallies. I thought that because as indicated by the first red arrow, price and momentum had both broken support levels. However, on the bounce we went up enough where now momentum got back above it's downtrend. In normal market conditions I would probably still have shorted this today, but as we know this is not normal market conditions. The chart of the SP 500 while this was happening of course made another new high, so it is far stronger than this. We have inconsistencies amongst the indexes now. The small cap which is basically the Russell is showing the most weakness, the SP 500 the most strength, and the Nasdaq is in between. This type of non confirmation makes for tough sledding.

I do not have any positions on in either stocks or futures at this very moment. I am not going to take the bait on this current intraday move on the indexes just to watch the Fed make another phone call at noon and have them reverse the whole thing on me again. I doubt I will do much shorting in the indexes or stocks at all until we have an obvious trend change. There appear to be some decoupling's going on from stocks here in other markets which is a refreshing change. If it continues, it should allow us to trade more freely across all the markets. It is too soon to tell if this is real, so stay tuned.

There is a strong seasonal trade to the long side for GOLD here the next few days I learned from a video Larry Williams just showed us the other day, and we are seeing a bounce there today right on schedule. I think bigger picture now rallies in that market are selling opps but time will tell. For now the mustard is off the hotdog there. For today, don't take the bait on this index decline here, I am fairly sure this will be reversed by the Fed before the day is over.

I will give what I see as the markets setup to move and which way over the weekend.

Tuesday, January 25, 2011


As I have talked about this over and over, I just decided to surf the web to see who else might be popping off about this and found something I just felt was too good to pass by. Here is another crime scene photo from today in the SP 500. Once again right as we were on the verge of rolling over big right here, a magic 60,000 contracts were bought right at the low at 11:30. I have labeled this ab normal. You can see to the left a more normal distribution where you get accelerating volume on a sharp down move which exhausts itself, then the market rallies. One thing we have seen happen over and over, but not every day, is what is on the right. A mysterious buy program that comes out of the blue when one would rarely come along. The next chart is another example of one even more obvious. The very last day of last year in the last 10 minutes of trading you can see 160,000 contracts were bought in the last 10 minutes! Hmm... do you think someone wanted to make sure the year closed off on a strong note? You could have argued that was short covering for year end but the market was up the whole day so that is not applicable. It is what it is folks.

You can damn well be sure if these were sell orders and not buy orders, there would be hell to pay for this type of thing. The fact that it has an upward bias of course is good for average Joe, but I maintain that this type of market manipulation should not be allowed up or down. Just because it is up because the Fed is behind it does not make this right. This is why the market has a very strong upward bias now. The "mystery" buyer who can be relied upon at our darkest moments. I found the clip below which puts some actual numbers to this and it also explains why this can't be done every single day. This was actually from 2009 and it was aired on a fox network channel. It was an interview with a couple of traders.

“Something strange happened during the last 7 or 8 weeks. Doreen you probably can concur on this -- there was a power underneath the market that kept holding it up and trading the futures. I watch the futures every day and every tick, and a tremendous amount of volume came in at several points during the last few weeks, when the market was just about ready to break, and it shot right up again. Usually toward the end of the day – it happened a week ago Friday, at 7 minutes to 4 o’clock, almost 100,000 S&P futures contracts were traded, and then in the last 5 minutes, up to 4 o’clock, another 100,000 contracts were traded, and lifted the Dow from being down 18 to up over 44 or 50 points in 7 minutes. That is 10 to 20 billion dollars to be able to move the market in such a way. Who has that kind of money to move this market?

On top of that, the market has rallied up during the stress test uncertainty and moved the bank stocks up, and the bank stocks issued secondaries – they issues stock – they raised capital into this rally. It was perfect text book setup of controlling the markets – now that the stock has been issued…”
Just the sheer enormity of that number is staggering to me. Let's assume that his numbers are correct. Just that one little move required billions of dollars. Now do you wonder why the Fed is unwilling to open their books to the public? It is true they are making a profit doing this because they are able to keep the market ever creeping higher. However, during the 2007 - 2008 selloff they lost their ass in these transactions, and those are the ones they do not want exposed. Furthermore, it would expose that underlying frailty of the bubble we are once again building. They just continuously operate on the assumption that we can't deal with the truth, so they give us one bs story after another. I feel we should have free markets, but we don't and that is all there is to say on it.
The one thing I completely fail to understand is why they won't let even a 5 or 10% correction happen? This in my opinion is what leads to these horrible crashes we get. They become reversions that are so past due, that they are much more violent than they otherwise would be. It must be exhausting to monitor things this closely and launch these strategic buy programs "when we all need them."
I think if you trade the stock indexes even if you use daily charts now it might not be a bad idea to take profits if you get a good hour or two down, then re-enter them on bounces. In other words trade around a position. Tuesday did give an outside bar in the ES with divergences galore, normally a very good selling spot but not now. Had you taken that trade you would have been smoked. Shorting almost anything has been immensely difficult, you are almost guaranteed a $500 to $1000 pullback even in the trades that wind up working. There will be a washout that will just free fall once this breaks out if even for just a week or so. However, trading off trying to catch it, against the large majority of the trades being ulcer builders, I think just warrants a different strategy. These are not normal market movements we are seeing here. I know as long as I live I will never forget this time, I have just never seen anything like this in the way of market manipulation. It is unprecedented and seemingly unending.
As I have said many times, stick by your core strategies but be very careful of shorts no matter how good they might look. You don't want to be the one that Fed took out of the game before they backed off what they are doing. The markets are rigged here so be aware of that and act accordingly. We should still have a downside bias here, but it is going to be rough sledding going down, not for the faint of heart. If they do ever allow a correction, there could be a big trade to be had on the long side following it.
The dollar/gold correlation is going to have to wait another day.

Often there are periods where it is unclear what to do next, this is not one of them. We now have a clear path in front of us, sell rallies in the next week or so. We have broken down enough in most markets now, where the short term up trends have been broken, so now we need to short the rallies. The above chart is that of the Russell 2000. Of course since the world is one trade thanks to the FED, most charts of virtually any market look almost just like this. Choose your poison. Crude, Grains, Metals, Indexes, they all look the same. Shorting any one of them is like shorting any other, so as I always say, keep your total risk in mind. If you short them all it is like taking many times the risk in just one trade. This is never a wise thing to do.

I came across something interesting this morning, a study of past crisis periods and what on average transpired. If we are to go by what has on average happened in terms of unemployment, debt, housing values, etc.. we are about on the average for most of these categories now. In other words, this is basically just a run of the mill crisis, no better or worse than any other. These are just statistics, not an opinion of someone. I have to admit, that I tend to agree with this thesis, or at least for the purposes of the financial markets. On one hand the excesses the caused all this have basically been kicked down the road, not really dealt with. This you could say should be a negative in that they won't just go away. Whatever the case may be, we do have a rip roaring bull market on our hands for stocks, and that is all that we should be concerned about as traders. Whether we "should" have one is irrelevant. We do have one.

I still maintain, that the tree needs to be shaken, and will be at one point this year. I had thought coming in that it might begin mid January, and I stated that at the very beginning of the year. So far that appears to be right on cue. The one thing that we have going on right now which is a divergence that is not good, is that the SP 500 is showing much broader weakness than the DOW 30. Of course the DOW is a very narrow group of stocks, and what this also shows is that value is leading the way. With the overall economic situation, that is what we should expect to be the case. This is a bull market, but not a tech type bubble where speculative stocks are recording moonshots one day after another. The earnings reports have mostly featured better numbers due to cost cutting and improved efficiencies more than top line growth.

The next chart shows the last time this type of thing happened, this chart shows the SP 500 vs the DOW.

Of course this was the beginning of the major meltdown and I am not suggesting that plays out here. I am just pointing out that this is a major red flag and not what we want to see if we are planning on continued upward movement. Narrow leadership is the opposite of what we want. We can't just all buy IBM only and nothing else.

The other very interesting thing that is going on here is that of the correlation of GOLD to the DOLLAR. I will talk about his tomorrow. For now the path is clear, sell rallies.

Sunday, January 23, 2011


I read something the other day promoting putting some of your money into the YUAN as a safeguard against a collapse in the US. This did not sound like such a bad idea just on the surface, so just for kicks I pulled up the currency pair of the US to the YUAN. You can see the dramatic move that has taken place here, with the YUAN appreciating rapidly against the dollar. Some of the promoters of this idea claim there is very little downside and likely quite a bit of upside, REALLY? Where were they 10 years ago when this move started?

This bet is basically shorting this pair right here. Now there is absolutely no question that by any measure the trend is down here. I certainly could not tell anyone in good conscience to buy here. However, if you look at this closely what you see is that we are at a seasonal low spot, and there is a ton of divergence in the ADX index. In a strong trend, the ADX should be increasing. It did for most of this recent downward move but recently it has not confirmed the recent action. If we pair that with the fact that we are incredibly extended in this direction already and in a zone where a reversion is a mathematical certainty, does it make sense to initiate a position here?

This is another example of trust but verify. On the surface this seems like a good idea, or does it? We know there is spiking inflation in China, the very condition the doomsayers claim is the reason we are headed for trouble in the US. Wouldn't a move into their currency now be the equivalent of moving into ours once our inflation wave starts? In other words right when it hits the fan, you are chasing the currency. The theory for the US is that the FED will continue to devalue to dollar to fight the inflation. Why wouldn't the Chinese do the same thing? Folks if they do this will move in the opposite direction of what you would want if you were to make this move.

There is a consistent theme to many of these types of ideas. This is the same trade essentially as buying the GOLD market here. The move could continue but has already had an historic run. This is akin to having shorted the SP 500 when it was under 700 due to larger picture views that we had problems coming. The move had already happened! How would that trade have turned out with the SP 500 now at almost 1300? It is amazing how the "experts" always come in after the fact right at the end of the move and get everyone loaded on the wrong side right at the turning points.

I don't know about you, but it will be a cold day in hell when I short a move like this in the above chart at this point, very cold. Sometimes we all get tied up in making things too complicated. Just knowing the cyclical nature of life, does it make good common sense to wait for something to move an extreme amount in one direction, then betting on the move continuing? If you are of the mindset that reversions never happen, by all means go ahead. However, you should keep in mind that reversions to the mean are not ideas, they are statistical facts. They happen period. It is not always easy to time them, but in a situation like this you are basically in a 90%  + probability of a reversion of some type upward. If you are inclined to take on this strategy of putting your money into the YUAN, wait for some type of correction first.

Readers here know I have been bearish on Crude Oil while the world is now talking about $100 plus Oil again.

So far in the above Crude chart we have gone basically sideways since I came out on this, and I have not taken any shorts yet. However, if we were to get a bounce as diagrammed in the above chart, I will be looking for short entries. This is by far the weakest of the 3 main energy charts. What I am concerned about is that with the stock indexes looking to be in big trouble here, that they just drag this down along with them without a bounce. However, that is just conjecture and we have to trade what is actually happening. So far I do not have a sell signal here yet. I did exit the BTU stock trade I showed the other day for a nice profit on Friday. That was tied to the overall weakness I am looking for in Oil. I wanted to be short an energy stock in case this thing broke. I suppose I could still be short but it went down 4 straight days and I more doubled my risk in profit, so I rang the register.

Just to once again remind people of why I am so bearish here, we have record long positions with the small speculators and record commercial short positions. If we happen to get a down move in stocks, look out below here. You commodities bulls better hope some of these markets hold right here, this is a critical inflection point for many of them. If we hold all is well, if not.........

One of my favorite things about Italy is the way everyone always has to have the last word. I got into one exchange where I traded about 10 prego's with someone on the way out of a store.You can say Prego to almost anything, soooo   Prego!

Friday, January 21, 2011


I ought to know better after being a trader for 25 years, but apparently I have not learned my lesson yet. I have been looking for something that tells me "we are here" with the GOLD market. I have for the last year or so warned people, incorrectly so, of the coming debacle in this market. I have sat by and watched small investors drive the greatest bull run ever. We had 10 consecutive years of gains, unprecedented in any commodity market. So of course the pundits tell you that is the time to buy. Really? Does that really make any sense to anyone with no bias at stake? Wait for the greatest upward gain ever to take place, then go in and buy once it has taken place!

I get these emails from this one advisory service from Porter Stansberry, who by and large seems to have decent research at times. I think their track record from what I can see is pretty good but I have not studied it that closely. However, they also occasionally fall victim to these "secret" videos that almost have a witness protection feel to them. I notice a trend in these types of things beginning to start. The tip off to me is it is always some person wanting to keep their identity secret, and the most annoying part is it features a power point presentation that is read to you. One of the most annoying things is having a sales person put something in front of you then read it to you as if you can't read it yourself. Here is the link. I suppose if you like what you hear, subsribe or buy whatever they pitch at the end.


I have to admit that I lost my patience trying to hear this guy out. What is always the case is a sales pitch at the end to buy something and they try to lure you in with all this intrigue about a mysterious guru or insider. It is almost a polished version of the gambling services that always feature some character with a strong New York accent, crowing about his incredible track record. I heard on the radio yesterday a discussion of these services, and a few different people called in saying they used to work for these places. What the plan was with callers who called them is for every 10,000 calls they got, half the people would be told to pick one team and half the other. This way they were guaranteed 5,000 call backs the next week. Of course yet another marvelous scam.

The point of all of this is, do your own research. Do not act on what people like me or any secret guru who hides in a cave in Afghanistan say to do. If you choose to act on others research, find people with provable track records. Real accounts with real money traded, and real results. I have that and will have it going forward in our advisory business. This guarantees nothing at all. However, what it does give you is a general sense of whether your "advisor" has actually every hit a ball out of the infield. It is impossible for someone to show you how to do something they themselves cannot do. This nonsense about some secret guru, is just that, nonsense. If you can make it through the above video, let me know what the punch line at the end is. I would be willing to bet without having any knowledge of the end, that it tells you to buy GOLD. This leads me to why I am now going on the record.


Just to be clear on what I mean by this. I am not saying we will make a higher high than what is on the daily charts now, although we could. My prediction here is that within the next month or less, we are going to begin to move down a good amount in this market. As per what I always do, I will be looking to trade in the direction of these comments, but will also wait for my signals on a daily chart to develop. I may or may not post all the trades here. As I move back into the advisory business I have to be a little more careful about that going forward.

I am likening this video to the infamous, Nasdaq 10k Wall Street Journal story that marked the end of the Internet bubble. I think when I take this in context with the fact that we have had the largest number of consecutive up years in a commodity market ever right at the time this comes out, that tells me we have a significant top forming. I am not saying this will necessarily be the end of the run. What I am saying is that we are going to have a multi-month decline here that will be a good money making opportunity. If it turns into more than that it will be obvious as it unfolds.


From listening to the pundits you would certainly expect to see a different picture than this I would think. The Dollar Index is almost exactly at the same price as it was one year ago as shown on this chart. This is part of the core argument of most of the GOLD bugs. The Dollar is going to get wiped out and no longer be the world's reserve currency making commodities sky rocket due to inflation. Will it get killed from here? Perhaps, I have no idea. The point is that be careful when some "expert" tells you Gold or anything else, has to rally because the dollar is getting killed. It is not. It has come down, but that has already occurred and is now going sideways.

Anyway, there it is my call and I will eat crow if I am wrong. I have gone over other reasons in prior posts including the COT picture here, which is also part of why I am coming out here and calling for this move. I was wrong last year for the record in making a call like this and unlike many others admitted to being wrong. Why should anyone heed my advice this time? Good question, maybe you shouldn't, but there it is.

Thursday, January 20, 2011


Yesterday was one of those odd days where the world crumbled internally yet the Dow average showed a very small decline. The reason for this is the above chart, IBM. This is a Dow component, and it had a monster day up while many individual stocks got hit hard. If you look at all the broader indexes, you saw large down days, but due to the Dow average being comprised of only 30 stocks, when one had a day this large it helps support the narrow average.

There are alot of interesting things happening today. First, the stock market is remaining the calm at the eye of the storm. Large declines are happening in currencies and commodities today almost across the board. I had mentioned in the metals that we had pulled back to some support points but to be careful because they could "free fall." That is exactly what is happening today. Silver as you can see below is down about $1.25 today so far.

I could put up any one of a number of charts, they all look the same. It is interesting though that the dollar has not rallied much. What this tells me is these markets are just so overextended that they are falling on their own weight, and don't really need an impetus. Is this the big one? Of course we never know that, and I think it is impossible to determine that. None of these markets should have ever gotten anywhere near the heights they have, so it is really a pointless task to try and big a realistic big picture view. If the governments left them alone I think most things would fall 50% in a flash, stocks maybe 30%. That is not going to happen so it is anyone's guess from a 10,000 ft view.

Gold bugs say go long with all you got every time a blade of grass grows, bubble people say go hide in a bunker. The truth is likely someone in the middle. One thing to keep in mind with the public is they are often right in the middle of trends, and usually wrong at the extremes. Overly bullish or bearish sentiment leaves you in situations where there is nobody left to act in that direction and that is now reversals happen. So far this seems to be a normal pullback. We will find out in many of these markets if it is more when we bounce. If the high tests fail we might have something bigger on our hands. I expect that to happen as readers know, but so far this is not enough to prove anything.

One thing I "like" about all of this is that it came out of the blue just when people least expected it. That is what also makes me think we have something bigger on our hands. You can bet the PPT has both hands on the wheel right here, let's see what they got in the last hour today. What I have also said repeatedly, is that the exits are going to be crowded when this happens. Small money is scared money, and small investors have driven most of these moves. When someone has 5k to their name and puts it in Gold or Soybeans because some celebrity on a commercial told them to, then a neighbor told him he had made a fortune on Gold coins from Peru, you can bet than when that 5k becomes 4k, he is getting pretty nervous. That nervous feeling will turn into a mouse click on the sell button pretty quickly. Now the same guy has 3k by the time he gets out and it not clicking the buy button when he should be, buying on weakness after the washout happens.

If you are not short anywhere, don't chase this, wait for a bounce in whatever you are looking at.

Wednesday, January 19, 2011


Yesterday's post could not have been more timely and I am glad that I followed my own advice. You can see on the above chart where I almost went long. The order would have been filled in the last few minutes of yesterdays after market session, then stopped out today. When a market gets into a strong trend like this in general it is prudent to look to buy very minor pullbacks. In this case there was an inside bar with down close. However, upon deeper review, it was one of those bogus holiday bars. I have had trouble trading around these types of bars, so unless the setups are perfecto, it is better to wait. I also did not like the fact that the ADX is coming down alot while we are making new highs, that is a non confirmation that at some point like today matters.

I do try to use the rule that a bar is a bar, and it is data on the chart. However, I have noticed a strong tendency in the last year for these holiday bars in the indexes and currencies to reverse the very next day after a decent sized move. This was yet another example of this happening. Although we have an uptrend that is extreme, I find when I scroll through all the individual stocks for trades, that there is an incredible disconnect between the average stock chart "look" and the indexes. There is no guarantee that an individual stock will trade like the index. There are several variables that can move a companies share price that does not effect others. However, if you have watched the way the whole world has morphed into one market, you would see that over the last year or two the differences have vanished.

There are several reasons why this is happening and I have covered them ad nauseum in here so I won't delve further into them. Here is what I have found each day recently. I have had a list of stock trades every day, and almost all of them were sells! You would think that makes me a complete idiot and that thought has crossed my mind many times. However, my signals are mechanical, so there is not judgement as far as what is a signal. The judgement is in which ones I play and how I do it but a sell is a sell and a buy is a buy. The buy setups I have come across all have ADX just spiking higher and at an extreme reading, an automatic red flag for me. As a result, here is the only stock trade I currently have going.

You can see where I got short here. Unfortunately, many of the stock sells I had setup for today were very marginal after yesterday. They moved up enough to mess up the setups, and most of the buys have the adx spikes, so again being patient. If this is a normal garden variety pullback, some things will setup for long side entries. If not hopefully we will get a bounce after the first decline to get short.

I still like Crude Oil on the short side, but just don't have an entry on the horizon. I was sitting in someones office yesterday in a another business interest I have, and they were remarking how due to China Crude Oil is going to skyrocket. I also learned in the paper yesterday they are going to sink our aircraft carriers. So basically they are going to kick our ass, and save us from our economic woes, then cause this huge inflation scare in the process. NOT!

This is as good a fundamental setup for a decline as we can have. I know I have bashed the COT report and it is true that there have been a few other setups like this that have not led to declines like they normally do. However, at some point the basic fundamentals are going to matter. This arcane idea that every person in China is dying to buy Gold and Crude Oil and can barely sleep at night because of how anxious they are to wake up the next day and buy more, is so tiring. Can you really risk your hard earned money on that type of assumption? There is not a daily chart sell signal, so again I am waiting patiently here.

The last chart I want to show today is yet another example of how the world revolves around stock prices.

You can see in the above chart the incredibly tight correlation between stocks and metals. Here we have an intraday chart of Silver and overlayed in GREEN the E Mini SP 500. These could be the same market. However, what you can notice looking closer is that the SP 500 led it. It broke down first and brought this with it. This has been consistent for quite some time now even though historically this would still have to be considered unusual. However, it is why I say that the only reason the metals have not turned down is that stock prices have not. They will go together.

I would sure love to see this correlation disappear but I doubt it will anytime soon.

Tuesday, January 18, 2011


It is during times like this I have to keep reminding myself to STAY PATIENT. This is a very difficult market cycle, one of the toughest I have ever traded through. Why do I say that? Several reasons.

First, We have never in recent years had markets manipulated to the degree that they are right now. There is not a thing you can do about this other than recognize that it is happening, then ignore it! That may seem like a contradiction but it is not. There is no sense getting worked up about something you cannot control. Our job as traders is to constantly adapt to what is at hand. Whether this is the FED or some other controlling group pushing things it does not matter. The trends are in place. It is very important to focus on your trading techniques and stick to them. You will likely have a lower percentage of wins to losses than in a normal market, but the wins should be larger than normal and as a result you can still come out ahead.

During normal market conditions you can trade reversals and do pretty well, but as with all approaches, if you only have one way of doing things, the market will have a cycle that carries you out. You need to be able to trade with and against trends when it is appropriate. I personally have cut down my size dramatically in recent months, especially on trades against trends. This has saved me a fortune quite frankly. This is just thinking on your feet.

Second, and this ties into the first reason, we have extraordinary trends going almost across the board right now. Although this is not a bad thing, moves this strong do not give alot of chances to hop aboard. You almost have to take the first little twitch that retraces, then hop aboard as we blast out of it. It might only be one day after a run of 8 closes up, that closes down. Our gut tells us to wait for more of a pullback, but in trends like this that often does not happen. This is where you have to trust your signals.

Third, many fundamentals often tell you the trends are about to end and give you many false alerts. This can cause you to exit longs too soon, or even get short prematurely. There have been many ADX > 60 readings and many Tom Demark Sequential sells, that have failed. Historically these have been great tools for giving us a warning of a trend ending. These tools are essentially worthless at the moment. The COT report has also become worthless. We have seen numerous examples of record Small Speculator long positions in many markets. We have close to that in the chart above, the Aussie Dollar. You can see that in the past this has generated declines, so far NADA.

In summary, it is my feeling that the approach you have to take and one that I am taking is to be patient. Follow your signals, but do not force them. If you don't trade for a day or two, so be it. If you find yourself constantly fighting the trends, back off on your size but stay with your techniques. If you are using sound techniques, in time things will be ok. If you are just someone who likes to fight every trend, you might want to re-examine your techniques to see if they truly have an edge. It is ok to be a counter trend trader, and I do that more than I would like to. However, you just have to be careful, a 40 foot wave might look pretty but surfing it and staying alive is another matter.

The Aussie Dollar above does seem to be a market setting up for a decline. You can see a good amount of divergence in the momentum oscillator on the weekly chart above, and of course the COT stuff is bearish. The COT data is bearish in so many markets I am not sure it means anything since it has been for months and no declines have happened. There are times when extreme readings get reached that should mark exhaustion points, but we are not seeing that happen right now. I do have orders to short the Aussie in the market today, that do not appear to be close to being hit. They are below the current price by a good amount. I am not sure if the setup will still be there tomorrow.

I did get stopped out on my 10 yr position this morning for a measely 4 tick profit. Those markets are just not going to be able to rally as long as stocks stay this strong. However, they are setup still so I may take another swing if the setup is right.

One last passing thought, if I see one more of those foundation for a better life commercials I am going to scream! I cannot imagine the advertising budget they have, must be hundreds of millions of dollars a year. For the record, if my kid flopped at every sport and starred in a choir that would not work for me, but that's just me.

Sunday, January 16, 2011


Richard Russell: Forget everything you've heard about a gold bubble

Thursday, January 13, 2011

From Richard Russell in Dow Theory Letters:

Question: Russell, what do you make of all the talk about gold being in a bubble?

Answer: I've seen a number of bubbles in my life, and they have all been associated with huge and frenzied participation by the public. Think of the tech bubble, the housing bubble, every bubble was characterized by broad and frantic public participation.

Who do you know owns gold or has any gold stocks or ETFs today? Ask 20 people at an investment conference whether they have participated in the gold bull market, and you will be shocked at how few have entered the great gold bull market.

So if gold is in a bubble, it's a bubble in the minds of those who have completely missed the gold bull market. Public participation in the gold bull market has, so far, been unbelievably thin in the US. If gold is in a bubble, it's a bubble unlike any that I have ever seen before.

I had this forwarded to me by someone last night. It is an excerpt from a known prognosticator and after reading this please look at the chart below and tell me if you think this assessment is accurate?

I realize this chart is a mess with all the arrows. The RED line represents the COMMERCIAL players and the GREEN line the SMALL SPECULATORS ( the investors he says have not participated in this rally ). Maybe I am just a dumbkopf, but what jumps out at me just in looking at this chart is that every time the price rises substantially, the SMALL SPECULATOR longs increase right along with it and the COMMERCIAL longs decrease right along with it. You can see in 2009 specifically, the entire years rally was completely driven by small traders the ones he says have not participated! This was my whole basis for being overall bearish on this market and wrong. If you study this data over many markets and going back in time many years, you will find that this is highly unusual for small traders to be able to push a rally this far for this long. This is one of the problems with fundamental data, at times it is just so early you can get wiped out looking for turns that should happen that don't, or take years to develop.

How you synthesize anecdotal evidence like he references above is very subjective. I would argue the anecdotal evidence is off the charts bullish. How many TV commercials are there telling us all to buy gold? A helluva lot more than said to buy Real Estate at the peak. From G Gordon Liddy, to Dr Laura, to Sean Hannity, the whole world is telling us all to buy GOLD. I have been asked by 9 year old kids how much Silver I have bought. All of this is my experience and his is different, so it just depends on how you look at it.

Here is the bottom line at this point. The market is in a solid uptrend in spite of all of this, and that is what matters. If this is a bubble, when it breaks it will be the shot heard round the world because you will have a $100 down day in GOLD and probably $2 or $3 in Silver. That will be the warning that things have changed. As you can see from the chart above, the Commercials are buying this dip we are having now as we are into weekly support levels, so I think we are at a short term buy spot potentially. I would wait for the price to resume back upward before getting in because we could free fall here for a time. My short term indicators are not giving me buy signals, in fact I did short Silver last week but am out of that trade now. I managed that trade terribly so I am not going to get into details on that.

The next chart is that of COPPER and look at the incredibly bullish SMALL SPEC position in this market, this is an all time high. Once again numeric evidence, not my opinion, that the small investors are pushing this market.

You should not run out and short this just because of this condition, it is just something to be aware of that this is beyond being on fumes.

As I look at one market after another we see similar situations to this. Since historically these have been very good gauges of when to look for market turns the following thought has occurred to me. What may have changed that is making so many things that have worked for decades now be totally ineffective? The possible red herring is of course our good friends in the government. What if they are classifying their activities to inflate everything in the small spec category? They should fall into the large spec classification. Wouldn't that  explain alot of this? Since the sheer numbers involved here make no sense, I really have no idea. At the moment unfortunately the best answer is it is truly different this time.  For my purposes whether these markets keep rallying or not is irrelevant since I do not hold things for years at a time anyway. I just try and point out what has historically given us indications of price turns coming.

These conditions are easier to use buying when commercials buy on declines in an uptrend then to sell short when they are fighting the trend like in the above charts. In other words, when their activity supports the overall trend, it is best to trade in that direction.

Friday, January 14, 2011


With alot of talk now going on about the Muni Bond market and whether or not there will be widespread defaults, it seemed like a good idea to chime in on this. The above chart is that of the MUB the equivalent of an ETF/Fund tracking Municipal Bonds. The damage that has been done recently is obvious. Keep in mind that this is a weekly chart, the daily chart looks like a black diamond ski slope. Fibonacci analysis would call to have you buying in right about now to catch the "magical" .618 level. I have never been a fan of that type of trading even when I actually tried to trade using it. The problem of course is that you just blindly buy in space at some magic number that may or may not be relevant. You also have to be aware that by the time it gets to the .618 it has already blown through the .236, .382 and .50 "magic" levels. You already have 3 losing trades by the time you pull the trigger on the fourth one. I wish I had the "confidence" to trade like that but I do not and never will, I like my money and don't believe in just throwing it away like that. However, at times the .618 does stop the market on a dime, but it does not do it consistently.

With regard to the overall thesis of a high amount of defaults coming, this is a tricky subject. When you have the Meredith Whitney's of the world and her presumably high paid staff of eggheads studying this, it would be hard for someone like me to challenge the analysis. I don't have the collective staff, brain power, or inkling to undertake such a study. As a result, just thinking about it on a rudimentary level, it does seem likely to me that there are some deeply rooted problems here. First, the concept of just inventing money and figuring out how to pay for those that financed it later, has gotten us into most of the pickles our country has gotten into other than wars. That is essentially what is happening when a bankrupt entity issues bonds. Some municipal bonds are backed by higher levels of government and some are not. Also, as we have seen the concept of bailouts take a larger than life role, it is entirely possible even the FEDs could show up on some of these issues. As a result, it is difficult on an individual basis to truly pick on one and make some money by betting against it.

Living here in San Diego, I would be inclined to bet this city could become escape from San Diego like New York in the Kurt Russell movie. Rarely does a week go by when some business entity does not leave here costing hundreds of millions of lost revenue. It makes me wonder if it is possible to get to a point of negative net revenue for the city? I guess we can just all buy and sell our stuff from each other and exchange our money! It would seem betting against Muni's from here would be a good bet. They may be backed by the state, but this state is bankrupt, so that should not mean much. However, this is a very heavily democratic state, and a stronghold for that party. There is also a democrat in the white house, so bail outs are high probabilities for this state. Net net, you see the slippery slope that gets going here.

If you accept the overall thesis that this house of cards in Muni Bonds is crumbling, how exactly should you play it? First, avoid buying them as part of a low risk retirement portfolio. They would fall into the category of high risk, hence commanding a smaller percentage of your net worth. You could use that premise to buy some if they go on fire sale, which they will at some point. Second, look for symbols like the one above that track these vehicles, and trade them. The problem with doing that is this symbol above on it's busy days barely reaches 500,000 shares. I don't like shorting anything under 1,000,000 shares per day. These lighter volume items are perfect storms for short squeezes. There is no guarantee you can avoid them anyway if a big hedge fund shows up, but your odds are better on the heavier volume products. You can search for others and also wait until the volume climbs here.

The other way to play these types of things is a big mans game requiring millions of dollars and getting into some of the obscure derivative products that are out there, CDS etc. I do not suggest doing that. We also are at a point here where if you were inclined to get short, I would wait for a bounce, there is no logical place to have a stop if you are wrong here. We have a free fall going and it is a pure momentum play to chase it right here. It could turn on you at any moment.

In summary, I tend to agree that there are problems in the Municipal Bond Market. I am far from an expert in this area so I defer to the conceptual research others have presented ( I hate doing that I always want to do my own). How to play it is another matter entirely, and I have outlined a couple of ways here. For the most part I think the best idea is to avoid them in retirement accounts.


This is the name of the company I have formed with a close associate and excellent fellow trader, Michael Poissant. We have entered the Robbins World Cup of futures trading contest under this name, so you can monitor how we do there. We will eventually be putting together a fund, but we have not done so at this point. There are very tight restrictions on what can and cannot be done ( mostly cannot ), once you enter into that business. Once we are registered etc, I will have to change how I do this blog, but that is a long ways off at this point. For now it is business as usual, and you can watch and see how we do in the contest. I will  not report specific trades we make in the contest, if we do well eyes will zero in on us. Hopefully we will stay on the leaderboard.

My partners name is Michael Poissant, hence P, the N just a cute separator, then J for Johnston. With all that we arrive at PNJ, pretty simple. The technical issues that caused me to withdraw from the contest last year are resolved. I think I was up around 50% when I closed the account, don't recall exactly. Last year was not a great trading year for me anyway, and the purpose of entering this contest under our company name is to have a track record in an independently audited account that will serve as the beginning of our company's performance.

Wish us luck, it always makes things more difficult when you trade in the public's eye wide open every day. Trust me, it puts pressure on decisions that you don't have trading in private. You never want to look like a fool!

Thursday, January 13, 2011


The crop report came out for the Grains yesterday and most of them flew the coop except this one. Wheat did rise, but you can see it is lagging considerably and is setup as a sell now. It does look to me like if we break today's low tomorrow, a short entry can be taken here. The overall markets are elevating again, and the sell signal I mentioned yesterday in the SP 500 is not going to trigger today. However, this is one market that has been able to trade on it's own merits anyway. Although it is not good logic, being aware of the stock market no matter what you are trading has become imperative. It is good to see that there is some sanity left in this wacky financial world we are living in.

Bean Oil is also lagging the complex somewhat but not as much as this one market is. I may do some of each, not sure yet. The Bond market is also making another rally attempt today. This has been a frustrating market. I have been looking for an up move, so have many of my associates, and I have taken a couple of small losses trying to catch one. I am trying again today, so maybe the third time is the charm?

I actually played the 10 year because it is my opinion this market has held up better and has a stronger market structure than the 30 year. You can see we have had 4 higher short term lows in this market and are attempting to break out again. Will we? That is why they turn on the machines every day, nobody knows.

It does appear that overall many of the potential sell signals in commodities have been negated in the last few days with the Dollar wipe out that has happened. As a result, many of the trades I was sitting on waiting for are not going to develop. Crude in particular has now negated it's sell pattern due to it's recent strength. Maybe we are just going to get another lift off here. The metals are lagging somewhat but it is not a great sell pattern there either, and it is doubtful we will get a significant break there without some stock market decline which does not seem to be in the offing.

Other than the above I do not see a whole lot. The long Pound trade is one I got in but got out too early as it is exploding to the upside right now.

Good trading to everyone sorry I am brief today

Wednesday, January 12, 2011


I caught Meredith Whitney on CNBC this morning and after listening to her defend herself against the scrubs on the panel, I wondered why she bothered to even go on. It is true that some of her dire predictions last year were incorrect and you have to be prepared to face the music if you go out publicly on something and you are wrong. She did not really admit to being wrong previously, which in my view was a mistake. Sometimes you are just wrong, it is what it is. Own up to it and move on, don't give some half assed excuse as to why you were not really wrong, it takes away from your credibility. I am sure her research is sound and she will be proven right in the end here. It is hard for anyone who has been around for awhile to have imagined the FED could ever control things this tightly for this long. It is unprecedented and many long time market observers have underestimated them.

I do find it interesting that someone that is very bearish, would take such a lambasting. You have to be a complete idiot to buy this recovery story. It is the biggest load of crap that has ever been propagated. She is a banking expert, and we all know the banking system is in dire straits. Having a party that is essentially bankrupt, loaning money they don't have to other bankrupt parties, is hardly a long term solution for the financial crisis that we have "still going on." Yes I said it, STILL GOING ON. This is not over by any means. However, we are supposed to believe that just because the FED has manipulated the stock market into a huge bull market, that everything is fine. This is just hogwash, PERIOD. Maybe this plan will eventually work but imagine the world exactly as it is now in every way with one difference, DOW 6500. Would we still be talking about a recovery if every one's 401k balances were still in jeopardy? If the answer is no, then there is no recovery. If it is yes, than we do have one. You have to answer that for yourself.

Why do you have to get beat up like that for having an opinion. Maybe she is wrong and if she is her clients will lose money. What is the harm in that? I doubt many people agreed with Paulson when he got short a few years ago based on his belief the real estate market would implode and billions of dollars later he was proven right. The trick is timing your positioning, and that is easier said than done. If you are fighting this rally, you better have awfully deep pockets. I do not feel that it is wise as a longer term investor to be shorting this yet, the momentum is way too strong. I do think your stops should be tight now in case something happens.

Speaking of something that is probably wrong but I am still going to throw it out there, check out the possible sell signal in the SP 500 above. This is one of these trap patterns I like. If tomorrow we were to take out today's low assuming we close strong today, it will have trapped breakout players into a bad spot and could create a decent down move. Of course we have to preface this with the fact that the FED is trying to limit any downside moves even on an hourly basis, so it is doubtful this could get away from them. However, it is a legit trade and one I will take a swing at if it develops. I do have some filters at the point of impact that could derail this entry if we get there and those will not be divulged here. As a result it is not a lead pipe cinch that I will short tomorrows low if we get there, but it is probable. I just won't know for sure until we get there if the trade is a go. We may just sail higher, but we are really getting alot of divergence now. We also have potentially sells in the metals now, and some other commodities, the grains in particular, that also have this potential trap pattern in them.

We know that basically all the markets are still one trade with a few outliers, so be aware of that in what you decide to play. A sell in one market is the same as a sell in stocks etc.. I do think we have the potential as I mentioned the other day for this "arrangement" to separate some, but it has not happened yet. Until it does it is business as usual and most trades are the same. I did have some stock longs I just took off today due to this pattern, and the big divergence that is here now. We can and might still keep climbing, but the air is getting thinner up here for the sane world. I can tell you this, if you pattern your trading around buying at levels like this, eventually you will be carried out. This type of market action is unusual, and once we return to a more balanced situation, you will find yourself in trouble if you just blindly buy breakouts. I like to buy breakouts, but not at levels like this. There are divergences all over the place here, the warning light is flashing.

Tuesday, January 11, 2011


The above chart is that of the 30 Year Bonds and the last 4 releases of the Non Farm Payrolls report. You can see that 3 of the 4 bars are basically normal range days. There is one that is larger than normal. In the old days this did used to be a major market moving report, ahh the good ole days! The government takeover of the markets has had alot of significant effects and this is certainly one of them. Here is a quote from a service I recently mentioned I signed up for just to get a daily dose of the gloom and doom view so that I could constantly evaluate it as to it's merits. To give full disclosure, Porter Stansberry is the gentlemen who runs this service and this is one of his associates in a daily email.

"Traders used to stand aside and avoid taking on new positions before the release of a major government report. There was no need to jump in front of a potentially volatile situation. But the biggest reports don't create much volatility anymore. So there really isn't any need to stand aside.

Perhaps Wall Street is finally putting government statistics in their proper place… third in line behind lies and damn lies.

Best regards and good trading,"

Jeff Clark
I think for the most part he has got this correct, and maybe he is just not saying everything here. What is missing is really the full explanation. I do not represent this guy at all, so take the fill in as a comment from me that he may or may not agree with. The reason why the reports are being ignored, is that everyone in the know is aware that what the FED does controls all the markets now, and any reports effects can easily be erased by a large futures buy program. As a result, why panic, they know the Fed will move the market back up if it declines, so there really is not much risk. We have seen this countless times in recent months. It has now gotten to the point where almost any news regardless of how significant it should be, takes a back seat to the forthcoming FED action to counter it. It is really the days with no POMO that need to be studied. Those are days when actual market forces could move the markets like they used to. I don't watch this everyday because the last time I checked, POMO activities were happening almost every day so it is basically watching MASH re runs over and over, yawn!
I like these guys from the above quote because they are not afraid to call it like they see it. It seems the government has a shark eye on them because I think they have a large enough subscriber base that they can get their views out widely. I am just a little fry trader that nobody knows is alive, so I can pop off for the most part, and remain in relative obscurity. Readers who have been with me for awhile have certainly seen now the merits of what I have been talking about along this front for long enough now, where there cannot be any doubt as to what is going on.
Now back to trading for today. I have been talking about the Energy complex as setting up for a sell signal. Ironically, the best of the bunch as far as the technical signal goes is Unleaded Gas.

It is my feeling that we should never short the strongest member of a trading complex, so even though we have this great looking divergence, we want to try and push over the weakest team member. Why pick a fight with the biggest guy? Why not try and take on the smallest one? Crude Oil at this moment is clearly the weak link in this group. I suppose you could say Natural Gas, but that market is a free spirit and does not trade in sync with the others. I really consider the energy complex to be Crude, Unleaded and Heating Oil. I trade Natural Gas on it's own.

It is clear to see the dramatic difference here in this Crude Oil chart versus the Unleaded Gas. This is where I am going to play if I get a short entry that fills. I do think that tomorrow below today's low is one possible entry point to short this market. As with any setup, this is just that a setup. I would not suggest blindly going to the market and shorting here. We did have a sharp increase in accumulation yesterday. At times this is just a blowoff that marks turning points, but it also could be a forewarning that this is going to rocket out of here. If you are a long side player here, buy the RB since it is the strongest. I would have a difficult time going long here due to the large amount of divergence in the momentum oscillators as well as all the commercial selling that is going on.

I debate this issue of comparative strength and weakness constantly with people. There is nothing that I know of that works every time. If I knew of such a thing I would not reveal it. However, I can tell you that observing this and trading in accordance with it has saved my .... countless times. I also have a friend who likes to buy the weak thinking they catch up, this does not happen, study charts. PG if you read this I am not referring to you.

Good Trading and may the Force ( FED ) be with you

Sunday, January 09, 2011


The above chart is of the CRB cash index. I have not looked at this for a very long time. I was somewhat surprised to see it not be stronger than this. However, since I am looking for sell signals in almost every commodity market right now, I was not surprised to see a sell signal in place here. We have a significant price divergence going on here with the momentum oscillator, and it is rolling over. I am looking for sell signals Tuesday or Wednesday in several markets. Here is what is very surprising, I am looking for a buy signal in the stock indexes in that same time window. Commodity and stock markets have been joined at the hip on an almost tick for tick basis month after month for quite some time, and although it is a historical anomaly, it is still almost shocking to see the two markets actually separating again.

This has come out of the blue, which makes it more legitimate. What everyone waits for will never happen. I don't think many were looking for this decoupling to happen right now. Ironically, at a time when the bullishness for Oil is just off the charts, that market seems to be ready any day for a major tumble. See the history books if that surprises you. In the Fed's quest to inflate everything, they have been pushing on a string as we know, so it may be that they will only be able to keep control of the stock indexes, and will have to let the dollar rally and commodities decline. It has to be tiring to monitor financial and commodity markets to the degree they are doing it, and put out one fire after another. At some point you have to figure something has to give. It seems they can control the whole world, but they cannot.

The one very bearish fellow I mentioned here in this blog recently, whose emails I have subscribed to just for the sake of evaluating the doomsday scenario, has even relented some on Gold expecting a major shakeout to occur there this year. Of course he still sees that as a buying opportunity. He may be right on that, I really have no idea. I will evaluate whether or not metals are a buy if they tumble. Until then, I am looking for a sell entry, and still don't see one. One could develop this week if we get a bounce. The one problem here is that when a market is inflated this much based on the speculation of small investors, the exits could become crowded in seconds, and believe me, when the small fries head for the doors in those markets, you newbies are going to see something you won't forget for many years. I wish I had the divine wisdom required to pinpoint that $100 down day in Gold we have coming, but I don't. However, I would literally bet my life we will see one if not more of those probably this year sometime.

So, what to do now. First, look for pullbacks in the dollar to buy, and bounces in commodities to get short. In the stock market, I think buying the next dip, even if it is a day or two, is the correct play.

The next chart is a weekly chart of the Wheat market, the weakest of the Grain complex. I am hoping to find a sell signal here soon. You can see the heavy Commercial selling that has taken place recently. Many commodities markets have this, some of them have had it going on for awhile now and are due for trend changes. However, they have not occurred yet, so be patient. The powers that be don't want a dollar rally and commodity decline, so it may take awhile for true market forces to get this done.

I suggest anyone who has any interest in COT stuff to spend time studying the material. There are still ways to use this stuff, but they are not necessarily the same as the traditional ones. We are in uncharted waters for market manipulation, so the timeliness of the turns in the markets are not as closely tied to fundamentals as they historically have been.

I wanted to briefly touch on a subject I find myself contemplating on a daily basis now, and have not come to any conclusion yet. This subject is the doomsday scenario. There are those out there as I have mentioned who are quite credible, calling for a major crisis to develop soon. I generally do not spend alot of time thinking about such things since my time frame for trading is reasonably short. However, if these guys are correct, my trading accounts will be in jeopardy because all the firms will fail, and the SPIC will be basically gone. As a result, I find myself devoting some time thinking about the possibility of such an occurrence, and also how if it were to happen, would I survive it.

What bothers me on the surface about all of this is that everyone of these people say the only possible way to survive this is to put all your eggs in one basket, GOLD. Regardless of my views on GOLD or any other market in particular, I find myself having a hard time believing that putting all your eggs in any one basket is ever a good strategy. IT SIMPLY IS NOT. If you don't believe me track down a former Enron employee.

Here is another thing that on the surface seems implausible about all of this. It requires predicting correctly the fall of the ROMAN EMPIRE part II. I have never believed that good strategies require the ability to correctly pick the "different this time" scenarios. It is true that changes in the world do happen, and when they do they are first time occurrences. It is my feeling that if the US were to fail, the whole world goes down, we don't go down on our own. Certainly the European countries are in far worse shape than we are, and I just can't see myself bowing the Buddha every day hoping he will spare me. On the other hand, it is clear we are on the verge of something very bad here. Just the sheer arrogance of the congress to try and push through that 1 Trillion omnibus bill, shows those jerkoffs have not and won't ever get the message. They have dug us such a hole along with the Fed, that I don't see any way out without considerable damage to many of us.

In summary, this is something I am continuing to evaluate, and once I come up with a definite view on this I will put it in here. One thing I am sure of, when this next crisis does arrive, and I do think there is going to be one of some type, there will be a tremendous opportunity to make money if you are in the right place at the right time.  I do also think that when it does arrive it will be bigger than the last one. I also think it is likely that the money will be made on the short side of something, not the long side. I think it is going to be a massive deflation not inflation wave.