I am in the process of trying to strike a deal for my own show with the Comedy channel after a joke I made yesterday went viral. My joke was " Stocks will have a down day." I just meant at some point in history, they will actually have a close that is lower than the prior day. I did not identify a specific day. That joke got so much laughter that it went VIRAL.
Obviously I am kidding, but it certainly seems that every single sell signal I have ever known of that has been a viable technique has failed to even generate a 2 day pullback. Here above we have yet another "joke." It is another sell signal. This is the megaphone pattern I talk about from time to time, and it now exists in the VIX. One thing to keep in mind with these patterns is that they work best at extremes. I know Bernanke would not consider this an extreme based on what he is doing, but most people would have before the stock market became a punchline and not real.
There are a number of ways to trade this type of pattern and you also have to keep in mind, it is in the VIX not the stock market itself. Although there is a strong correlation there, it is not 100% by any means. What this basically tells us is there is somewhat of an indecision in volatility here. The fact that it is occurring at an very low level is what makes it a sell signal. Even though I am laughing out loud looking for sell signals on the intraday charts today, it is what my signals tell me to do.
There are times like this that are incredibly frustrating. I am hard pressed in my mind to think of a time in my career where the markets were more difficult to trade than they are now. You are just damned if you do and damned if you don't. The market is so ludicrously extended in umteen different ways, yet it keeps plowing forward. If you are a newbie to trading, just be careful with how you are trading this. The way to trade these types of situations will only work about 10 to 12% of the time. That is roughly the percentage of the time we get runaway trends. Many a friend of mine pissed away incredible amounts of money during the Internet crash because they did not understand that just buying every minor dip no matter what, does not always work. In the last 3 months you could have literally bought the first 5 minute bar that closed lower and made a ton of money. This market condition although it seems to be never ending, will end.
Determining when it is ending is always a challenge. I would say that one good way to do it might be if you get 3 consecutive losses trying to buy dips. There is no magic to that, but it would tell you something is changing. It is hard to imagine how you could have lost 3 in a row doing that for the last year, so it would tell you things have changed.
I wanted to talk briefly about market correlations. It is my belief now that these are here to stay. The one thing that has changed in the world is the way the large funds operate with technology. They are incredibly adept at programming their trading to moving very quickly to what is moving. This is why you get these light speed moves. It is my belief that early on they tuned in to what the FED was doing to manipulate markets, and geared their programs to it. Why not after all they are in business to make money not pass moral judgements? As a result, since the fed is trying to create inflation, and reduce the dollar, their programs are all set to trade everything in the same direction. A declining dollar would in general be bullish for many commodities and currencies. Once they key in on another fed manipulation, the buy orders get thrown in electronically and off we go. This is all mechanical, so I do not know exactly what the tip off levels in anything are. I am sure they are different with different funds. The point is that trading most things in the same direction is going to stay with us for awhile.
See you on the Comedy channel!