Tuesday, June 28, 2011


Today I am going to talk briefly about contrarian thinking, but first let me talk about what I have been doing the last couple of days. The above chart is that of Crude Oil and the recent trade I made. You can see where I shorted this on Thursday, and I got away with one here in all honesty. Yes the market cratered and the trade worked out, but I was asleep at the wheel here. You cannot see on this chart, but there was a major low over to the left that I was selling right into that I had not noticed when I was getting into this trade. I often exit against these types of support points, so had I noticed this I might not have done this one. However, I did once I was in and it started free falling. When I noticed the low and we were approaching it I put a limit order in about in the middle of the range of the lowest bar and got filled where indicated for about $3500 per contract. I suppose one could say I got lucky here, but I did follow sound trading principles so I am going to say it was skill. However, I still was not as diligent in looking at this initially as I should have been. The lesson is to make sure not to be sloppy and I was here.

I mentioned yesterday that I was looking for a rally still and we may have started one. The next chart is one of a few stocks I bought yesterday, Microsoft.

Apparently they made some type of announcement, I will let CNBC explain that to everyone, I don't care. This was setup as a buy for me, the Bernanke's were setup for a buy confirming it, so I took the trade. I also took a few other longs in various stocks. I suppose being bullish here is somewhat of a contrarian position, so let's talk about that for a moment. I also mentioned that the Bernanke 2000 formerly known as the Russell, was the strongest index, I went long there yesterday as well.

What is Contrarian Thinking? Obviously by definition it means thinking contrary to what others do. How valuable is this for trading? That depends......

One of the things that I think is misunderstood about this concept is the power of the masses. The masses do drive trends in price, so just taking an opposite position of them to be a smart ass can be a bad idea. Also, even when you are right the sheer momentum of the masses tend to drive trends farther than we can ever imagine they will. You need to have nerves of steel at times to trade in a contrarian fashion. I can assure you that at times you will be wrong and will get run over, it has happened to me. The Metals markets are an example of that type of situation. I was bearish on Gold more than a year ago and just flat out dead wrong. There was every single sign of a frenzy and mania one could ever want in that market. I even had 7 year old kids asking me how much Silver I had bought at a Sunday party! If that is not the ultimate "we knew it was a top" signal I don't know what is. That happened over a year ago. The masses have powered these markets on. Obviously now Silver has made it's top, but look at what you would have had to have taken on in terms of risk, to have shorted that at the highs. Fortunately for me I do not trade on my opinion, and I made money on the long side of these markets even though from a contrarian standpoint, I thought they were sells.

I mentioned that after the top happened a story would come out about a hedge fund manager that made billions shorting that market, so I am sure as we continue down, a story or two will come out. The trick with Contrarian trading is understanding that the masses are wrong at the turns not in the middle, and timing them is not an easy task. I have been having an outer inner monologue on the end of QE2 and the fact that it is such an obvious trade I am skeptical of it. That is an example of contrarian thinking. There are millions looking at that trade, and millions of people don't make profits trading. I am hesitant to go with the masses on what would be a turn here because they are normally wrong at the turns. So how do you know when to go with a Contrarian thought or idea and when not to? For all we know comrade Ben and company have made a back door deal with large funds and institutions that they will quietly give them money, if they agree to be heavy index buyers once QE2 ends. There is absolutely nothing I would put past these guys at this point.

The answer is very simple, follow your rules for trading. I may think out loud like that, but I never execute a trade based on an opinion, EVER!!!! If I have sell signals after this bounce peters out, if it does, I will take them. If I do not I will not. Whether I think the pulling of the rug of QE2 will cause a decline or not is irrelevant to how I will trade it. This is my style and I know what works for me. Chasing arbitrary opinions about deficits, politics, dollar devaluation, is not a way for me to make money and I do this to make money, PERIOD! I would rather stand in the corner and talk about the Lakers at a cocktail party and have everyone think I wash cars, than brag about some macroeconomic view that will make me appear to be smart. I will never forget having some Yenta realtor yell at me at a party back in 2006 when I told everyone all my timing models said to sell all your real estate and that timing markets was what I did for a living.

Of course this was followed by a shout down by some pinhead who is out of the business now, telling me how I knew nothing about real estate, they weren't making anymore land, and that I should stick to commodities. I sold my house 2 doors down about 6 months later making over a million dollars profit and rented for 3 years while this "expert" lost her business. If we take that as an example, look how hard it was to actually be correct about when that top actually occurred. The masses had a huge stake in seeing that continue to move along, so even after I sold at what seemed like the very top, it did not really roll over for more than a year even though the internals deteriorated very quickly. This is a similar situation to what we have at hand right now.

The stock market has been artificially elevated like housing was with again cheap money, sound familiar? At this point we basically have a presidential re-election at stake with the market staying aloft. Barry has done virtually nothing right at all except be at the helm during this moonshot of a stock rally. If this craters, he is done without question. The main reason the PPT has elevated the stock market is that if it were still at 6500 and everything else was as it already is, the public sentiment would be completely different, and entirely negative. They have made people whole in their retirement accounts which makes them less fearful of the bad things that are going on, they have "recovered." The "recovery" is nothing other than a recovery in the stock market, there is no economic recovery at all, that is poppycock.

If we take all this now and guess as to what might happen with the obvious rollover that the end of QE2 should bring, it just makes me wonder why they would allow it to happen? However, make no mistake about it, if I get sell signals I will get short. If you trade based on opinion and not rules, I think you are going to be chasing your tail. Make sure if you are of the opinion that shorting this at months end is the right play, that you are doing it for sound technical trading technique reasons, and not just an opinion about Comrade Ben and what he might have up his sleeve.


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