SOMETIMES MARKETS DON'T LISTEN
We have all written off this market now as DOA, and it may be overall, but markets have a way of throwing us a curve ball here and there. They do not like following scripts, preferring ad libbing most of the time. I think we may have one of those scenarios now. I have been steadfast in stating that I thought the correction to this move down would be complex, and that spotting the next sell signals was going to be tricky. That does seem to be playing out now. If we look at what is going on in the above chart, there are some contradictory things. First, the Commercials are heavy buyers, the red line at the bottom. This is normally bullish, but in the indexes, the COT data has not been very accurate the last few years in spotting market moves. Nonetheless, old habits die hard and I still look at it.
Next we have the seasonal tendency to decline here for the next month and a half. We then have my synthetic COT index, which is in middle ground, not giving us a buy or a sell signal. I have mentioned the achilles heel with this indicator of mine is that it switches too early at times to the other side of the market, I have labeled a few of those situations. However, as you can see for the most part even the early reads turn out to be correct even if we have to wait a few days for them to work. Keep in mind this is a tool for determining direction, it is not an entry technique. As a result, I don't consider the early signals problematic, because there are no entries in those until after a few days anyway. If you just use trend lines for confirmation, these readings have not been wrong much. Here at this moment we are in middle ground telling us nothing at all. What I am looking for here is for the market to creep up here, which should drive this indicator down into the sell zone confirming the next short entry.
I have been reading that the talk of our fearless leader comrade Ben signaling QE3 is increasing, and he has the correct forum this Friday to announce it like he did last year. I don't know or care what news item might be that would coincide with a bounce. If we do bounce, and this indicator gets back down into the sell zone, we will have alot of things going for us on the short side to enter on a breakdown. We will have the seasonals, long term cycles, the trend, and my COT index all in agreement. If that happens it will be must see TV. Maybe it will not and we will just take off. If he does announce QE3 it will be interesting to see after the initial rally from it, if it sticks or not. I have my doubts it will stick, but as we saw last year, fighting the FED when they decide to raise the stock market is a losers game.
Next is every one's favorite market, GOLD. This chart is an example of why I am fascinated with this little creation of mine. If you look at how accurate it has been here, it is amazing. If you look at the COT Commercials at the bottom, it has been heavily into the sell zone the whole move up here, yet my indicator has given several buys, all that were accurate, with one sell that was wrong. This is the main reason I constructed this beast, to try and get around this tendency in big runs, for the hedging nature of the commercials to flash one false sell signal after another. The one signal that interests me the most, is the buy when the market was screaming higher already. If we get insiders buying when price is already that strong, it is time to get aboard with both hands, and look at how the move accelerated from that point forward.
I am going to plow back into the best way to use this indicator, I have not done much recent work with it. I will not reveal in here what it is, but I may decide to give it up to subscribers to my newsletter if I decided to do it again. One thing you learn in this business, is that innovations are hard to come by. The market participants are incredibly sophisticated, and they can arb out any new tool pretty quickly. This is why mechanical techniques only work for short periods of time. Some wise ass from a hedge fund will figure out some way to trade against them, and poof, they overpower it and it becomes ineffective. As a result, this is going to be my secret but I will use it here to show setup trades as I have been.
Before everyone gets worked up about my statement I am not sharing this, look at the above Natural Gas chart. Although the majority of the signals are very good, there are 3 in a row in the middle that were wrong, way off. This is what has kept me from betting the farm on this tool. The first wrong signal could obviously be ignored since it came after a market sell off, but the next two seem to make sense other than they were incorrect. In any event, it is time for me to start spending more time with this. This is a market I have said I was looking for a long entry in. If you are really aggressive, you could be long now when yesterdays high was taken out. You have a higher short term low than the lowest low. I have not gone long yet, I am waiting for the seasonal period to kick in. Maybe I will miss the trade. Also, the COT Synthetic indicator is in middle ground not signaling in either direction.
Overall, for the next few days, I think it is the long side or risk on trade in most markets. If we rise, we will then have to see if the larger picture seasonal tendency for declines kicks back in or not. The exceptions of longs the next few days are GOLD and SILVER, do not chase these markets right here.