Friday, October 14, 2011


I want to focus primarily today on the stock market. This has been an incredible rally here, just straight up after the false breakout of the trading range at the bottom. At the time I thought it was a false reversal due to the larger cyclical picture which was telling me the low was likely to come at the end of the month. We did have the screwy mystery chart, which called that low almost to the exact day 1 year in advance. This is once again giving credence to the predictability factor of that idea. I have not divulged what it is because it is not my work originally. However, now that we have had a chance to watch it live for months in advance, then see it call a low this accurately, you can bet I will be giving it some serious consideration come early March when it calls for a high point, then next June when it has another significant low.

In the mean time, what to do now? Keep in mind the bigger picture here, and this is what that picture is the way I see it.

First, we are still in a down trend on a weekly basis and are into a resistance zone that should provide some type of down move any day now. That is the larger trend, so the biggest moves should in general happen in the direction of the main trend.

Second, on a daily basis we are still in a clearly defined trading range which I have drawn out on the chart. Generally the way these act on the edge is that you get a false break and quick retracement, just like we had at the lows. Or we get a false break that retraces back into the range, then takes off again in the direction of the original breakout.

Third, we are at a time during the year when typically a rally takes place and we also have some larger picture cycles confirming that a significant low should be forming down here. This gives us reason to lean to the long side breakout of the range thesis.

Fourth and perhaps most importantly, the Bond Market has been very strong which is bullish for stocks. The general idea here is that money flows to where the greatest returns can be had. As a result when interest rates get really low the prospect for higher rates of return switch to stocks, so that is where the money goes.

Of course we never know for sure what will happen, and we could easily just go back down quite a bit here even though I don't think we are going to. In any event, it may be tempting to some to buy after a rally this strong, but statistics tell us that is not necessarily a great idea.

This table shows the results of buying after we have reached a Percent R reading on a 22 period basis, of > 85 while my COT Synthetic is between - 8 and - 15, which are the conditions at hand coming into Friday. Then once in having no stop and just exiting 10 days later. Obviously, this is not a very good result, so buying right here on average has not historically been a great idea. The prudent move at this point is to wait for a retracement of some type, then get aboard buying strength once it turns back up again. This is what I am looking to do.

Here is a prior instance I found of what I consider to be similar price action in a trading range. You can see we had a false breakout down, then it immediately shot all the way across the range to a false breakout on the high side. We then retraced back into the middle of the range, which was the buy point. In this instance we got very choppy upward action afterwards, but the point is to identify where I think we are now just based on a sideways price range for a couple of months. We could also argue that we were in an up trend coming into the trading range in this example, so it was logical we would break to the upside. The point was just to find bar patterns that were similar, not over analyze it.

In general Friday's do not tend to be reversal days, so with this early strength I think we will stay strong today. If we are going to get a reversal here back into the middle of the range, it should happen pretty soon. The alternate scenario is just to fly out of here which could also happen. Just know what you want to do when you want to do it. Then when the time for action comes, you just click the mouse and don't get tied up in your underwear in the process.

The last chart is that of the Sugar trade I told everyone about, then did it, and here is how it looks currently.

The market is moving up, but what isn't at this point? You can see where my target is here, very unlikely to be hit today, but the orders have to be in just in case. The trailing stop is now well above my entry price, so the worst case now is a decent profit, with the chance for a good sized one. If there is one thing I can impart to readers who are newer to this profession, it is the following. You have to catch larger moves to make a lot of money trading. If all you ever catch is small little wiggles, you are never going to get anywhere. Even in my day trading, I look for larger moves, and not a few ticks. It is true you will get stopped out alot doing this a get small little wins and losses along the way, before catching larger wins. It is frustrating when you can look back and say "well I could have taken X out of that had I exited" and that would be much better than the dinky little win you got when your stop got picked off. You have to step outside of that type of thinking. What we are trying to do is trap price movement and get in sync with price trends, then let their momentum bring us the returns.

It puts so much pressure on you if all you ever get is $500 or so a contract, to just always be right. It is a very stressful way to trade. One thing you have to keep in mind is that it is how much you make, not how many of your trades win or lose. This is a big lesson I have learned over the years. I had many years where I had 70% or more winning trades for the year, but my biggest years have always been when my percentage of wins was lower than that, yet I caught some big moves. Once I got past "myself" and allowed things to move a bit I became a much more profitable trader even if it meant at times I had weeks where I did not make any money. It is about the larger picture, not short time frames.

In the above trade since it was setup on a weekly basis, my logic is I am looking for more than a little wiggle in it. The target may change, what I have displayed is just what is there for today. I am not going to get into how I arrived at it, but in general it is just based on the Target Shooter tool that is displayed. I project many things, and when they form a cluster in an area, that is where I usually put the orders. Of course just like anything else, it is a judgement call.

Good Trading and have a nice weekend

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