Sunday, October 23, 2011


Those of you that have been regular readers here of my commentaries know that I base much of what I do on historical patterns as opposed to forming complex economic views of what I think will happen, then acting on that theory. I have found that although history does not usually repeat itself exactly, it generally shows patterns that play out in similar fashions. The reason I think this happens is that price graphs are essentially summations of collective human emotions. They include the calm, the lethargic, the frenzied, and the irrational all in one line on a chart. Since the collective human psyche has not changed in hundreds of years, I think it is the best probability to bet that it will not.

There are those that prefer to take the path of the different this time argument when they predict things to occur that have never happened before. To be clear, there are events that do happen for the first time, and if you are able to correctly call those in advance, you will be very wealthy. The GOLD price move is one such example of this, there has never been anything like this that I can find, and those who predicted it and went long 10 years ago have done incredibly well.

I am willing to miss those types of things due to the rarity of them, and perhaps I am just not smart enough to figure them out anyway. This brings us to the discussion of the day, have we seen the low in the stock market, and where do we get long?

One of the reasons I am a short term trader is being exhibited by the stock market right here. It is so difficult to pick the exact low, and if your success requires you to do that, your results are going to be mixed. When you miss a major low like the one we have just seen, you find yourself in a very tough spot as to where to "get in." As a long term investor you cannot afford not to be in, so you have to chase it. As a short term trader, it is just another trade and there are plenty of other markets to play in if you miss one somewhere. I miss trades all the time, and I have missed this one, or have I?

The top two charts show a search result for capturing when we have had a price pattern like what we have had, while accompanied by bullish sentiment, and commercial buying. I was surprised to see that the best match I found also occurred at virtually the same date during it's respective calendar year that we find our self at this year. In that instance, we never had a pullback of any kind, and the market just took off. If you are a long term investor at this point, with us being at the time of year we are, and the long term cycles as bullish as they are, I think you have to get long here.

I am glad I am not because it would be very uncomfortable for me to get long after a monster short term rally like this where the market is incredibly overbought. In the 1998 example above that I think looks remarkably similar to our current situation, we were also just underneath the 200 day Moving Average. If we had dialed down to the daily chart, there was about a 5 day very small sideways to slightly down pullback that shaped up right about here. At this point I think if that were to take place, it might be the last chance to get aboard here. For my purposes, I will go on my short term indicators to drag me into this. They are really a marginal call right here. There technically is a buy pattern, but there also is a potential sell pattern if Friday's low were to be taken out in the next day or two.

In situations like this you can stop a stop and reverse type of strategy. Certainly if we were to trigger the sell signal and the market reversed back up quickly, that would be a green light special to go with and and go long. The Naz has been by far the leader here being close to it's yearly highs already, so from a short term perspective, that would be where to look for longs.

Net net, the price action is speaking here in my view, this market is ready to go, in fact it already has. As to whether or not it pulls back now as I have been stating I thought it would, I do not know. I do think we have seen the low. I have also scrolled through a ton of individual stock charts just to get a pulse on what is going on underneath. I do not see very many setups in either direction for trades Monday. So many stocks now look just like the indexes, that the diversification idea has jumped the shark. I just don't get a definitive read in either direction from that review, so it does not help much. Since I am on record as saying I thought a pullback would happen, I have to stay with it. However, if I am being completely honest here, which is what I always am, I am unsure about this market now.

I wish I could give you a definite call in either direction, but I just don't see a trade here. When I am unsure, I don't make any trades and I look elsewhere. From a long term perspective, we are close enough to where a low will be that if you have a long time horizon, it is probably time to get in and live with a pullback if it happens. You could also get partially in and add on a dip if one occurs.

What else do we have to look at here?

Here is the Coffee market, one I had mentioned a couple of weeks ago as a buy candidate. I have marked off three possible long entries that I saw. I just entered on the most recent one on Friday buying at Thursday's high. So far it looks ok but you never know, I have seen days like this followed by days just like them in the opposite direction. This came down to judgement as to when the price action was actually confirming a trend change had happened. The very first entry to me was not enough of a price confirmation with how strong the down trend had been. Had I been in that I would have been stopped out for a scratch on that large outside bar down. The second entry I have marked off, was in hindsight the best entry. My entry was very close to that same price and I did not have to sit through that one bar that would have almost stopped me out. As a result, I am comfortable that I have entered this trade decently. In reality I should have played all 3, but I did not. I doubt I will ever do everything perfect, so I don't sweat that too much.

I have one short term target displayed on the screen. Because of the larger picture bullishness on the weekly chart, I will likely go for a higher target on this one. One thing I do know, most of the time when I have large targets they don't get reached. Most of the time the trailing stops get hit, or something changes, like it did with  the Sugar trade, and I decide to get out differently.

Unleaded Gasoline is a market I am looking for a sell in. The energy complex in general is all setup as a sell. There are a couple of proprietary things that I don't show, that are telling me this is the one of the three major energies that I want to short. It remains to be seen if we can get a decline in anything while stocks rise. Now that there is talk stirring about QE3 which anyone with a pulse knew was coming, we may see the FED to another inflation attempt. These guys are just unbelievable. Who in their right mind would be willing to trade off ruining the lives of hundreds of millions of people, just to artificially raise stock and hopefully, real estate prices. Yes you read that right, if they create big inflation, it is going to screw a lot of people but they don't care. They want to try to trick everyone into thinking everything is alright and they should start spending to lift the economy. The whole premise of our economy is so screwy. The whole thing is based on people spending beyond their means and the FED creating bubbles so people can reap windfalls to pay off the debt they stack up.

The problem of course is that people get greedy and don't take the money when the bubbles are there. They actually ramp up the spending even further beyond their means due to the wealth effect of the bubbles, and it creates a death spiral.

Someone needs to tell these jerk offs to stop doing this. It is incredible the hall pass Greenspan got, he started this whole damn thing.

Good Trading this week to everyone.

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