Thursday, October 20, 2011


One of the things I risk every day doing this is be thought to be a fool by people all across the world when I am wrong about something. One harsh reality, is that the only thing I can be sure of is that I will be wrong about some things. That is not meant to be a negative thought, but if you think about it there is logic to that statement. I remember in the days when I had my trading service, I always told people the only thing I could guarantee was that there would be losses. I certainly could not guarantee there would be gains. Let's face it, when trading we know that every trade will not be a win, but every trade could be a loss. A sobering thought, but it is reality.

Now that I have picked up readers from literally every country on earth, I risk being a transcontinental idiot and not just a domestic one! With that aside, the following is how I see things at the moment in the stock indexes, which also defaults to just about every other market as well.

First, we are still in the trading range on the daily ES chart, albeit right at the very top. We had a false breakout and reversal at the bottom of the range which is what led us up here. We now appear to be setup for the opposite situation. However, there is an alternate scenario, if you are really bullish. We had a small inside bar yesterday with a down close. These bars often lead to explosive up moves when the highs are taken out the next day. You could argue that there is a legitimate long entry above yesterday's high today and you would be right. So what to do?

On one had we have had a huge rally right at the seasonal time window that came out of the blue, this should be bullish, and in general I think it is. However, now we have extended a long ways upward to the top of a very well defined range, with almost no pullback at all. You could certainly argue that price is speaking, and that we are in lift off mode. We very well could be. It might be that we will look back after another 1000 Dow points and say,
what a no brainer that inside bar entry was."

Here is why I do not think that is going to happen. First, we are right up into the weekly sell zones in a down trend that I showed the other day. Generally these are good spots to get into a continuation trade in the direction of the main trend which is down. At times with trend changes we do just blow through these zones, so they are not a guarantee at all. However, if I also take into account my synthetic COT which is clearly telling me sell as well as a few short term oscillators I use that are projecting down even with an up close on Friday, it still tells me to look down for the moment.

As a result, I am going on record as saying we retrace from here to setup the year end buy, and do not just explode right out of here today or tomorrow as it appears it could. I think if we do break out it is going to quickly reverse, if that happens in the next couple of days.

Here we have the world's favorite market GOLD. We are rolling over here at the moment, and in the danger zone. I posted recently that from a weekly setup standpoint, this is a great buy setup. That is still true. However, that is a setup not an entry, daily price action still has to generate a buy signal to get it in line with a larger time frame setup. This recent low marked on the chart is the line in the sand. If we close below this level, the whole up trend is now broken, even on a weekly basis. As I have stated here over and over, and I will do it again at the risk of once again being a fool, this market is going to collapse just like real estate did, it is just a when not an if. I do not know when that will be. What I am fairly sure of, as it has been with every other asset bubble in history, fraud will be exposed, and everyone will cry foul. Millions and millions of people have been suckered into thinking this market can never decline, just like they were with stocks in the late 90's, Oil when it reached $140, and real estate in 2005. The core arguments were the same for all of them. They all had some assumption about a large scale economic phenomenon, that was infallible. In all of those cases the arguments turned out to be invalid, so it will be here as well.

What people fail to realize in my view is that this asset just like any other is subject to up and down cycles. It has had an historically long up cycle, it is due for a reversion,  just simple math. Those who had the insight to pick this up 10 years ago have made an incredible killing, those who bought it late will get wiped out. It is always the same with asset price cycles. I personally do not care either way, since I don't hold things for months or years, all I am trying to do is point out what to me as a trader of 25 years is obviously a trap trade.

With all that aside, pay close attention to this recent low. As long as we hold above it, I think there is a dynamite long trade coming here. What has to happen is we need to start making high highs and higher lows, in other words, put in some type of short term market bottom. Once that happens breaks to the upside need to be taken. Until that time if you are short in a short term trade, just trail this down and see where it goes. I would think about exiting against that low or slightly above it if I were short this market, since I am expecting it to hold.

I think where some of my readers are getting confused with my position on this here is this. Those of you that are bullish are synthesizing economic fundamentals and concluding a certain outcome must occur due to that. My analysis is strictly based on technicals. I do not consider my opinions on economic fundamentals when I trade since I know they are arbitrary. This is why I say don't email me on this. It is more because we are just analyzing this from different perspectives. It is not because I am sure I am right and don't want to consider alternatives. Numerically there aren't any. However, discretionarily looking at economics, there are thousands of alternatives.

If someone wants to show me examples of mean reversions that never happened, that is welcome, because that is more in line with my core argument here. What I don't want to get into is someone telling me because there is big jewelry demand in China, Gold has to keep going up etc.. That is just an arbitrary opinion. Also, if you think we are returning to Mad Max days, and GOLD will be this precious bartering item, that is also an arbitrary opinion. I want statistical reasons in terms of someone giving me a commodities market ( not a stock ) that has gone in one direction with no reversions, indefinitely. Keep in mind that if those types of reasons are what you base your trades on, there is not necessarily anything wrong with that. It is just not how I trade, or how I form my views on things. More power to you if you can make those random guesses over and over and make a market killing, I can't succeed that way. Your arguments might be right for all I know, I could be wrong!

If someone can convince me of that and that there is a high probability that means reversions will no longer happen, you will find I am flexible in my views on things when I learn something new. In other words, convince me in my language why I am wrong.

The bigger picture to me is a rally up that fails the yearly highs that tops early next year, setting up the return under 1000 for this market and potentially much lower than that.

So there you have it, a fool going on the record. This fool does put his money behind his mouth.

Fool Out!


John M said...

I have to say that I've been silently reading lately and applauding your stand on gold. The plains of failed traders and investors are littered with the 'this time it's different' crowd, and the gold goldilocks will join them at one point or another.

That whole Mad Max scenario never made sense to me, either. I mean, how is gold really different from any other mode of currency, fiat or otherwise? It's just a matter of faith that someone else will consider what you proffer to have any value. Gold is a shiny rock. And that's better than a piece of fancy printed paper how?

Of course, some will say that historically, gold has always been of value, and they'll hang me on my own criticism of 'this time it's different' if I say that doesn't necessarily matter. It can be difficult to parse when humans' hard-wired way of thinking--that whatever has happened or is happening will just keep on happening--is wrong and when it isn't.

So I admit that gold has history on its side in that extreme scenario, just as bubbles and their popping have history on their side. Maybe the seeming contradiction is a matter of timelines. Gold as barter material is dependent on a future that assumes the absolute worst. Anything short, and the argument dissipates. But huge runups and overvaluation spikes are shorter-term. They're also much more reliable than predicting an extreme left turn in western civilization.

Alain said...


I see Nasdaq as leading indicator for equities in past. Today, we closed < previous inside days. Lower prices could setup a LW's specialist trap pattern whereas prices may retrace more than half of the trading range.

Best not to be ultimate bearish or bullish but follow markets. Copper on the way but do not see much potential <300 for now. Got out of coffee long, looking from sidelines. Soybean confirmed down move. Energies waiting. Crude may setup for a specialists trap too. RB, HG unclear.

Agree with you: non traders will tell us what we should have done once moves resolved... Re-subscribed to PP monthly live meeting. Let's see what the news will be.