Wednesday, November 30, 2011


I realize these Trade Station charts do not show very well, but if you enlarge this you should be able to see what is important. Readers know I bought into the debacle of last week in the SPY's. At the time I think I said it is not that big of a position and if it works out I will make 5 to 10k. Well it is over now, and the tally is 10k almost right on the number. You can see where all the light blue lines go up, where I exited the entire position early in the day when we were right on the highs at the time. They were later exceeded on the explosion up into the close. Why did I do this?

As traders we are in the business of taking profits, not of being right. I do still have some long exposure in some other things so I still stand to benefit some if we keep rolling up. I entered this trade with the idea that I would hold it through the end of the year. However, I also entered it knowing we were in a down trend and I was hoping to catch an oversold bounce in that downtrend. I had no idea we would go to an extremely overbought level this quickly. Extreme overbought conditions in a down trend are not a place I want to be long on average. I want to be flat at those junctures, or short. My expectation was that this would just gradually creep up for the next month. When we got this huge move up, and got this overbought, and I also looked at some intra day things to see if at least for the moment, we were due for a pullback. Once I looked I did see a few things that told me we might pull back a little so I decided to pull the plug. This does not mean that I think the year end seasonal rally is over, it likely is not. This is just too far too fast for my taste especially keeping in mind that it is against the trend. I wish this move had not happened so quickly but it is what it is and I made a judgement call.

I will wait and see now if we back and fill, and if we do whether or not my short term indicators are indicating a buy at that time. If they are I will go long again. For the time being I am into the consideration of what to short into this strength mode. If we just keep going and I miss the move, I do not care. I just made a decent enough amount for just 4 days of work, and these overnight moves are so treacherous. It is an odd world and time we live in, when an announcement that if you think about it just confirms that the banking system in Europe is on the verge of collapse, launches a rally this big. My question is who will bail out the central banks? Who will bail out the FED. Can they own the whole world?

That of course is a bigger picture question and irrelevant for short term trading. For short term moves you don't want to fight central banking moves, they are going to be bullish. I think it is likely that until the very end when the bubble is re inflated to an equivalent level to what it was a couple of years ago or likely beyond that point, we can hang in there at these price levels. However, make no mistake about it, kicking the can continually down the road is going to lead to a market condition that is going to be worse than the 2008-2009 decline. You just can't keep stacking leverage on top of leverage. At some point there actually has to be those who pay back loans. I do not understand the logic of those who think the rich people can just have their wealth confiscated and re distributed, to solve all these problems. What happens once you have done all that? Since the pattern is obviously to continue to spend and leverage things to the hilt, you are betting on another generation of rich people to be hatched, so that later on you steal from them to pay for what you are doing today. How is that generation going to be hatched exactly in a climate like this?

For those of you struggling in this environment, do not get down on yourself. This is the toughest trading environment I have ever seen. One thing you always have to be as a trader is flexible. If you fight the changes that have obviously taken place, you are just going to lose money.  I spent the weekend going through my stock trading list. This list is 150 or so just random stocks that I think have the best patterns in them, the most like futures in terms of how smooth bars form and don't have gaps all over the place like some of these penny type stocks. These typically have less chop and better trends in them. I compared the best retracement entries in all of them to the best retracement entries in the stock indexes. I  found that of the 150 of them, taking multiple turning points for each one, getting a combination of over 1000 turns, there were only 5 instances of good trades that did not occur directly in concert with the SP 500 turns. This is mind boggling, but it tells you the degree of correlation and more than raises an eyebrow or two.

This makes me think that the central banks are actually already in the stock trading business. The only other explanation I can come up with is that the whiz kids out of MIT etc, that the Hedgies hire to write algorithms for them, are just keying off the indexes for all of their signals. Maybe it is because they have observed the tight correlations. Does the dog wag the tail or vice versa? It hardly matters. What matters now is that almost every market trades incredibly tightly in sync with the US Stock Indexes. This makes for incredibly difficult trading conditions. 

However, keep in mind that governments don't really want you trading because that gives you independence from them. You hear the liberals from Douchfett ( Buffett ) on down to Democratic Congressional members, they want to outlaw trading. It would not shock me to see that they were somehow behind all of this. However, I think it is more of a just general, "Don't let this thing go south" direction from the people at the top to the central banks. The rest is just a consequence of all of that manipulation.

Ironically, it has been months since I have seen evidence of intra day PPT action. There may have been a day here and there that I missed, but they have been noticeably absent. It could very well be that they have changed their tactics to the overnight sessions since it was becoming blatantly obvious to almost anyone, what they were doing. This might be a more efficient way of moving markets. Light volume makes moving markets much easier and less costly. For now, it seems the day trading by them is gone. Today's late rally was not likely a PPT move since we were already up big when it happened.

Looking forward to the next few days, I am looking to try and short an ETF or two into this strength and as of press time I have not decided which ones. I also think Natural Gas is starting to look interesting on the long side. Hogs seem to be a day or two away from a sell setup and Heating Oil is showing it's relative weakness in the energy complex, so there might be something there coming along.

Remember even trading ETF's the correlation game is still in play.

Good Trading


Alain said...

what is PPT?

Chris Johnston said...

plunge protection team just surf the web and you can read about it

Marc said...

Just wondering if you know how a market can have such overnight moves and then after the open just go flat all day. Is there someone or an entity keeping the market in a narrow range during regualr trading hours? Is it possible to keep a market in a narrow range?

Thanks, and I really enjoy your posts.

Chris Johnston said...

Mark I have to say I am not sure but I suspect it is due to the governments manipulation of the markets overnight and how people react to it. The lion share of the moves are happening overnight and I think the retail investors have been scared out of the game for now, so there is not as much intraday activity. When you have a 30 point overnight gap for example in the es like Monday on a news story that is bullish, it is tough to play. You don't want to short it, yet it is already short term overbought. It leaves day traders with a tough proposition. Damned if you do damned if you don't etc..

It could also be due to the large funds and how they are trading which if you believe what is out there, many have gone to cash for the rest of the year. I think the net YTD return for hedge funds overall is down 9% and they have thrown in the towel.

Sorry I can't give you something more definitive.

ya said...


Thanks for sharing your experience It helped me to crystalize some important concepts about this business. How many markets do you follow & do you trade contracts outside of US?

Chris Johnston said...

I follow almost everything, but don't trade Forex I think that is a suckers market for people with no money

ya said...

So tomorrow is NFP - would you adjust your current positions in anticipation of potential volatility?

ya said...

When I asked about foreign markets I meant futures ? Like DAX traded on Eurex etc.