Sunday, November 20, 2011


I have been watching the Presidents Club golf matches over the last few days, and an interesting analogy to trading jumped out at me. As I watch Tiger Woods hit the ball as well as he ever has, yet lip out more putts than I have ever seen anyone do, it came to me. Sometimes in life you do all the right things and still do not get good results. It must be incredibly frustrating for him to literally have a putt seemingly perfectly struck miss the hole by an inch on literally every single hole. Of course this could be Karma for his past transgressions. He has been a terrible human being for a long time, so it is hard to feel sorry for him. However, I have recently kind of been in this mode the last couple of weeks. I have lipped out several trades.

If have seemingly done mostly the right things, made pretty good market calls, and have nothing to show for it at all. It is very frustrating and on top of it all my wife told me last night we are getting another horse! Now more overhead, terrific. Times like this are when you have to be a bit careful about losing your confidence. I have always felt that all you can do in life is do your best, and if you do that over and over, good things will eventually come to you. The tricky part is making sure that when you think you are doing your best, you really are, and also that your are focusing your best effort in the correct direction. After all, I can focus all I want on winning the NBA slam dunk contest, but guess what, I won't succeed. During times where you are not getting the results you would like you need to make sure you are focused on the right things. Losses and break even trades do happen in this business, so you have to accept them. I just like to make sure they are legit trades by my rules, and as long as they are it is business as usual.

Discretionary trading presents real challenges when bad periods show up because the second guessing can drive you up a wall. I am going to give you a specific example of Live Cattle, a market I wrote about telling readers that sells were to be done.

Here is the chart of Cattle, and I have marked where a legitimate entry spot was at hand. At this point this trade certainly appears to be off and running and potentially a home run trade. I have often discussed seasonal tendencies and that they are not the holy grail, they are just something to be aware of. It is uncanny how at times I have seen perfect setups like this fail in a situation like this because the seasonal had a few days more up before it's peak. In those situations a perfect entry wound up setting up at the seasonal point. Since I am aware of this, I nit picked this trade way too much and wound up missing it. Now of course we don't know whether or not this might bounce and setup another sell in a week or so, which would be that scenario. However, the bottom line is I should be in this trade and I just got too greedy on this one.

I am not sure if there is anything really to learn from this, it was just a bad judgement call. There is really nothing else to say about it. When you trade in a discretionary fashion sometimes you just make mistakes. It really is that simple. For those of you who are in this trade, congrats it looks like a could be a big one. I will join you if we bounce a few days.

I know I am beating a dead horse on this next market, but it is still set up very well, and perhaps we will finally get a short entry pattern this week.

This is Crude Oil on a daily basis. Here you can see why you have to be careful with seasonal patterns. We are going completely opposite of what should be happening seasonally here. We may well be running into one of these seasonal inversions where the projected low will actually be the high. However, there are some proprietary things I use that show this market is due for a fall now and should be shorted on a bounce. Since Crude is the strongest of the energies, RB or HO are the places I am looking. The one fly in the ointment for a sell here is of course stocks. It appears to me now we are going to get a move up now, and with the correlations we are all aware of it remains to be seen if Crude could decline while stocks rise. I have my doubts, but I will take the trade nonetheless if it presents itself.

Here is the chart of the SP 500. As I watch some of my shorter term tools which were telling me we could fall off a cliff last week, I also noticed one that was contradicting that, ADX. ADX should in general be moving up confirming price moves, since it measures the strength of trends. You can see where I have marked this off, moves where price was going down, but ADX was declining. This was telling us the trend was not getting stronger, it was weakening. We certainly have that going on now. The other thing which is just anecdotal, and nothing more than arbitrary opinion. The price just does not want to seem to go down. Every time it is on the precipice of a nose dive, it holds.

When I put all this together with what we know is a strong seasonal and cyclical tendency for a rally, I conclude we are likely to move up here. I do not have short term buy signals yet, so I am not long on a short term basis. However, I have moved some longer term money onto the long side here for what I think might be a hold through the end of the year. I am hoping to scale in on a decline from here with more of it. We always have the Europe event risk, so you never know when we might get a 400 point down day. However, overall, I think it is time to be long for the rest of the year give or take a few days.

MF Global and Friends

I have exchanged some emails with some of you on this subject, and the following are my current thoughts on this. First, no matter what regulations are in place, they only give us a way of disciplining people who don't follow the rules after they break them. They cannot physically prevent someone from doing what allegedly took place at MF Global. As a result, it is impossible to know with 100% confidence, that whatever firm you are using, is following all the rules. There was a public statement from MF right before this crashed, stating all was well. Of course it was just a lie. People lie, see OJ Simpson if you have any doubts on that. It is my understanding that there was some advance warning in the financials of this firm for those who were diligent, but I do not know that for sure since I had no funds there. I use the Weiss rating service to track my banks and PFG where I have a good chunk of my money. It is free, just make sure to dodge all the gloom and doom emails they send on the world. They are very negative on things, and I just have no interest in that type of crap in my email inbox every day.

Once you have done what you think is the proper diligence on your firm, I suggest you also do the following. I don't think if you can help it, that you should keep too large of an amount at one firm. Once you get into the hundreds of thousands or more, split it in half at two places that you have researched the finances of. This way if something were to happen, you are not all in with just one place. If we were to get into some type of systemic failure situation, where all the firms failed, there is really nothing you can do about that. If you think that will happen you should not be trading. I think we have to operate on some basic assumptions in life. If you spend your whole life waiting for the sky to fall, guess what. If you are right and it does fall we are all gone including you even if you predicted it. If we get to a point where the US Government fails, the whole world is going to be gone and most of us won't even be alive to worry about our brokerage accounts.

I operate for the most part on the assumption that our basic way of life is going to remain the same even though we will go through boom and bust cycles. Along with that assumption comes along a financial system that should remain intact. I don't want any comments coming from people trying to convince me we are all doomed and America will disappear, they won't get through. With all this in mind, my view is that you split up your money if you have a large amount. Whether you do or not, make sure where your money is follows the rules and is on good financial footing. Once you have done that, go on with your life and trade and make money. 

I know there are those that think their money should be at a place where it is backed by Gold. On the surface I can't argue with that except in the following way. What if the value of Gold drops by 50%? What would happen in that event? History has told us this will happen with a 100% probability, it just does not tell us when it will happen. I would not be surprised to see another firm or two go down if things get really bad. However, if your firm is not doing much trading the risk should be minimal. The overall suggestion is that you have your money in a place where they their money from brokerage and not trading. MF was trying to move into the trading world and guess what, most traders lose money. Is it any surprise they did?

The point I am trying to make is that it is important not to get too carried away worrying about things you cannot control. If you are so inclined to be influenced by reading, read opposite views of yours and then consider them. Just reading those who already agree with you does nothing to help form a solid opinion on something. I have to admit, that there are a few things from some of these wacky liberals that make quite a bit of sense to me, even though I disagree with the lion share of what they push for. Most of the reading I do when I do it, is the negative stuff. I read it because it is for the most part the opposite of what I think. Even though there are people who are very intelligent arguing for certain things, for the most part they are paper champions. However, they do at times make good points and I consider them instead of just dismissing them blindly.

I think they are right on some level in that we have difficult times ahead, I just don't think Mad Max is coming any time soon.

Good luck this week



ya said...

Do you use futures for your longer term trades? Do maintain same risk parameters for longer term trades?

Alain said...

Chris, I feel with you. My August was very well, September a high volatility slope ending with zero and quite a in October. With smaller risk exposure, I recuperated about half so far. I feel that the way we traders go is the goal. Fix costs, investments when accounts not increase or decrease hurt (mentally). Sometimes, extreme mental stability is required to stay on track and just continue to do what we did before - also after 5 loosing trades in a raw! This is not a biz for 9 out of 10 people.

Decided to slow down this week: quit SwissF.; RB, HO, grains, allowing re-entery i.e. next week.
Was short silver, quit at $34 before the decline day last week, spite of capital protection. There was an option allowing a raise to $37...
Short some cotton, may add upon correction.
Longs, that may setup - not ready yet: Dow, SwissFr., coffee.

A bit of relax, a good turkey and two, three good trades can change the world!


colin said...

Chris, there's an interesting comparison of the S&P in 2008 to the current market overlaid. If you go to: http://www.alsosprachanalyst.com/markets/the-latest-look-of-sp-500-compared-to-2008.html?vm=r

The similarity is uncanny. Its pointing to ongoing weakness in the market. I was wondering if you'd seen this and your thoughts on it?


Chris Johnston said...

Ya, answer is no they are different. You have to buy into weakness for longer term things so stops can't be close


Curious where you live? I know I have readers all over the place


Yes I am aware of these types of things. Keep in mind everything I have short term is showing down. It is just the longer term cycles and seasonal influence that has me committing a small amount of money to the year end rally idea. I am not long in anything else. I do feel though that the people pushing those charts, and there are a lot of them, are perpetual bears and can always find a reason to predict a massive decline.

The lighter volume nature of the holidays make it easy pickens for the PPT to manipulate prices, so I look for day end rallies, mostly in the last hour for the rest of the year.

Chris Johnston said...


here it is Don