Saturday, November 05, 2011


Today will also serve as Monday's post. I am showing what I am looking at this coming week, one that could be action packed. The above chart is that of the SP 500 with a lot of noise on it. I would suggest ignoring everything on it except the bands where I have the arrows. Many of the COT tools are ineffective with the stock indexes, which is something I have covered here in the past. I just have this template that I look at all markets with, and I did not feel like deleting all of the items I use elsewhere just to post this one chart here. One thing to point out that is very surprising, is how ineffective Sentiment is with this market. There have been several instances of very high readings that have not resulted in even minor little declines. That is highly unusual, most other markets you can almost bet the farm on fading Sentiment.

The simplest tool that there is to use in trading is trend. All of us get caught up in all types of fancy "indicators" to help us beat the trend. Sometimes I wonder if just looking at price bars and nothing else but my bands, might be the best way to trade. However, I have pretty good success doing it with some fancy tools, so I am not going to rock the boat. In this case you can see we are right into the red band, which indicates sell in a downtrend. That is why I am looking to the short side this coming week. There is not one other single reason for that view. What my tools are telling me is that we will have something like what I have labeled in the middle of the chart. In that instance we had a 3 to 4 week decline, followed by a big rally.

As much as I throw in commentary all the time about ancillary things, which I do consider at times in trades, the basic issue is always where is the trend, and how do I get in sync with it. I often try to trade against a short term trend in deference to a longer term trend in the opposite direction. The thinking there is that I am getting good location in the trade, and that the larger trend should drive a bigger move. This is why many entries I make like many you have seen recently in here, are against the short term trend that is in place at the time. This is one of those instances.

It is my view, not my opinion, that the trend is still down and this is a selling opportunity. The one point I need to make is that it is my "opinion" that we are going to rally into the end of the year and beyond. That is based on cyclical analysis. However, when it comes to actual trading, I use the tools I have to make my decisions. Most people would wonder why if I am bullish would I be looking to short this market. That is the best answer I can give. I trade where my tools and not my opinion lead me. If we do happen to keep moving up the trend obviously would change, and then my technical view and opinion would be in sync. Ironically I have not found that when my technical view and my opinion match, that the results are any better than when they do not. I just consider opinions, both my own and others, to be of no value at all. The other thing which I always say is, I could be wrong here. I would love to be able to tell you I never lose in a trade, but that would be a lie. Maybe this trade triggers and the market reverses back up and I lose. That would not surprise me here or ever. That is what stops are for, limiting risk when I am wrong. One outcome I never allow to happen is to lose money or an opportunity to have made some, by allowing my opinion to over ride my technical tools.

How many "expert" opinions have you heard in your life that were dead wrong? I trade off my tools period, and they are telling me to look for short entries this coming week in many markets, starting with the indexes. I will want to see some short term weakness to confirm entries, I do not enter at the market as I have stated many times in here.

Here is Crude Oil, and the picture here has not changed one bit. This is about as good of a sell setup on a fundamental basis, as I can have. It is my feeling now that Heating Oil is the weakest near term, so that is where I am looking for shorts. You could certainly argue that Unleaded Gas is weaker, and just by price bars alone it is. However, some of my proprietary indicators are showing more short term weakness than RB is so that is why HO looks the best to me. I think it is valid when you have a complex like this to trade the weakest even if the setup is in a different individual market. In general they move together, although we have seen that strange spread trading between RB and Crude recently.

Of course since the world is one trade, the currencies are also sell setups here. The above is the Swiss which has been the weakest of the bunch. Take your pick here. The one word of caution is that with these tight market correlations you have to keep in mind that they are basically all the same trade. If you trade multiple markets in the same direction, you are basically just taking one trade with multiple times the risk. I suggest taking your total risk dollars, then divide them into the individual risks for each market. Just make sure the total dollars across all the markets don't exceed that number. It is highly unlikely a short would work in any of these, if the stock market takes off again.

The Bond market rally I called for has started, so look for buys there. Overall, I am looking for short term sell signals in most places coming into this week.

Good Trading


ya said...

chris, sounds like your work is telling you to look for risk off trades. Was wondering what your tools show re Nat Gaz (has been weaker than oil, even though may have less potential in a down move, there is particulary high tension in Middle east that can support oil) & AD which also may be a better short. Thanks as always

Chris Johnston said...

I don't really consider Nat Gas to be part of the Oil complex, it trades completely to it's own tune. There is no doubt it is the weakest, but there is a lot of POIV divergence in that market right now so it is not a short for me

AD is basically the same trade as the ES, you could switch the symbols and nobody could tell the difference.

As far as tension in the middle east, it reminds me of the movie Naked Gun when the one guy says to the older gal, my clients are really upset. She says of course they are they are Arab Terrorists, they're always mad.

Isn't there always tension in the middle east?

Alain said...


Swissfr, Bonds suggest being model trades - entries as from PP material. My trendline technique suggests HO as well, although LW suggested RB in the weekly update. But I feel if wanting to trade everyone will have to take his/her own decisions.

I will also keep looking to silver and copper short. Both have sentiment extremes, Willco on top and divergence in A/D and momentum. May be worth giving it a try as an entry 'd be on.