Sunday, November 13, 2011


For the most part all we really have to do is study this chart to determine which way we want to trade. As we saw once again over the last two days, when stocks rally everything else comes along. Of course the crazy uncle Natural Gas is the exception, and to some degree the grains have also been. For what it is worth, and I stated this last week also, this is one of the toughest trading environments in history. You have to stay the course during times like this. I would suggest not getting discouraged. You can go home one day with a monster profit and have it completely wiped out overnight due to a huge stock index move that influences everything else. It can happen in either direction. I cannot tell you when this will return to normal, but my gut tells me not any time soon.

What is causing this is market manipulation by governments, and they are above the law so there is nothing that is going to stop this. They are afraid to allow a downside washout for fear of the wide spread harm they perceive it will cause. Whether or not they realize behind closed doors they have caused this whole thing or not does not really matter. We are where we are, and they do not want to be the ones that presided of the great epic meltdown that could occur if they back away. Unfortunately, what they are doing to combat the fallout is more of what caused it. It is hard for me to see how in the end we are not ultimately going to where we need to go to clean out all of this leverage. However for now, "Leverage for everyone!"

I love the comments by Alan Bubblespan the man who got this whole thing really rolling. This guy should play Carl Spackler in the next Caddyshack, he blew our whole golf course apart with his policies inflating bubble after bubble. So what this leaves us with is a market that "should" rally to the seasonality and cyclical influences. However, the economic back drop is awful, so we are getting this horrible day to day chop. One thing to keep in mind, corporate profits are screaming due to the Feds interest rate policies, so all is not lost.

The chart above shows that we are still in my weekly sell zone for the SP 500. All this tells me is that we are still in a weekly downtrend, nothing more. You can see at the recent lows we had buy signals based on COT activity. I think COT data in the stock indexes is completely and totally worthless so it should be ignored. Let's just stick with the trend, which is still down. As to whether or not we will have a meltdown here, I doubt it. The setup was there the other day for one to happen and it immediately rallied like crazy after the one big down day. This tells us there is a decent bid under this market. I still think in general dips are buys, but if I get sell signals up here in this sell zone, I will take them.

This tells us that this should be about the same thing for most other markets. However, that is not necessarily the case. Let's look at a few here.

Here we have the world's favorite market, GOLD. This market "shockingly" resembles the SP 500 also, what doesn't?  As I noted on the chart, I have had some conflicting information here. During the sharp drop recently we went right down to a very long term trend line, which held. I pointed it out at that time. I said things are ok if this holds, and also indicated if it did not the game was over for a decade here. It held. However, what had also happened at the time that down move was occurring was, we had a trend change via my bands. There are some rules for that, but in a bland state, if focuses on gaps with the bands. Not all gaps are trend changes, but all trend changes have gaps like what we had where I have the black arrow. What this whole thing told me was to buy the levels where the trend line held, then look for sells when we reached the upper red band. We just reached it.

This market is a sell now in my world. However, Silver and Copper are so much weaker, that is where I will likely do my selling here. As per usual, this is not a sell at the market situation. It is a market setup for a decline. We could have a couple weeks before daily trades come along here, but I REALLY like this one. The reason for that is that we saw on the recent decline what is going to happen when the bottom does fall out of this market. It will be a decline for the ages, and one to get rich on for those who can catch it correctly. There is hundreds of millions if not billions of scared money on the long side of these markets. When the tide turns, the exits are going to get crowded incredibly fast.  Cycles tell us January is the time here, but that is one tool only, there is also a seasonal top due in a couple of weeks, so maybe that will be our kick starter here. You can see Sentiment is high again here so if we are lucky, in the next two weeks that will continue to climb, which will better set this up.

Here is Crude Oil again, a market that has exploded higher in the last couple of weeks. This is why you cannot enter at the market based on weekly setups. This weekly setup is still in place as it has been for a few weeks. We how see Sentiment even more bullish, which is bearish. There is nothing more that I can say that I have not here, this is a very good sell setup. Obviously, RB has been the weakest, with HO in the middle. Sells if they are done would be best served in RB. I have a triple divergence in one of my short term indicators right now for Crude, which does not happen too often. These normally spot very big moves, but there is not a sell signal on the daily chart in sight yet. This is more a market to watch for an entry, but there is not one here yet.

Part of doing this and showing live trades is paying the piper when one does not work out too well. The Aussie dollar short I did last week was one such trade. It became a ONE DAY WONDER. I really wish I was smart enough to always know in advance when a trade would give me a huge one day gain, then completely reverse the very next day. Of course when the stock market rallies 500 points, being short in most things is not going to work out too well.

This is a trade I showed live, it had everything I could ever want in a trade except one thing, I nice profit! We had significant POIV divergence indicating down. We had a really clean trend line for price that broke. We had a large range bar down on the day it broke. Normally in an instance like this I would carry my stop above the high of that large range bar, and let the price wiggle around. In this case since the trade had moved so much in my favor, I felt that stop point was too far away. As a result, I moved my stop to where I was in, and got picked off Friday. This was a judgement call, and this market could very well just go back down. However, if stocks stay strong, this market is not going to decline independently of that. All of the stimulus that is going on to keep the bubbles in the world inflated is going to continue to keep pressure on the dollar, hence currencies will hold up.

I still have short term things here saying to sell so I may be back into a short again here in a couple of days, you just never know. This market did stay weaker than the others, validating that I did choose the correct currency to short. However, in the end the trade was no good, so it does not really matter. You can certainly take profits when you get a big day like that, but you will never catch a large move if you get in the habit of doing that.

In summary, here is what I am looking for. My short term tools still are not bullish for stocks yet, so I am looking for sells in the indexes. This is not an at the market situation, it never is for me. I think Gold is in a spot for a decline, and think shorts should be looked at in Silver or Copper. I want to apologize for one inaccurate answer to a question last week. The Cattle market was setup as a sell on the weekly chart and I recall telling someone who asked that it was not. My apologies for that mistake. Rallies are sells in the Cattle market the way I see it. I am also still bullish on Bonds but have not been able to find a way into the long side of that market yet.

That is it for today

Good Trading


ya said...

Glad you have restated your view of Cattle setup as negative. When you said no before it made no sense, since it was negative 2 days prior.
Here is another topic I am sure your other readers will be interested in: Trading is one's businees & one allocates certain percentage of capital for this business. Even if you are succesfull it is uncertain & risky business, so ones natural inclination would be to diversify & invest other parts of capital elsewhere with the goals of capital preservation & may be some growth. You are not believer in PMs, investing in any finacial instruments is very risky & subject to uncomfortable volatility, (there are exceptions if you can find them), money in the bank/short term instruments subject to devaluation & dont earn much, I personally believe that dollar will be devalued in some way (devaluation, inflation or some other scheme) in 5 years time. Rental real estate seems to offer some of the answers but that is different business & may require knowledge & skills you dont have, hedge funds, asset allocators (find a better trader). Where then? Care to share your thoughts?

Chris Johnston said...

I am the wrong person to ask that question. I make very good returns on my money short term trading, far more than I could make doing anything else. As a result I do not have much invested in other things. There really is no such thing as diversification anymore, the world is one trade. Every single asset goes up and down together.

For those of you that had the foresight to invest in the PM's many years ago, you have done very well. I do not make long term investments based on opinions like the dollar is going to be devalued for example. What if that opinion is wrong? There are people that are going to lose half their money when the GOLD market crashes, and I just hate to see that happen to innocent people who have been snookered.

It does seem to me that rental properties are now a good idea just because they pencil out now. I will likely go into that with some money in the near future.

Sorry that is not much of an answer. I like to stick to what I know.

Alain said...

I am not a specialist in real estate but posting past experiences. Investments in cities with higher economical strength are better than on country side or vacation places. Prices may stay volatile once interest rates will increase. It seems important to keeps loans small. There is still too much real estate on the market - almost worldwide - and; therefore, prices may not increase based on demand.

Bonds are difficult: long term bonds may decline in price in case interest rates will raise. If not forced to liquidate for cash it may be ok one day. Short term bonds hardly pay banking fees.

At least for me, I do not see long term opportunities in financial markets (stocks, commodities etc) at this point. Larry was mentioning coming to a 'picture perfect' setup in financial markets. But I do not know if this idea is still on.

I started to buy USD resp. to sell other currencies i.e. EUR against the USD as long term project. You may look at a Yen chart for last 20 years as an example. Deflated currencies tend to increase and inflated to decrease in value (Brazil Real in the 90ties). I do not leverage positions here and; accept downsides - a long term project. When I bought gold in 2004, I was between zero and under water until 2005 - that's what long term means.

Note, my strategy works for me and may not be appropriate for others.


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Chris Johnston said...

I am fairly sure this is spam since I think it is the exact same text I recall seeing once before. However, in the event it is not, why would I want to spend money on something that does not make me any?

Talk about a bad trade!

Chris Johnston said...

Agree on the balances small on rental properties, that is what you are going to need to have them cash flow anyway. Being a slumlord is the way to money there not renting expensive places.

Long term investing is very difficult you have to be right for a very long period of time. To me that is harder

Anonymous said...

Good traders like good athletes make it look easy but behind the scenes there's a lot of training and preparation. Could you briefly discuss what exactly your typical workday is like? Are you constantly staring at charts and working out possible situations and trades or do you spend more time pouring over data and news? Do you have a routine everyday or does it vary?

Chris Johnston said...

that is a very good question and I think it is worth dedicating a full post to it which I will do tomorrow

colin said...

Chris, re your comments on gold. While I appreciate your saying its not necessarily a sell tomorrow, to me it looks extremely bullish based on your chart for the following reasons:

1. the commercials are the largest net long they've been in a few years based on the COT.

2. the seasonal trend being up into january.

Surely those two factors alone would pretty much overide anything else. (ie. the potential negatives you see).

Also, corect me if i'm wrong, but the open interest being low, together with the commercials being net long is a very bullsih scenario, isnt it?

Your comments will be apprecitated, as always.


Chris Johnston said...

Agree with your cot analysis it is dead on, my comments were just based on the weekly trend being down by my bands and my short term proprietary things indicating a sell may be coming. The seasonal is also still up right now. Cot stuff is not always right.

Maybe the sell won't come but if it does I will take it