Monday, December 26, 2011


Before I get to what I want to talk about today, I have to offer a huge apology. Comments are supposed to be forwarded to my email for review and approval. I do this just to keep out spammers and the occasional unlock i phone stuff. I still can't figure out how you make money commenting on blogs about how to unlock an iphone? I have blocked hundreds of those attempts. However, today when I went in to do my post an avalanche of comments was waiting in Blogger for my approval. There are so many good comments that I have to respond/talk about a few of them today. I guess I have learned that I need to go to this section each time I log in. Trying to troubleshoot blogger for things like why the comments are not coming to my email address is like falling into a dark abyss.

Chris, Really enjoy your articles, except when you slam gold all the time .You keep saying gold is in a bubble . Despite the fact that precious metals has been the #1 sector over the past decade, it represents approximately 1% of the holdings of the average investors’ portfolio. Arguably, there has never been such perverse under-ownership of an asset class in market history. This is an absolute rebuttal to all the nonsensical babble of “gold bubbles” and “silver bubbles”. Obviously a sector cannot be in a “bubble” (which by definition is a market mania) when the asset class remains a secret and/or mystery to the vast majority of the investment community. How you can kep calling gold a bubble makes no sence, the facts just do not support your claim

Robert, I guess you are right maybe I do slam Gold too often. I think when we debate whether something is a bubble or not, either side can find statistics to support the view they have. I would not consider 1% of an average persons portfolio to be a very good measurement to look at. How is an average person defined? I would think the average person probably does not have much of a portfolio of any kind, so what is in it probably does not matter much. I am not sure how this could be objectively measured, and then compared to what that same percentage might have been at prior peaks and troughs?

That aside, I think what keeps me pointing this out is the same thing that kept me warning people about the real estate bubble. I have told the story in here a few times about the party in my old neighborhood I attended and was shouted down and called an idiot by many attendees when I told everyone why I had just sold my house and that the RE market was going to drop 50%. All of the know it alls that berated me went on to bankruptcy when the crash happened. I have since had a couple of realtors contact me wondering how in the world I knew it was going to happen? This situation in Gold to me is even more obvious than that was. The emotional attachment people get to things that are in bubbles is amazing to me, maybe I am just cold hearted? What especially worries me is all the creative arguments that come along to justify something that is obviously way out of whack. In real estate my favorite was"they are not making anymore land." If I had to pick a favorite for Gold it would have to be "it has never been worth zero." Here is a monthly chart of the cash pit contract of Gold. How anyone can look at something like this and expect it to continue is just beyond me, but have at it and go all in if you are so sure I am wrong. I also fail to see why this puny little retracement we have going on now on a monthly basis, makes it a double fisted buy?

We just recently touched 4 standard deviations on the Monthly chart over a pretty short time period of 12 months. That should be as close to a statistical certainty for a reversion as there can be. The way I nailed the real estate bust was finding it had moved 4 standard deviations in a couple of categories.  However, to have markets we have to have people on both sides of the argument. I am never so arrogant to think I can't be wrong on something. You Gold bulls may be right. However, what you do need to realize is that you are betting on something that has never occurred before in any market in history, if you are calling for $5000 here. My view is to bet on the favorites not the long shots. This means that I will never catch the long shots, so when they happen I will always be wrong. If this long shot comes in I will be wrong. Everything I study tells me a reversion is highly probable event. It is not here based on fundamentals, that is the biggest problem with where the price is now.

There were a few comments about Briese and his gold views. I do not have a link to that report he put out, but you should be able to find it on the web somewhere. It is really just a numeric analysis of bubbles, and by the way he defines them for the study, Gold falls into the category. I seem to recall it is certain percentage moves over a certain period of time, but I do not specifically recall the details. If there is enough demand in here by readers let me know and I will see if I can find that report. I might have a copy somewhere.

I find myself in general agreement with your market evalutions and, as usual, in disagreement with your political views. Pretty amazing, in a way, I suppose, but to think that Obooboo is or wants to take us to socialism--which still is wrongfully discredited as a general idea and is just as generally proven in almost every rational country that has adapted major portions of the philosophy--I stress the word rational--well, to think that Obambam is of a socialist bent is to completely and willfully misread this incredibly malleable and ideologically uncaring politician for something he is not. This kind of misunderstanding of the dangerous, centerless person that he actually is, will only help ensure that he continues for four more years. Which, considering the alternatives on display, may not be the worst of all choices, even if I gag while I say that.

I am not so sure we disagree John, I just think he is stupid to be honest with you. Maybe it is blind ideology and not stupidity? I think intelligence is proven out in what you do, and by that measure he clearly is not very intelligent, even though he can read teleprompters with the best of them. I don't think we truly know what his real objectives are or what he really believes. I do know that he wants to take money from people like me and give it to unions basically, and that is not acceptable to me. As to the alternatives, I will vote for any Republican except Ron Paul who is just out there on Pluto. I don't really like Romney he is just a typical politician to me, says what he thinks you want to hear, looks good etc.. Gingrich is brilliant but I doubt he is electable. I would love to see him in a debate against Barry. The problem would be that he would embarrass him so completely that it would probably work against him in the election. He would be perceived as a bully probably. However, Barry just has to go so anyone short of Ron Paul would be better than him. I do worry about 4 more years with him, he could do immeasurable harm that could take years and years to fix. I think all of politics is so corrupted now on both sides of the aisle that the whole process makes me sick to my stomach. If I hear John McCain one more time, I might jump right through the TV set and strangle him myself. He is so annoying, and he gave us Barry to boot.

Anyway, I should probably keep my political views to myself, I know it costs me readers who don't agree with them. I have tried to keep them out of my posts recently, but I am somewhat of a loose canon at times so these comments just slip through my defenses I guess.

Chris. first of all, GREAT blog. i like the honesty. you are like the Howard Stern of trading blogs (that's a compliment). can you post an updated chart of stocks compared to that weird index that you said has nothing to do with stock, but has been a remarkably accurate for no explanable reason? are stocks still tracking reasonably close to it? thx

Oh boy do I love this comment. I was a huge Howard Stern fan for many years. His old TV show way back when before he got really big, was one of the funniest things I had ever seen. It was made funnier by the terrible production quality. His episode where they went to the Planet Lesbos and Captain Kirk beamed down to the surface and his toupe was beamed down separately and crooked on top of his head I think might have made me piss my pants. Here is the updated weird chart. I will give you a hint, it has something to do with the Euro.

Here it is. The general idea that is behind this chart which is something gaining some traction, is that the Euro is determining which way our stock market is going. However, this is a twist on this idea that is really strange and that is why I don't feel at liberty to reveal it exactly, since it was not my original idea. By this map, we kind of go sideways from here with a little up into March. We then would have a decline into about June 22nd, then straight up for the rest of the year. I think this is entirely possible especially with rates being this low. Corporate earnings will continue to increase with interest rates basically at zero. This chart is incredibly intriguing but due to it's bizarre composition I just have a hard time placing a lot of trust in it. However, it's track record speaks for itself at this point.

Buy Low Sell High or Sell High Buy Low! On a somewhat philosophical note, would you agree that most trading systems are trend following? Maybe that is why being a contrarian has yielded better trading results?

I think I agree with this when it comes to the large funds and how they trade. You can't move large size as easily taking other approaches. This is why you typically see the Large Specs positions always increasing as trends move along. They are basically the trend drivers, wrong at the turns, but right in the middle of them. As far as individual trading systems go, there are a lot of ways to skin the cat there. I tend to prefer fading market extremes with those, but that is also not an easy road to go down.

Hi Chris, I appreciate your honesty and that you are not afraid to admit when you miss some trades. Especially during these days when it seems to me that everybody was correctly predicting fall in EURUSD and making a killing on the short side. Of course they never mention their losing trades. During the weekend I read on the Bloomberg that the surveyed analysts were the most bullish since November 11, which unfortunately happen to be the area of the intermediate term high. What a joke these analysts.. I don’t have access to LW sentiment index but this Bloomberg indicator performed quite well during recent time. I didn’t short gold, I was very hesitant after the sharp decline on Monday. Anyway, always looking forward to your commentaries. Good luck!

Thanks for this comment. I hate to take on other commentators, but we all are wrong at times, you just have to admit it, what is the shame in doing that?

Someone also asked about inside bars and how I use them. I just have them highlighted so I can see when ranges are contracting. I don't really focus on them too much. I do at times like to trade with them just because the stops are really tight, but I don't think they are any more accurate than any other type of bar. I got stuck in the wrong font for these two paragraphs and can't seem to fix it.

I have been spending quite a bit of time with my variation of my COT indicator. Here is a chart of IBM and look at how good this has been here. You may ask why would it work on stocks when there is no COT data on them? The answer is that it does not use COT data, it uses inputs designed to mimic what commercials would be doing if they traded stocks. This is not an idea I pioneered, but the way I am going about it is unique as far as I know which is why I am keeping the calculation of this to myself for now. It is amazing to me as I look at one chart after another, how accurate this indicator is turning out to be.

I am working on the trigger for the trades. Even though in this chart you could have just entered at the market every time the indicator got into the zone, there are charts where that does not work and the markets continue in the opposite direction. Once I figure out the best trigger I will discuss it here.

I think this week will be quiet with an upward bias in stocks. I am likely to exit my long stuff at the end of the week, since I am looking for a short term sell signal to show up at that point in the indexes. I had stated here that I did not think this rally would be very explosive, and so far it has not been. There is too much at stake politically now for them to allow this to fall at the very end of the year. Also, funds will try to make this as good of an ending as possible. The COO short stock trade using this new tool is still on. I will post the exit for Tuesday tomorrow morning. That trade currently has a small profit in it.

Thanks for reading, and my apologies on missing so many comments. I did post all of them to their appropriate threads and just highlighted a few here today that I wanted to discuss. If you have made one that I missed or did not discuss today please resubmit it and I will promise to respond.

Happy Holidays to everyone


student said...

Is there any chance this is a bottom like it was on Nov 25,
(which you nailed), and ES is due
for 50-100 point rally from here???
Why this time is different from Nov 25 bottom, whcih was equally scary and clueless at that time?

I posted this comment to your now or never post sometime back. can you please comment on this?

Anonymous said...

Glad you figured out there was a problem in the Comments section.
Ironically, I thought to myself a week ago that it was odd there had not been any comments for a week or longer. I meant to write but then left town for the holidays and purposely left my laptop behind. A vacation is a vacation after all.
Your political commentary is fine with me and I think it supports most readers notions about your honesty and the breath of fresh air that you bring to the trading blog world.
That said, I disagree entirely with your assessment of Ron Paul. h
He is the only one of the candidates and maybe the only one in Congress that thoroughly and completely understands the root cause of what ails this once great country. It all starts with the FED and the special interests. All the other buffoons are just spewing empty rhetoric like the talking heads on CNBC who talk but are incapable of walking their talk.
In addition he has the most consistent voting record of any member of Congress over the last 20years. He truly understands that as a member of Congress his oath of office to support and defend the Constitution is his primary job. Just about all of the other 535 morons have been destroying the Constitution for decades and things really accelerated with the Patriot Act. Government is out of control especially the "police' type agnecies. I just had the horrible experience of having to stand by and watch these TSA idiots do a full body pat down on my 90 year old mother because the xrays showed two stents in her legs and they "had to be sure". I too had to go through the same thing because I have an artificial hip but at 68 I can handle it and expect it.
What an embarrassment our police state has become and not one of the candidates for either party will do a damn thing to fix the problem as they are all pro war and pimps for the military industrial complex.
As Einstein said: "the problems of the day cannot be solved by the minds of the ment who created them"
Keep up the great work and here's hoping we all have a prosperous 2012 trading year.
Don in Virginia

Chris Johnston said...

Don I will have to partially correct myself on Ron Paul. I do completely agree with this take on the FED he is dead on there. However, his stance on defense should scare the daylights out of anyone thinking about supporting him. He would get a lot of Americans killed, millions. I also loved his comment about how Warren Douchefett knew nothing about deriviates, about 3 months before he made a derivatives trade that netted him a 5 Billion dollar profit.

As with any other candidate, many have their good and bad traits. I just think his one bad one is the most dangerous of any of the bad traits of the contenders. To think that we could just sit here and have no military presence anywhere else in the world and everything would be fine shows a complete lack of understanding of how the world works. He is intelligent there is no doubt about that, so I don't understand how he gets to this conclusion.

I stand partially corrected!

Chris Johnston said...

I don't see this as a potential spot for a big rally like Nov 25 for a couple of reasons. First, we are not oversold at all here. Second, my indicator was in the buy zone in Nov it is not now. The third reason, is the seasonals. Recent years have shown a tendency for declines in January.

Robert said...


thanks for posting my comments about gold and your belief its in a bubble--like i said i totally disagree with you on that.You do make some good points--but so far this year gold is UP $220.70, or 15.94% in the past 12 months .
i would hardly call that a bubble.If you owned a stock , mutual fund or what ever and it was up 15% for the year would you call that a bubble-don't think so--
anyway we will never agree on this ,so only time will tell--
Happy New Years by the way.

Chris Johnston said...

Robert I think what you are missing in my argument is that there is a total lack of attachment to fundamentals in the rise of Gold. If the stock market were to have been up 15% this year I would have called that a bubble probably. Although low interest rates are a fundamental of stock rallies, so maybe not. However, something rising 15% on pure speculation of something happening that never has before would just by itself get me to thinking it was over extended. In any event, we don't agree on this and that is what makes for markets. Time will tell who is right. At least if you are wrong you can hide, I can't!!