Monday, December 12, 2011


As I watch this across the board melt down today, I started surfing for the media's take on it which is always good for comedy. In the best of comedic performances we get CNBC to tell us investors in mass sold because of inflation concerns or the price of oil. I wonder if they could produce one single money manager who has ever done that even one time? Why would those concerns cause them to sell today this very second? Why not tomorrow, next week? Further, even if individual investors actually did do that, they don't represent enough volume to move the market. The institutions move price, they don't trade this way EVER!

I did see something that continues to perplex me. The unions in Italy are striking over the austerity measures! Apparently there are some cutbacks in their pensions and they of course would prefer the government just take the money from the privileged, the rich instead. Let's look at this for a minute. What exactly makes people privileged?  A privileged person simply has things that others do not. Wouldn't a lifetime pension qualify for that? Lifeguards here in California get guaranteed 90k per year pensions when they retire at age 50. That to me is about as privileged as someone can get. What this really is boiling down to is a fight over a way of life. If I were president I would do just one single thing, and it would solve virtually every problem that we are grappling with. I would eliminate all pension programs for all government employees hired the day after I took office. I would not take away the ones that are already in place, but I would state that if you start working tomorrow for the government you will be offered a 401k program to build your retirement with and nothing more. In time this would solve the problem even if it took a few years.

At this point we would just have an even playing field between the public and private sectors, and that would be the best way to shrink government. Many would still choose government for security reasons, but not because it pays more which it currently does. I am just astonished that I have never heard one single person suggest this. As we watch Italy and previously Greece, we get a preview of what we are starting to see here. People are the same everywhere. If you spoil people with preferential treatment anywhere, weaning them off it is very difficult to do. They become so blinded by their desire to continue getting their special treatment, they are oblivious to how it might be effecting others. I see this in the behavior of the rescue dogs we are constantly bringing in. If we spoil one too much which is easy to do since we know in most cases they have had terrible lives and I want them to have great ones, we see how they then come to expect it. We had one actually get really mean spirited after we spoiled him then tried to reign him back in.

It is my opinion with all politics aside, that human nature is going to result in the resolution to all of this stuff around the world being very ugly. I just don't see how millions of people who have had special privileges for so long, will ever we willing to give them up without force. As traders, this is going to present a great opportunity to make money. We know these people don't care if they bring the whole thing down. They are so focused on getting over, that they fail to consider any alternative scenarios. When this all comes down, the money to be made on the short side is going to be really incredible. However, do not get so one sided that you think just because of all of this everything has to always go down. There are always opportunities on both sides and that will be the case with this also.

The price of Gold is heading down back into the really important support levels. As I said the other day, these levels need to hold. I know especially for those newer to trading, who have been participating in this and making a killing, it seems inconceivable that it might end some day. History tells us emphatically that it will and spectacularly when it does. When this market breaks whether it is soon or a year or two from now, just imagine for a minute that you were a buyer at $1700 because you thought the dollar was dead and Gold had to go to $5000. Further you put half your net worth in it. At $1500 which is about where the critical price levels are you are down 12% basis the spot plus whatever markup you paid. That would be anywhere from 15% to 30%. Conservatively you are down let's say 30% total, which is 15% of your total net worth. This is a good amount, but you are probably just nervous but not really worried yet. Then a couple of $100 down days come along. Now you are down another 10% and the media suddenly switches to panic selling stories about Gold. You are now getting scared but still hanging on, you know the world as we know it is ending, cats and dogs will be sleeping together, it will rebound.

Now another couple hundred dollar drop happens, now you have a 50 spot on your hands. You have lost 50% on the move and 25% of your net worth. The tough economic times have come, yet the dollar is soaring, gold and stocks are tanking. How can this be, doesn't Gold always hold up in times of crisis, that is what you have been told? Of course you never bothered to do your own research, you just accepted this as gospel. Had you done your research you would have found that this premise is completely false. There is no consistent relationship between Gold prices and crisis periods. At times it has risen, at other times it has declined. Maybe at this point you buy more thinking this will turn around. We drop another couple hundred dollars, and now you panic and dump the whole thing with a 70% loss and 35% of your total net worth up in flames. 

I know bulls are laughing at this, I am sure they were back in the early eighties also. I have seen this type of thing happen in one market after another many times over the years. A market rally begins,  the media jumps on board with some BS reason as to why it is happening. The marketing companies that benefit from the sale of the product that is rising start hitting the advertising hard. They even feature experts giving you all types of Nobel prize types of reasons as to why it is different this time, and will continue indefinitely. They rake in heavy commissions selling the product, and many people flock to the industry to chase the fast money. Sound familiar, could have been the Internet in 1999 or Real Estate in 2003-2005 just as easily.

Lets just say for the sake of argument I am wrong about the above scenario. I was not in 1999 having gone flat in Mid December and dodging the whole drop other than shorting it at times on the way down. I was out in real estate in 2005 making over 1 Million dollars profit selling my McMansion. However in both of those instances, I had reasonable exposure. I did not ever have anywhere near 50% of my net worth in either of those places. You can avoid the scenario I just discussed by having a prudent bet on Gold. You should never have 50% of your money in any one investment, that leaves way too much exposure. There is certainly a lot less pressure with a 10% loss on your hands than there is with a 50% loss. For those who think Gold will never decline again, just in the unthinkable event that you might be wrong, have an exit strategy for at the very least some of what you have.

It is one thing to bet against history, things can change. It is another thing to do it with too large of an exposure to your whole portfolio. Never bet on a long shot with all your money. How many people go to Vegas and bet what they can't afford to lose? DO NOT BE GREEDY it will catch up to you at some point that I can guarantee. Today we have broken decisively a near term trend line for Gold that rises up from the critical September low point. Now the short term trend is down, the medium term trend has already been down before today ( the weekly ). If that September low happens to go, the long term trend will then be down. The actual trendline off that low comes in right now at about 1610 or so. If we get under that it is time to worry.You do not want to be long if that happens. You could argue buying against it on a test with a close stop is a good risk to reward trade, and you might be right. We are not down there yet so it is too soon to tell for me it that is a trade to do or not. In summary, the bigger picture is on the verge of changing here, this is a critical price area for the world's favorite trade.

I know someone asked once if I ever lost money on a blunder and I said yes, it was just a coincidence that the last few I was able to get out of with small change on the plus side. Here is one where I gave the house a little change, but a small amount.  I mentioned the Corn market over the weekend as a place to look for a long. I was already long when I mentioned it and I felt the trade would be confirmed if we took out Friday's high today which we did not.

I am not sure if I consider this a blunder or not, but as I looked at my momentum oscillators late in the session today I just felt they were not really rip roaring bullish. When I am trading against a trend this strong and I get an initial entry that seems promising, I like the trades to go right away. In this case we dipped way down today, and came within 1 tick of my stop, then bounced back up some. As I projected another bar going up my short term indicators were still not looking that great. The other grains do not look overly bullish even though there are some divergences in POIV, Beans in particular. As a result, I determined I was forcing this trade, so I decided to take a small loss and get out. I think across all my accounts the total loss was about $1200, what I basically consider a scratch. I really like the way this market has tracked the seasonal so closely, so I may well get back in here in the next couple of days. For now I am out. I have not traded very much the last week or so and I think that pushed me into this trade. I am not sure if this was a blunder or not, but I am sure that as I look at it now by my rules regardless of where it goes tomorrow, I should not be long yet. I tried to front run the entry a bit and it did not work out so well. Such is the life of a trader.

As I look at the indexes, I still am really bothered by the huge POIV divergence against price.

I have drawn a dotted line across the recent highs, and look how much lower POIV is here in the Russell than it was when price was basically at the same level a month ago. When I think about this and the fact that we are in a weekly downtrend still, this tells me to look for a short term sell signal. If we close up tomorrow and don't just lift off, this could very well be a sell on Wednesday. Ironically my indicators are also saying tomorrow could be a buy it today's high gets taken out, so it is a dilemma for me as to which way to play this. The DX also has pretty strong negative divergence in POIV as do Bonds.

Net net, I am not sure about how to play the indexes tomorrow at press time here but the POIV makes me nervous on the long side just for the record.

Good Trading


ya said...


Interesting analysis. The gold chart looks worrisome to say the least. I have been one of those gold bulls, trying to reposition have been very expensive so far. Looking at the gold chart i can't help to notice bullish divergence on POIV, may be false hope?

ya said...

About your Corn trade. It is hard to follow your decision making process without seeing the same tools you are looking at, but irregardless what they are,it is not often that things lineup perfectly, so does not go againt your discipline to let the trade work ?