Wednesday, December 07, 2011


For today's narrative I am going to take a shot at something a little different. I watched a well known newsletter writer basically ruin himself by doing this last year. I still get emails from them occasionally with sharply discounted prices to try and get subs back. You do take a risk calling a special alert for something if it does not play out. I am going a step below that, and also qualifying it with entry techniques below. I guess the good news is that this is free so I can't lose any subs if I am dead wrong.

My feeling is that any newsletter that is cheap is not worth getting in general. If something is worth something, it should cost something. Do not discount the price after a blunder or series of them. You need to come out and admit you were wrong, explain why, then move on. This one particular letter has never done that. Perhaps ego is involved, who knows. It is hard to have an ego in this business because of how often you get your ... handed to you. As a prior writer of one and possibly a future publisher, you always have to balance what you charge between having it be cheap enough that people will pay for it, but not so cheap that you attract the wrong crowd. The wrong crowd is the get rich one, and unfortunately that crowd is much larger than the "we are serious about this and want to learn over a period of time how to make money" crowd. In either case, you need to make the quality of it as high as you can and let the chips fall where they may.

Readers know that I am still short the SPY's in a reversion to the mean type of trade. I do not expect that trade if it works, to be a big winner. All I am looking for is a small reversion and at this point a close under 124.97 in the SPY if it were to happen today, would be good enough to exit that trade MOC. If that does not happen today, the number will be different tomorrow. The reason I go that specifically into that is that I think we have a somewhat unique situation at hand here. We have several markets that if they were to close today right as they look in the chart above,  are really good buy signals for Thursday. Specifically, the Euro ( in the chart above ), of course the DX which is the inverse and is a short, the Aussie Dollar, Heating Oil, and Silver. The grains are also possibilities, but the patterns are not as good there. There are others as well you can take your pick, those are just my favorites.

So, the way I am going out on a limb is that if we get a down close today in the ES/SPY that satisfies the above price target, I am calling for a good sized rally to start the next day in most places if the highs of today get taken out. If we happen to close down, and continue down, the trades are off as they would not meet my entry requirements. We will need at least some very short term show of strength to pull me into them.

I found myself in a dilemma last night for today in many markets. I was logging all the potential trades for today which were mostly longs. Once I wrote them all down, the problem suddenly appeared. Every market is keying off the ES for direction. The ES is incredibly overbought having gone almost straight up since 11/25. I know there are good edges on a very short term basis, for fading moves like this. In the SPY there is over a 90% probability of some type of at least small reversion taking place here. If I know then that the probabilities favor a small decline, and a rally is what is needed for these correlated trades to work, it simply does not fit, at least for today. Maybe we will just keep going up and I will miss these moves, that is entirely possible.

One thing you have to learn to accept, and I constantly have to re state this to myself, is that you are never going to catch all the moves that happen. NEVER. You have to establish some rules and live with the fact that you will catch the moves the line up with the entries you use.What is particularly challenging in this environment is that if you miss one you miss eight, because everything goes at the same time and mostly in the same direction. This is why you are seeing so many top traders doing poorly this year. Some of the very best are losing money this year. I can only speculate as to why this is happening, but I think this has something to do with it. You either miss moves, or you are too heavily weighted in one direction, when the trades do not work. When that happens they all lose at the same time. This is why I have constantly stated to be careful about your risk parameters this year.

Here we now have another situation where several trades may be lining up in the same direction. I will be using the same logic as I have before. When deciding which to play I will consider them to be all the same, and will make sure the contracts I take in each one are less than normal so collectively they add up to the risk for one trade. I will likely go slightly beyond that level, but not by much. By trading multiple, I do give myself a chance for some small difference between markets to allow one to work here and there if the others don't. However, there really is no diversifying in the traditional sense any more. If you just look at for example the emerging market ETFs, and compare those to growth stock measures, then look at foreign country ETF's, then to the US stock indexes, you will see they all look exactly the same. How exactly are you diversifying putting pockets of money into each of those if the chart patterns are all identical? You are not!

In any event, if we by days end wind up with the reversal bars on the chart that are currently in place, taking out those highs tomorrow, reversing back up again, would be very bullish in many of these markets for the short term. If we happen to close down today, but not far enough to reach my exit point, then there is another decision to make. That would tell me in all likelihood we might retrace a little bit more. However, I am not going to get too far ahead of myself with this. 

One step at a time, I am trying to build the brand of me here basically, so let's hope it is available in the future at Saks Fifth Ave and not Walmart!


volume said...

Hi I have been reading your blog for a while and am impressed. I notice you talk about volume every now and then but it doesn't seem like volume plays a major role in deciding when you enter and exit trades. Could you discuss briefly how/if you use volume? Thank you

Chris Johnston said...

Volume from every study I have ever done with it is irrelevant to market direction. I often wonder if those who trade with it have ever actually researched it at all, or they have just taken other people's word for it that it is important?

I have thoroughly tested all of the alleged price and volume patterns and not one of them tests out to have an edge of any kind in stocks or futures. As a result I never even look at it other than to make sure I am not trading a market that the volume is too low to get good fills in like RICE or stocks that trade less than 500k per day.

Maybe I am wrong but that is my view on volume.

ya said...

Are your studies of volume include volume based ndicators like OBV & POIV

Chris Johnston said...

No ya those you mentioned are oscillators that have things other than volume in them, I am talking about just volume stand alone with nothing else

ya said...

What about intraday volume during reversals

Anonymous said...

Hi Chris,

Couldn't find your e-mail address so posting here...

I am a frequent reader of your comments, I am always inspired by your insight and persistency!

I believe this time I might have something to contribute as well. I have created a very simple trend recognition software to simplify my daily routine and made it public at http://www.strongtrends.com as other trend following traders might find it useful as well. I was really really tired of going through dozens of invididual charts by myself every day, now I can quickly go through the list and refer to charts for final judgement.

I would be more than happy hearing your feedback, if you like the idea I would be thankful for sharing this tool with your friends too!

Best regards,

Chris Johnston said...

It is of no value regardless of time frame from my studies, if you like it use it. There are very few absolutes in this business. If it works for you have at it

I do not ever look at volume other than what I said, screening markets with too low of a daily average.

Chris Johnston said...


I agree going through a ton of charts every day is very time consuming. I have several criteria lists I have created that bring back the general things I look for to help with it. I don't know if I will have time to review what you have but I will try to find some.

ya said...

Was reviewing the markets you like on the long side. Wondering what made you bullish on HO?

Anonymous said...

Who do you consider to be the "best" traders?

Chris Johnston said...

Bruce Kovnar makes the most money, Tudor Jones obviously is on the list. Of course Larry Williams. There are several others less well known that I have been told by people in the know, that are not doing well this year and that overall it is a down year for most of the better traders. I will not say how I know this but it is a reliable source.