Wednesday, January 18, 2012


I have marked on the chart the 4 previous inside bars with up closes that have occurred during this nice run up in the stock indexes, and as I drafted this we were working on a potential 5th one. In general these are sell bars if the lows of the prior days go all else being equal. Since we did not wind up with one it is no Cinco, it is Quattro. Now we just have another higher high and higher low in a daily uptrend. I know it may seem annoying to have me constantly talking about the short side when the market is going up virtually every single day. It annoys me also.  One of the inherent weaknesses in any oscillator is their tendency to diverge against trends prematurely. At this point this market is just too strong for me to short it. I do have a triple divergence on one of my proprietary tools, but this is just not a bar pattern now that I want to short. It is what I call a running market, and timing reversions with these is very very difficult. By a running market I do not mean runaway, I mean just small ranges, light volume, that just keeps on creeping in one direction. Maybe I should call them jogging markets? My next play will now most likely be to buy a dip, but that is just a guess at this point. At the very least I am going to need a lower short term high now to try to short this and we are not near that happening. We do have pretty bullish sentiment which should be bearish, but we also had that last year at this time and off we went.

You just have to know how to work with your tools. I do not just blindly go out and use them every time they diverge, to fight a trend. There was a time I did that, but the tire marks on my back from being run over finally convinced me to stop doing that. I do know that from most of my studies, buying extremely overbought conditions on average loses money. We are extremely overbought here. This does not mean we can't or won't keep going, but it does mean the odds favor a reversion of some type here. Ideally what I like to do is fade overbought or oversold conditions when they occur against a strong trend. This situation is not that scenario. It is questionable whether the trend is up or down at this point on a weekly basis. I am defining it as down due to how I use those bands I show at times, but it is close to producing daylight above them which would switch it to up.

I also know that some times in trading I have to follow where my tools take me knowing I will take losses but that the approach does make money overall, and I just grind it out. This is one of those times, I have taken a few small losses this month so far, and have one decent trade going right now that eclipses them. This is just the way it goes for me sometimes when I am not trading great. I just grind it out, stay patient, and the good wins do come along if I stay the course.

In looking at the indexes and markets that are proxies for them, it appears to me that either the Russell or the Australian Dollar ( US stock market in disguise ), appear to be the weakest. I always want to pick on the weakest. Why take on the toughest kid on the block, when you don't have to? I think for me to short anything it would be one of these two, but I doubt I will do it. This looks very much like January of last year to me, and although we had a pullback, it was very choppy and would have been tough to have made money shorting the indexes during that period of time.

I also am looking at Heating and Crude Oil on the short side here for an entry. I have not entered yet but I am looking for something there.

The strength in the Bond Market has resulted in no sell signals for me there even though I was looking for something to get me in sync with the seasonal down tendency we have at the beginning of the year. That strength is also telling me to be careful pushing longs in equities here. Both the ES and Bonds have been strong together and as we have seen, that does not stay in place for too long. They have a pretty solid inverse relationship in recent years. I think Bonds are telling us stocks are going to dip, but it could also be stocks are telling us Bonds will. Does the dog wag the tail or the tail wag the dog? Basically we are damned if you do and damned if you don't right here. In these situations I save my money and don't press marginal trades. Running markets like this are the hardest ones to trade. They don't dip enough to buy, and don't spike up enough to exhaust and reverse.

The stock trade in CTAS

Here is a chart of one of the marginal stock trades that I just closed out, CYN. There are a number of them that wind up this way, very small gains. What I like the most about this method is that it completely disregards bar patterns which in stocks are so erratic. There are so many false high and low penetrations as compared to the futures markets, that you just cannot reliably trade breaks of them anymore.

As I have stated before, I continue to be amazed that this method is producing wins when the market overall is going up virtually every single day. This made .14 which is nothing, basically a scratch, but I can tell you that trading stocks the way I was doing it last year would have resulted in me getting my ass kicked during this type of environment. I do not believe the same methods can be used to trade stocks and futures, they are just two different animals.

I will talk more about this method in the future if it continues to perform well in real time. I do not have much more to talk about, I am still short the grains with targets below that are probably too far to be hit. I will most likely get taken out on a trailing stop in them. Crude is really the only new trade I can see as a possibility for Thursday in my world. I am likely going to get more sell signals in stocks, but I doubt I will add any more shorts. I have some on now that are about even, and I don't want any more exposure due to the possibility that we have a runaway train on our hands here. I still think we will pullback, but it is anyone's guess when that will happen.

Maybe I should tell jokes on days like this?

Good Trading


Anonymous said...

Thanks chris. Great post!

The guy from www.forecastfortomorrow.com thinks this market has much higher to go, and I like listening to him because he has been very accurate before and gives out great advice.

I guess time will tell. I guess this greek crisis is already priced in no?

A.Martinez said...

Chris, you are probably right about the market being due for a correction. We broke 1300 decisively on the S&P today and I just feel like it's too obvious. I am long the energy sector 3X but as you stated I am ready to bail out if we take out a prior day's low. I honestly don't know what the market is anticipating here; and what in the hell is up with the home builders? Do you know anyone who is buying a new Lennar or Toll Brothers home? I sure as shit don't. They are almost going parabolic. I saw semi conductors break out today, AAPL is on fire, even NFLX has been hit with nitro glycerine.I almost took out some calls on NFLX today but I wont do that going into earnings next week, judging by the chart action though this thing could surprise to the upside. I don't know dude, but I am not fighting this tape. I thought gold was going to get creamed if it made a new low but no can do. Being bearish in this hyperinflation like environment just doesn't work! Good luck brother.

Alain said...


Crude are you looking up or down?
Looking to RB, tgt 286/294 after likely short.
Have HO on table as well. But 310 close may make shorts questionable and led me to believe going higher.


Chris Johnston said...

The tape certainly says higher, and I agree, fighting the tape is something I don't do anymore. I don't see any sell signals in stock indexes, just an overbought market that could benefit by a quick small shakeout to the downside to get rid of the weak longs. However, if you study the past, there are plenty of times when the market is running like this where it just keeps going. The Sentiment is probably the main thing that has me thinking a dip is coming any day, but I doubt it will be big.

Crude I have been looking at the short side, but Heating Oil is the weaker, so any shorts I do will be done there. My setup is just not quite right there. I looked at it last night for a long time trying to force myself into it and it is just a no go at this point with my patterns.

As far as the Greek crisis being priced in, who knows. I just can't trade off my opinions on things like that. When I see what is happening in Wisconsin with the way the law is being broken by the unions to run up the score on the recall signatures, I see that as Greece as well. There will be a critical mass point where it is clear that the majority just can't pay for the special treatments of minorities who get life long pensions and all these freebies. I just don't know when that will be. I just hope I am short with both hands when it does hit!

Home builders, who knows, I think that is just a short term momentum play on the back of a very strong overall market. Fast money chasing it etc..