Sunday, February 19, 2012


Maybe this is a Christmas present, hence the topic of the day? Actually it is Heating Oil, symbol HO. Unfortunately my mentor LW has beat me to the punch on this one. Any readers who subscribe to Larry TV are already aware of this setup. I could prove I captured the image prior to the release of that video, but it hardly matters. As a student of his this setup just leaped off the page at me Friday night. Why?

This is pretty obvious, there is a record net long position by the Small Speculators in this weeks COT report. We also have Open Interest rising sharply, and the Commercials shorting pretty aggressively. A setup like this does not come around too often on the weekly charts, so I have to be looking for a way to short this market. Keep in mind that this is on a weekly chart, and it is a fundamental setup. That does not mean you go out and find the closest 3 minute chart and click the mouse. It means you look for some way within how you enter your trades, to get in sync with what should be a pretty good down move coming.

The next chart is a daily view of this situation and you can see how well fading the small fries has worked. I have arrows indicating when they were at extremes, and you can see they were spot on in being dead wrong. This is typical. Fading these guys is essentially like fading that annoying neighbor who has a stock tip for you about some Guatemalan fruit fly breeder.

You can also see that Sentiment was also at an extreme in most of these instances which made them even better. The only thing I don't like about this is the price pattern, we are kind of moving sideways right at the double top level. What would be great would be Monday closing above all these highs, then reversing and take out it's low on Tuesday. I would be a player at that level if that were to happen.

The next chart shows a few things that are really starting to bother me about the moonshot going on with stocks right now.

I think anyone can look at this chart and realize this is building into a big problem. I have never seen anything go up like this that did not come crashing back down eventually. I have told people that I think what we are seeing now is the greatest stock rally of all time, and what I am referring to is the NAZ. This comment is just based on the price action, and the record high reading of ADX. Keep in mind most tops are made when ADX clears 60, it hit 82 here recently.

I have another stat that is good fodder for conspiracy theorists. In a normal year you have give or take a few, about 15 days that 90% of the SP 500 rise in one day at the same time the index itself does. Last year I believe there were 52 such days. That means that one out of every 5 trading days basically, everything went together. I really do not have an explanation for this other than a couple of guesses, which are as follows.

It is becoming a self fulfilling prophecy of whiz kids. The big funds hire these eggheads out of top schools to design algorithms by which they will trade from. It takes no great genius to see that there are pretty strong correlations in effect. As a result, they design biases into the buys and sells to sync up with the market as a whole. This is not a bad idea, even prior to recent times. Unfortunately what happens now is that you can just see when the futures get going that virtually every stock on the board goes with it no matter the chart patterns.

Another possibility is that the FED is actually buying stocks through it's "handlers." I highly doubt this but you never know. As out of control as government has gotten, it would not be shocking to me if this were to be true. Just the utter lack of any normal pullbacks of any kind make the NAZ chart look very scary to me. There are absolutely no support points in that market anywhere to hold up a knife down once it begins. I have not seen too much evidence of PPT action here other than a couple of late day buy programs at 12:30 that seemed a little "convenient."

The moral of the story is that it does not matter what is actually causing this, price action like this is not sustainable. The next chart is the mystery chart which shows we are here finally. This indicates a short term top lasting a couple of months. However, it does show then a long lasting rally to follow. If this were to be accurate, we have a dip at hand, then a rally we must be long for that will follow it. I know that I long to be the cat that ate the Tweety Bird, that guy who made a killing during market crashes. However, we have to accept that the big money in stocks in made on the long side of the market, not the short side. We do get down trends to play, but the overall mega trend is ever upward in spite of all the chicken little's we come across. Commodities are a different game in they are more mean reverting than stocks are.

It is time for me to start looking to see if I can find a way into the short side of the indexes here for a short term trade. All of this water cooler talk about Greece and the debit situation is just noise to me, I could give a rats ..... about any of that. I was listening to Kevin Trudeau on the radio yesterday while I was driving around, he is quite a character. He made one point that I thought summarized our problems here. He said to just look around your office and count how many things that are there that were made in the USA. There are not very many. Of course not, why would you pay someone double or triple the price for the same thing just so that you could support a union worker being able to have 4 jet skis, a lake house, and a guaranteed pension of six figures for the rest of their lives? What do you get out of that? The current move toward protecting and enhancing this type of thing while trying to force people to move production back to the USA is not going to work. I wish I owned a manufacturing company just so I would have the pleasure of telling some suit who was threatening me if I did not move things back here into a unionized plant, to do you know what.......to himself.

Manufacturing will return to the USA if and when we become competitive again, and not before that. If we don't, it won't. 

Good Trading


Vikas said...

The couple months of down trend which you see at this point, any indications of how much of a percentage drop it would be? Also, its hard for me to see a rally in the future because a weakening euro and a strengthening dollar, but its hard to fight the fed I guess.

Chris Johnston said...

cycles are about time not magnitude so there is no way of knowing

Anonymous said...

About a week ago my excessive momentum indicator finally called-out for a down move after about 3 ½ months since the last call-out to short the market. My indicator will be reset if the market goes up even a moderate amount on Tues 2/21. This market does not want to go down.
>1 Greece resolution
>2 Potential monetary easing
>3 Economic indicators exploding upwards
>4 Plunge protection team: It isn’t the Fed – they won’t get their hands dirty. It is the Treasury Secretary and one or other people talking with only one person at C, GS, JMP, BAC, MS. This one person, the CEO, only talks to 2 or 3 others in their organization who direct the premarket futures action. The Fed chairman knows, however.

I don’t think the whiz kids have anything on me as far as knowledge of market behavior. But their algorithms do impact market action.

Chris Johnston said...

You are right the PPT by definition when it was formed did feature the treasury secretary. However, if has morphed into way more than what it originally was intended to be by Reagan.

You may be right about those things causing the market to continue to go up, I do not consider things like that in my trading it just makes things was too complicated.