Thursday, March 15, 2012


I found this chart very interesting, shocking actually. In the world we live in where everyone has absolutely gone nuts, certain advisors have gone all in on Gold every day every week every month, seemingly for the last several years. To their credit they have been correct and their clients have done well who have listened to their advice. Many but not all of these guys don't even trade, they make their money from subscription fees. As a result of this they get very one way in their thinking at times. Even when they have good ideas, they often fail to see when one has run it's course and is due for a reversion if not an outright reversal. The only way you can truly learn your lesson, is to really get burned in your pocket book. I am not talking about losing subscribers, I am talking about having a big investment lose you 50% or more.

As we know with all bubbles, the roads are littered with folks who lost everything not just 50%, when they peaked out and reversed. As I have said, I do think this is on the verge of happening again in this market. Of course we also know many people do not agree with me. I don't care, this is my blog, my thoughts, and the trades I make. Everyone is free to have their own opinion. If you think I am a moron go start your own blog and call it CJ is a dumbass.blogspot.com. The above chart is out of an advisory service who just recently told people this was one of the best times in history if not the very best, to be a buyer of Gold stocks. I was shocked to see that just a couple of weeks later they appear to be saying uncle. In the back of my mind this makes me wonder if maybe I shouldn't be bullish? If the most bullish group in the world has given in, could that actually be a buy signal?


The whole idea of capitulation is that you look for things like this at extremes, when price has gone a very long ways up like the Nazdaq right here, Housing in 2005, or down like stocks in 2009 etcc. In the commentary from these folks I will give them big kudos here. For a group of people who would have taken out a third mortgage on their grandmother to buy gold at the beginning of the year and even up until just a couple of weeks ago, this might be a very timely change in their view. One of the biggest challenges in trading is having conviction in something enough to make a trade and risk real money on it's outcome. When you get a big move in your favor like Gold has made, and you have a home run on your hands, it is very difficult to do a 180 on that view. I have a hard time with this as well, which is why I am more of a short term trader. I get wanting to buy buy buy grandmother, but then quickly selling her at an early sign of trouble is really difficult to do.

One of the things that I have mentioned as a reason why I think we are in for a very big decline in Gold soon, is a characteristic of all bubbles. There is a stage where the masses realize they have got some trouble on their hands, and they rush for the exits. Those exits get very crowded very quickly and markets become illiquid ala the flash crash day. At some point when this market does start going down sharply, their will be a point where the big proponents of this whole story are going to say uncle. When they do that what we will see is going to be something people will never forget. We have started to go down a little bit here but we are not anywhere near this critical mass inflection point. I think that level lies under $1500 where the obvious support lies in the Gold market.

In their commentary the above advisors who shall remain nameless, did say in spite of their still bullish view, they have to defer to the charts which say the trend has broken. If by chance the market does break hard from here I am going to give these guys their due by name. They will have done a very good service by their clients in telling them not to buy now, when just literally two weeks ago they said it was the best buy spot in history. This would be an incredibly prescient change of view.

I keep finding myself staring at the Naz chart in amazement, I have never seen a stock market rally like this one in all my years of trading.

There are several significant problems I see now with what is happening, and it is time to be very careful here. First you can see the commercials have been heavily selling this rally. You can see what good it did you to know that, none! This goes back to what I have said about this report, it is an art not a science, to read it and use it properly. Selling in a huge up trend is for the most part a normal pattern and is not bearish. Here is what is really bothering me now, the last two panes on the chart. First the ADX. After hitting the record high I pointed out in here, it has come down. This was to be expected. However, price has not. ADX is a measure of trend strength, you want it rising to support trends whether they are up or down. When you have a price move where ADX goes the opposite direction, that tells you there is not a confirmation of the trend. You can see it was rising the whole rally until recently. At this point we have now made that new push up and ADX is making a huge divergence. That is bearish.

At the same time we see that the ratio of new highs to new lows has also failed to make a new high. When I combine these two together we essentially have a sell signal, or as my dad would say "that's horseshit." If only I could fully convey the tone of disgust in his voice when he says this it would be a lot funnier. He is not a trader in fact he would not know the Naz chart from two in the bush. This is just a phrase he uses. What to do with this?

First, don't buy anything. If you are already long which you should be, tighten up your stops. We are likely to have a trap door open here any day now. However, from a short term trading perspective, I do not see any sell entries right here. If you are a position trader and like to play the market from both directions, this would be a decent spot to start legging into a short position. That type of approach is not one I use, so I will not be doing this as tempted as I am. I am very tempted! Things like this are not always actionable intel so to speak, they are just things to be conscious of. If and when I short the indexes I will post it here.

Good Trading


John M said...

I think I know how your father sounded when he said 'that's horseshit' because my father used to say that, too. And once in a while, so do I, but you need that right delivery, definitely.

Nice post today, I haven't been checking all of my charts as carefully as usual so didn't see those two indicators on the Naz until now. Thanks, nice observation.

Anonymous said...

Hi, Chris,

I love reading through your blog. I have to admit though that your bearish bias on stocks overwhelmed my neutral trading approach. Shame on me. Lately I have retreated to momentum trading in stocks, after some TVIX escapades which really got me way out of the zone and hurt my account. On the other hand there were good reasons not to trade the TVIX when VX futures trade like a 600 points drop in the S&P500 is in the making heavily diverging from its "underlying" (VIX).
As to stocks we had a sector rotation into oil companies on Friday which had corrected quite orderly and showed good range expansions on Friday. I know you are pretty bearish on CL and HO. COT data really sucks. But doesn´t it always suck when a move gets going? Peter Brand has really been way off with his ideas on sugar and silver lately but here is his view on the energy sector (http://peterlbrandt.com/energy-prices-ready-for-another-up-thrust/). He basically says you want to see price confirmation for a possible leg up. It corresponds to your analysis that commercials heavily shorting is bearish unless prices go into an uptrend.
Well, why am I writing this? My point is there is lots of "cheap" money out there. It seems to shy away from bonds right now. So where shall it go? The retail investors have not participated in the recent rally in equities. AAPL which for most of the retail crowd is the stock market has had a fulminant run this week. But it has not seen those large 10 to 20% moves a day you would expect to see once it goes for its pop. So with sector rotation showing money probably moves among sectors but not necessarily out of stocks, doesn´t the market hold quite a strong hand at this point? Look at what your favorite short candidate (BAC) pulled out of its hat? That was not only congressmen buying on leaking information in the morning of Tuesday and then in the afternoon...fireworks. Doesn´t Larry Williams say that extreme readings in the ADX are strong signals but he does not look for diverting signals there?
The end of March is historically a rather weak period for stocks. If markets hold up well, it might pay off to squeeze out some points on the long side which at this moment is picking the lower hanging fruits...less effort, good reward. We will see.
Thanks for sharing your views. I love your blog.


Chris Johnston said...

I wish everyone would use their names instead of anonymous so I could keep readers apart from each other in responses. I think you have not read back far enough if you think I am always bearish on stocks. I will extremely bullish at the end of last year and took a big long position in the market. I am flat now. I have recently become bearish for the reasons I have recently stated, maybe I am wrong? It would not be the first time. If you are a short term momentum trader you absolutely should be playing the long side, the trend could not be more clear.

As to the COT comments, I have no idea who that guy is but I completely agree with the comments. All COT data does is give you a way to look if you know how to read it correctly. At times like now in the stock indexes, the data is of no value at all as I stated in the post. At other times it is very clear and that usually is when it is in sync with a larger trend like Gold has been recently. The data became bearish in a down trend and boom you got a big move down.

Energies as I stated in a recent post on RB, the COT data is not a sell signal there. When you have cot selling in a huge up trend that is normal and not to be considered a sell. I suggest you go find that post I don't recall the day but it was within the last week or two.

I was short Crude Oil and got stopped out for a scratch yesterday. That trade had nothing to do with COT stuff it was based on a short term trading technique I use that I do not divulge here. I do clearly state that a setup is just a setup, it is not an entry. Price action or other short term things have to line up with it or it is a no go for me. It does sound to me from your words that is similar to what this other cat is talking about.

As you know B of A is only a short candidate for me because I hate them, it is not fundamentally setup to be shorted. If my short term tools line up to short it or Douchefetts stock, I will take the trades. If they don't I won't short them. They are nowhere near setup now.

Cyclical studies now suggest a top late April, but there is certainly no sign of one here. However, ignoring some of these chinks we are starting to see would not be wise. It is an interesting question as to who is driving these low volume rallies we have seen for the last 3 years. Personally, I have no idea.

My trading style is not that of short term momentum trading, so when we get these moves that look like a ant crawling in one direction, I don't get many trades in those markets. I have not done a single short in stocks other than that one in B of A where I lost $200 last month. My tools don't generate buy signals in market patterns like that of the ES right now.

Suren said...

Hi Chris,

I came across this blog 3 months back, since then I am reading every post. It is really fantastic blog. The other blog referred by anonymous user in above post uses a long term trading approach. I was just curious about that site and quickly scanned through some of the articles. Interestingly,regarding GLD, though he is bullish on long term basis, his charts indicates that there will be a fall on short term basis and looking for another shoulder formation, which is same as you indicated in your profit target on GLD.

In essence, other blog uses long term trading and the approach is different. Anonymous has to recognize this difference in trading.