A TIME TO SELL?
Here is a prior example of a top that somewhat came out of the blue to many and does resemble fairly closely what we have going on now. I will fast forward to today on the next chart to show where we are in a minute. Larry Williams created the Large Trader Proxy Index, which is designed to show us on a daily basis what the Large Specs are doing at any given moment. The COT report comes out once a week, so there is a lag effect to that. This is a work around for that problem. We know that the large traders are the trend accelerators since they buy and sell based on momentum. The commercials being hedgers are most often opposite the trend at hand. They help us with reversals, where Large Traders help us with timing the entries on reversals. Once they shift their activity, we know the momentum in the markets is likely to change.
In the above example, you can see where they broke down on the long side before price made it's big drop. This is unusual, and in this case was a particularly bearish situation. This is rare, and I do not expect to see it now. However, surprisingly, we are on the verge of it happening again. It has not happened yet but you can see the lines are right together now. If we were to get a short move down of a couple of days, then a high retest, it could resemble what happened in 2010.
As I watch this run continue to unfold several thoughts enter my mind. Some of these have nothing to do with trading or how I will trade this market, but I feel like mentioning them so I will. First, at this point we have nothing at all that says to sell. As I have stated and I will repeat it, this move in the Naz is the single greatest bull move in history in that market in my view. This is not based on magnitude where it clearly is not, but based on the internals and the ADX specifically. It reached it's highest reading ever a couple of weeks ago, and we have not even slowed down one bit. The recovery talk is interesting. Are we really recovering, or not? I really do not know. When you look at the light volume of these moves in the last few years, and how they have just continued ever upward, it seems very unnatural to me.
The stock indexes trade light pork bellies and other low volume thin commodities markets. This makes no sense to me at all. I think there is no doubt that government intervention is going on and explains some of this. However, I have not seen the obvious PPT buy programs recently that we saw a few years back when we were climbing like this. As a result, if they are manipulating this, I do not know exactly how they are doing it. We certainly know the FED is basically running the world right now, and just continually printing money to solve every little problem, will eventually create a problem so big it cannot be solved. The when of that event is unknown. We will all know it when we see it begin, it will look like Gold did the other day when it starts. I think it will be bigger than the last one because of the bubble that is being built once again. We have not solved any of the core problems, and many such as government spending and debt are soaring out of control.
All of this leads me to this. No matter what techniques you use, there must be a trend component to them. One of the main tools I use has been diverging in subtle fashion for quite some time now in the stock indexes. In many market situations, all of those sells would have worked like a charm on the short side. I have not taken any sells just because I can see how strong the trend in price is. I don't care what squiggly line tells me what, when I see bar patterns like this, it is just all higher highs and higher lows. That is not a sell. If the top is made like Gold the other day, where just out of the blue we get a huge meltdown, I will miss it. Trades are so easy to see when we look at the left side of a chart, they are much harder on the right side. In other words, the left side shows us what happened afterward, whereas the right side shows the current bar only.
I have no magic answer as to how to incorporate trend into what you do, but the one tool I have shown here is one such way of doing so. It is "late" most of the time. Trying to be early has generally been expensive for me in my trading career. The further right you can trade, the better you will do. I would like to trade the short side of this market from a lower price level, more to the right than where we currently are. That means that the market structure needs to turn down indicating a trend shift first. I am tempted to leg into a short position up here, and build it for a bit, but I am worried that we could just blast off from here again. Fighting trends is a losing battle for me, so I prefer not to engage in it.
I mentioned yesterday that I would discuss the Aussie today as well. Since the stock indexes and the Aussie are so closely intertwined, I think they are the same trade basically. The one difference is that the Aussie has crossed below it's line with the Large Traders, so it could be argued to be weaker.
Have a nice weekend