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Wednesday, April 25, 2012

MOTHERS PREROGATIVE




As the creator of the Bond System I am it's mother, so it is my choice what I want to do with it. In this case it says to be long from the other day with a stop below. At the moment that certainly appears to be a bad trade, but as we know things can change in a flash in the markets. If that trade goes on to become a loss that will be two in a row, setting up a good time to start trading that system. We can perform a statistical exercise to measure the probability of certain outcomes, when you have an overall percentage that you know exists, and in the near term the percentage is off that mark.

An example would be that we know if we flip a coin 1,000 times, the distribution of heads vs tails will be essentially 50% of each. If there were a period of say several heads or tails in a row, that distribution is out of sync, and you would bet on it moving back to 50/50. It is the same with systems. This one has been generating about 87% winners. Now if we wind up with two losses in a row, the odds will be more favorable to start trading it than when it had several wins in a row, which was the case when I first introduced it here. It had a string of 10 straight wins, so a loss was likely coming maybe even two, just like we are seeing now. This trade is not over yet so we don't know if it will wind up being a loss. If this trade does wind up as a loss, the odds will favor trading the system going forward. Of course the other possibility is it is an early sign the system is breaking down. This is something that is impossible to know. You have to have an uncle point, and you just honor that if it continues to do poorly. Often running a moving average of the equity works decently. Once it breaks that you stop trading it until it gets back above it.

I said the other day that I did not take this long trade, and that I had decided to watch this before trading it live again. While I was busy not trading it, a sell setup developed that I thought was worth taking a shot at. I mention trap patterns often in here, and this seemed to be one to me a couple of days ago. When we had the breakout to new highs above the recent consolidation, I reasoned if it were to come right back down which it is doing at the moment, it would have trapped some breakout long players. Basically the stock market drives everything in the world, and with a bullish early move in the ES due to Apple, bonds declined and many other things rose. It just is what it is folks. I don't like this one bit because the FED basically has not only the nations finances on it's back, it basically has every individuals as well who has any investments. If they let the stock market go down, everyone will be hit. They know this and it is why they are not allowing it to happen. It will reach a breaking point, and that is going to be horribly ugly when it happens. It is going to be worse than 2008, but I don't know when it will take place. However, make no mistake about it, what they are doing can only end one way and it is not a "happy ending." Massage parlors are where you are going to have to go to get one of those when this starts.

The Gold and Silver action to me is interesting here. I do think they are setup on a weekly basis to rally, but the price action is very weak in both of them.




Gold is holding up better than Silver, and the COT picture is bullish. However, the price action is telling us we are still in a down trend. Until we break out of this down trend, then have a pullback, I will not be going long in this market. If for some reason the stock market heads back up again, and this does not come along, it would be a very bearish sign due to the high correlation this has to stock prices. It is too soon to tell at this point. For the moment it is setup fundamentally for a buy, price action is not confirming.

For those who say I am always bearish on Gold, I guess you will have to take a bite out of this one!

I will be traveling back to Chicago to accept my Robbins award at the Merc on Friday. I probably will not have time to do a post for Friday depending on what happens Thursday night. I don't know if this is going to be televised or not but I did have to sign waivers to the video footage rights, so perhaps it is. It is going to be done Friday afternoon. I am not sure what I am going to do spending a whole day at the Merc surrounding this event, but it should be interesting. I will probably be able to provide a link of the footage in here afterwards. I am usually good for a wise crack off the cuff quote, so hopefully I will come up with one or two on the spur of the moment when the time comes. I will have to gauge how serious everyone is, and whether or not there is a sense of humor in the house at the time.

Good Trading




4 comments:

Michael Tredr said...

it's 1030am as I'm typing this and I can almost vividly see the Fed saying something this afternoon that roils the broader markets. almost though. so if I were actually in that bond long, i'd personally hold it into the afternoon - i can see it making new multimonth highs.

HT said...

CJ - What do you think about Copper and/or copper related stocks? I have bearish signals combined with bearish seasonality and want to short play some copper stocks like TCK. Thanks in advance!

Anonymous said...

Have you looked at the dollar to maybe get a better hold on where gold is headed. The charts look almost identical to me.

Chris Johnston said...

I don't have a trade in Copper here. LW was trying to sell it in his trading service today, but it never broke down enough to fill the orders. My stuff is neutral right here.

As to the Dollar and it's predictive value of Gold, I do not look at that at all. There is a relationship there without a doubt, it is just not something I consider when selecting trades.