Sunday, August 05, 2012


This is a question I sometimes ask myself. Am I sticking to my rules or just refusing to acknowledge I am wrong and am missing the obvious?

The above chart shows the ES chart on a weekly basis. If I were to teach someone exactly what I look for in a weekly setup, this would be it.

1) As per my bands the trend has shifted to down much in the same way it had the prior occurrence I have marked on the chart. That says now to sell rallies at the upper band, which is where we find ourselves now. You can note that we are basically back up at the highs again much like we were earlier this year.
2) The Commercials and the Commercial Proxy Index, are both in the sell zone.
3) The Sentiment Indicator is overly bullish, which is bearish.
4) There is also a great deal of divergence in the POIV index on the daily chart ( not shown )

All of these added together tell me to short this rally. Obviously the $64,000 question is where?

Friday had such a large range that it is unlikely we would take out that low on Monday, so I don't see anything imminent. However, I am now watching my shorter term things to look for a way in here. If we just continue on up and the trend shifts back up, then I will re-assess things. For now this sell setup is well in place.

I am not going to be talking much about the Bond System now in here other than trades after the fact. Here are a couple of them that happened this week. Since I now have people subscribing to them it is not fair to talk about them until after they are already over.

You can see how well this system has held up, far beyond what I expected. You may recall in April when I first went public with this, we had a crappy stretch of a few weeks where it treaded water. This is how systems, or any other trading for that matter is. You cannot expect to have runs like what this has had recently go on forever, unless of course you are B of A or GS, and you have the Federal Reserve telling you in advance, when they are buying. In that instance, your runs can continue indefinitely. It is amazing how far things have come, that it is completely out in the open this insider trading that is going on, and nobody cares. The F You I won administration has truly changed things. It is just one smack talking event after another right now.

I do think there is going to be a rebellion at some point against all of this and I fear it will be during the next really bad period, where people just have nothing left to lose. I know in my own mind some thoughts have creeped in after this PFG wipeout, that I thought would never even occur to me. Those thoughts tend to come in during down moments, where I am thinking too emotionally and worried about my family. However, what if collectively the masses got this feeling? There has been a civil push back against all of this stuff, that has been repelled. What if we get a non civil collective push? There certainly have been instances in our history where this has happened. Can anyone name one where people politely asked for things to change and that request was granted?

Over this weekend I have been reading about Segregated Funds and trying to learn as much about this whole system as I can. I found two very disturbing things that everyone should research for them selves.

1) All individual accounts monies are collectively held in one Segregated or multiple such accounts. If an individual account takes a big hit, and it is beyond what they have, the burden falls on the FCM to make up the shortfall in the Segregated Accounts balance. If this loss is more money that what the FCM has the ability to provide, that shortfall is shared equally amongst all the account holders in that  segregated account. In other words, if a big loss occurs, all account holders can potentially be hit, even if they have nothing at all to do with it.

2) If the bank holding the Segregated Account goes down, there is no back stop against this loss. This would be a 100% loss of your money.

These are right in the laws that "regulate and oversee" the commodities industry. It is not my attempt to alarm you, but I have to admit I was not aware of the real risk that is involved here. Of course, the most secure places for your money require millions of dollars in your account, so they shut out most individual investors. Once again, the game is rigged for those who are inside, really no surprise is it?

There is no point in throwing out these types of things without also providing a solution. First of all, as a person who is just starting out, you may not have much money, so the first suggestion is not going to be possible. Once you get any significant money, say 50K, I would suggest you divide that into two places. You never want to have most of your money in any one place. I think ideally you would have it in 4 places or more. This way you are only losing 25% of your total when one of these things happens. I admit that I set myself up for this wipe out by having such a large percentage at PFG. This is a mistake I will never make again. I would bet my life that more frauds and miss uses of Seg money will happen, and if we get another sharp market decline, there may be many of them. Yes it could be a pain in the ass to have to place orders at multiple places, but it would be a hell of a lot better than getting wiped out all at once in one place. 

It is only the fact that I kept some money elsewhere that allowed me to avoid bankruptcy with the PFG situation. Had all my money been there, I would have lost everything including my home and most likely my animals as well. The human toll on things like this on people are so severe, it is just shocking to me they are holding on to the funds they do have this long. I am sure there are people who have been bankrupted by this delay. If it is only 20% so be it, that could be enough to buy some people some time to deal with this. The total freeze out is completely contrary to what is supposed to happen in these situations.

The other thing you can do is seek out banks that house futures operations. There appear to be some intricacies of the FDIC insurance that have pass throughs, if you also carry individual accounts at the same banks the Seg accounts are housed. I am still investigating this to get the full story.

I also suggest seeking out FCM's that have as large amount of free cash as you can find. This will put them in a better position to be able to handle a one account big hit. When I watch the grain markets do what they are doing now, this is where you can get into a huge hedge loss by a hedger. If for some reason they can't cover the margin call which could be huge, I doubt any FCM is going to have enough spare cash to cover it if it becomes a big loss. It might be a good idea to stay clear of where big hedgers are if you can help that. I do not know how practical that is.

The last suggestion is to stay clear of private firms, there is just a lack of visibility with them that makes it easier to defraud you.

I am researching the FDIC pass through stuff and will report what I find there. It was reported to me that could have been in place with Knight, if you had an account individually with the banks they house the segs at. I don't know if this is accurate, I am checking into this further and will report in here what I find. If that does happen to be accurate, that could be the solution we are all looking for.

Good luck this week


Anonymous said...

Thanks for the update and how does one determine if an FCM has large amounts of Free Cash?
Don in Virginia

Chris Johnston said...

Ratings services and financial statements

mono said...

Hi Chris, why werent you covered by SIPC - below is from my broker:
US Securities held are by the Clearing Agent who is a member of the Securities Investor Protection Corporation (SIPC).
This clause 53 applies to cash and securities held in US trading Accounts only.
Cash and securities held in your US trading Account are protected by SIPC up to $500,000 per customer, of which, a maximum of $100,000 can be un-invested cash. Assets held by other custodial institutions or you are not covered. The Clearing Agent maintains an additional $10 million in excess of the SIPC insurance coverage through a private insurer which may apply. Further details are available on its website. Assets held by other custodial institutions or by you are not covered.
SIPC coverage and the additional coverage are provided to afford certain protections against loss to customers resulting from broker-dealer failure. The US trading Account protection applies when SIPC member firms fail financially and are unable to meet obligations to securities customers. It neither protects against losses from the rise and fall in the market value of investment(s) nor is it a guarantee against the bankruptcy or default of the issuer of an investment security purchased by a customer.

Chris Johnston said...

You need to read further, SIPC specifically excludes commodities accounts. The reason for that is commodities firms have segregated money whereas equities firms can use your money, or co-mingle it as they state. Make no mistake about it, if a large equities firm goes down and your money is in cash anything beyond 100k will be gone. POOF!

Commodity firms are supposed to be the safest of them all because of the segregation dictated by law. We have certainly seen now with MF and PFG that is a crock!