I am not one to tell you to fight trends, in fact I tell people in my writings all the time not to do that. I have been there and done that. However, what I do try to do is stay on top of time periods where it appears something could be in the development stage for a reversal. I am starting to see some short term signs of trouble.
First, the ADX has hit a level where often reversals take place. You can see the last time we were this high marked the low before this huge rally we have had. I have written more about this in my Newsletter as to how to use ADX.
Second, we do have some accumulation measures starting to diverge as marked in the bottom graph. This just by itself is somewhat noisy and not enough to bank a trade on, but it is coming at a time when we are seeing potential blow off levels in trend measures like ADX. In my mind it means more in this instance. Next you can see we are basically at a seasonal spot for a decline.
I have marked off instances where we have been in sync and when we have not with the seasonal. This is why you can't bet the farm on seasonal's alone, they waver in and out. We still have some accumulation indicators on new highs as you can see in the top graph, so it is somewhat of a mixed bag here. The trend is still clearly up, so until we get some type of price break the market still needs to be played from the long side. You always have to remember that for the most part stocks are a buy with periods here and there that can be sharp moves, where they go down. Do not look at this market as an equally balanced affair like commodities where declines always follow rallies and vice versa. There is a decided up bias in the stock market and we just want to try and avoid the big drops when we can, and buy into them. As short term traders we want to try and short them obviously, but you can piss away a lot of money trying to find sells in a market with a 100 year bias to the up side. Let's keep an eye on this while we maintain our long bias. Newsletter readers know of a couple of things to look for that are more detailed with the ADX now to see if they take place. If they do we may have something more to talk about.
AN ONGOING PROBLEM AND A SOLUTION
I am tempted to apologize except I too have been burned about what I am going to discuss here. Once again we had some very suspicious activity at the price zones where our orders were in the Swing Service with a GOLD trade. Here is the trade, what happened, and what we will do going forward.
This is the intra day chart just to show what happened. We had a sell order that was in that got filled on this huge down leg just to immediately reverse and go all the way up and make a new intra day high where we got picked off, then come all the way back down. In this instance it is what is called a search and destroy day a phrase coined by the market profile people. This is a day that takes out the prior days high, then the prior days low forming an outside bar, then goes back up and takes out the high again, then comes back down. It can go in reverse order as well and still get this label.
One of the things I have done in the service is to keep the stops close thinking that many people can't take larger losses and we have been picked off like this for the last time. I have no idea if someone is gaming our orders or not, but this is the 7th or 8th time this has happened, so here is what we are going to do. The stops are now going to be further away from the price and hence larger in dollar value. In most cases it won't be a huge amount of difference. In this case and the Aussie dollar trade, had the stops been above the pivots both trades would have been fine, so that it what is doing to happen.
I did this trade in my accounts and got burned also. This has been a learning curve doing these trades and I have tried to change them some from the way I do them to make them easier to do for those with small account balances and that has hurt the results. We are still making money but not nearly what we would have been had the stops been further back. Now they will be.
The ES short my system had going was stopped out for a loss on Friday so now it is 6/8 for the year but has a net loss, so quite frankly it sucks so far. I will keep everyone posted on how it does. I have something new I am working on that is likely to take it's place, but first it has to be traded with real money for a bit so see how it does. It is very simple and I like simple.
For next week I don't see anything changing much but I have pointed out a couple potential problems that may be developing. I was told that Peter Brandt in his blog discussed the trader tax issue. This is something that has been kicking round in sub committees for a few years now as democrats in some pockets are trying to eliminate trading by speculators. I find it hard to believe this will ever pass due to the liquidity problems that would be created if there were no small traders. Even if it does pass it will likely only eliminate the scalpers who mostly lose money anyway. If you hold trades overnight or for a few days this will hurt your bottom line, but would likely take total costs back to what they used to be when we paid $20 to $30 round turn, so to me this is not a back breaker.
For those of you who are democrats, it is time to wake up to what your party is trying to do. You voted for this remember? They want to take away freedom so you can't complain now if you are a trader and don't like this. This is an issue they have been pushing for several years, so it is no secret.