Today let's follow Friday's post on the 60 min bond chart. In the newsletter this month I cover a top down approach of looking at different time frames in setting up a trade. I go from a weekly chart down to a 60 minute chart.

As of this morning at about 7:30 the bond chart looked like this. We do have a setup to begin looking for a short entry into this market.

There are several ways of trading something like this. First you could draw a trend line up from the lows, and wait for a break of it to enter a short position. Second, you could just blindly short the market and place a wide stop above giving this divergence room to play out (not recommended).

You could go to a smaller time frame such as a 15 min chart and try and get a jump on any breakdown that might be starting when it does.

Or you could just wait for a daily bar pattern to set up confirming this trade.

As a follow up to a previous post about the bond market, I have posted this 60 minute chart of the 30 yr bond. I know there are varying levels of experience in the reading base of this blog.

For those with trading experience you will quickly recognize the classic "bearish divergence" situation developing here. We have a new high in price, that is not being accompanied by a new high in the indicator below.

The indicator below, is not a goofy oscillator of the MACD type. It is an indicator that measures inside (professional) buying and selling. If you combine this with the price being at a key level of 10814 that I had mentioned before, a retracement in price could easily occur here. Divergences like this can move along for awhile, but rarely does a reversion not happen, once these set up.

It has been my experience that a full basis point reversion happens most of the time, once these types of divergences set up. This is not enough to just blindly go out and short this market. I have done that in the past and had my ..... handed to me as the rallies carried on. However, it is a starting point to look for other reasons for a short entry. If other things pattern wise and fundamentally line up, this can be a nice confirmation tool for the trade. It is even more valuable on higher time frames such as daily and weekly charts.

Here is Gold as of this morning at 6 am. Notice how I have drawn in red two flag patterns that could have been traded profitably on the way down recently. Notice, how long and steep this current flag is drawn in with a blue line.

As I have stated before, this type of flag is not the high probability formation that the prior two were. What you want is a quiet type of pause like the prior two did, then go with the breakout.

I expect this current breakout to re-trace. It may not, and if it does not so be it. I always want to trade when the odds are the most favorable for a win. They are not in this current breakout pattern.

30 Yr Bonds

There is alot of talk out there everyday about interest rates rising. Keep in mind that there is an inverse relationship between bond prices and yields. Higher Bond prices = lower rates and vice versa.

As you can see from the chart to the left, a short term rally in bonds has taken place. At this point 10814 is the key level. If we get above that price, the downtrend that has been in place will be broken. If you keep this in mind with the higher time frames as a reference, it is possible that long rates could begin to come back down, if we get above that price. The monthly chart has still held it's long term uptrend line so far, although it is right into it here on this recent low last month.

If prices turn back down from here then all this was just a bear flag basically. The commercials are in somewhat neutral territory at this point, so they are not helping clarify things much. In general, the seasonals support price rallies at this time of the year, with the ideal low being in the May - June timeframe.

POT OF GOLD

Is there a pot of gold at the bottom of this rainbow?

I have extended the blue line designating the top of the flag pattern that has developed in the Gold market. If you notice, open interest is rising, and the commercial longs are dropping. What this means is that a higher percentage of long positions are being held by non-commercial buyers.

This is NOT what we want as a fundamental backdrop for a price rally. As I write this it appears that we will have a gap down opening this morning with 615.1 being the last trade. This market on a short term basis may be oversold, but it is not setup to be bought right here.

On the bullish side, the long term trend is still up, and the Commercials Proxy Index is indicating a buying spot coming. Historically, when we have had a 10 day low and a gap down opening, it has been a profitable short term buy. When we wait for this gap down open to rally back to the 10 day low it gapped below, and buy on a stop, the trade gets better. However, it is not a strong enough setup to take just stand alone. It averages about $162/trade.

Again, as I have stated before, if you are long term bullish on GOLD just buying these drops when they occur and walking away is what should be done. As most of you know, I do not share that view.

Todays post is in regards to the COT report and a potential discontinuation of it. Please go to the following site which is Larry Williams web site. He has prepared a letter that can just be copied and pasted and emailed to the CFTC.

I think most of you have seen the value of this report, and how it has enabled me to pick one major price swing after another in various futures markets. Although there is somewhat of a back door way of simulating this, it does not work as well as the original report itself.

Please get the word out to as many people as you can about this issue, it requires immediate action. Thanks for your help. If you have any questions about this please call me at (949) 554-4150. Here is the link - http://ireallytrade.com/cot.htm

Thanks for your help

Chris J

Here is the updated GOLD Chart

I know many of you are very bullish on GOLD. Currently this market has formed a bull flag pattern as marked by the blue line drawn across 3 lower highs. This is in general a continuation pattern for an upward move. HOWEVER!!!!!!!!!

Notice how large the range in the price bars is compared to other recent bars. This is an intangible comment, but what you really want in a pullback to enter a breakout longside trade, is a tighter smaller range type of flag. These more volatile flags are more prone to failure.

The textbook says to buy a breakout above the blue line, and place a stop below the low of it. This is not a trade that I would advise doing. Go back and look at old charts for continuation patterns like this. What you will see is that the small tight ones provide the best breakouts, and smallest risk.

This could go higher, but it is an extremely wide stop and not for the faint of heart.

Here is a quote board showing Crude Oil (CL-067) and Stocks (SP-067). As you can see both of these markets are declining quickly together. This is from the mid morning of today. This is just another example of how Crude price moves do not cause the opposite moves in stocks. The pundits would have you believe this type of drop in Oil would cause a stock rally. It certainly does not seem to be here does it?

I covered this in the newsletter, but this just jumped out at me today.

Here is the update from yesterdays long trade in the S&P. As you can see from the carrot to the left, this trade was exited early today with a profit. The overnight hold SP system has had 5 wins in a row now, although this one was a small win.

The day trading system, has two consecutive losses, which were the two I displayed last week. This is the world of trading. At times everything you have will hit on all cylinders, and at times some things will be working well and others will not. My Bond system has had a couple of losses as well.

Keep in mind that even trading systems with 80% accuracy, still have 20% losses. If you experience one of the 20% losses in each of the systems being used at the same time you can still get crunched pretty good here and there. This is why I only expose clients to one trading system. It minimizes the volatility in the account balances. When you do get the 80% wins all happening in all of the systems at the same time, that is when the real money is made.

The reality of trading is important to be aware of at all times. Often it seems so easy, and at other times, very difficult. It is of the utmost importance to keep a level head and go about your business. Especially for someone like me who exposes my trades to the public, and my clients. I am always open to criticism, so having a strong belief system in what you are doing is very important. That is equally true for all of you. Do not second guess what you are doing. Once you have a plan for a trade, stick by it come hell or high water. If it fails, learn from it so that you will do better on the next trade.

Here is today's S&P trade. The Friday Day Trade wound up with a small loss at day's end. This is an overnight trade based on an entirely different pattern.

There is no doubt that the trend of the market is down, but we are significantly oversold. This does not mean that we can not get more oversold. It simply means that the odds of some type of bounce are greater from a situation like this.

After having taken the two losses last week in the day trading system, I went back to the computer to look at the patterns. I did in fact find a subtle difference in the pattern that did give those two days I was buying a downward bias. The two patterns were modified to take the new research into account.

For example, Wednesday's down close with a larger range than the day before, and the next bar opening below that low, has on average lost $607/trade. This is a bias that we want to have in our favor not against us. The pattern that I had indicating a buy on the opening of Thursday did not take this into account unfortunately.

The biggest part of trading, is adapting to changing market conditions. I just provided an example of that.

Thank you sir, may I have another?

Just a joke out of a frat movie, but applies to this chart. All of my clients know that I am overall bearish on the stock market, and have called for lower lows in the fall. However, in short term trading I am often opposite of the longer term trend.

Yesterday I had a day trade buy signal that I displayed that took a loss. Today, I have another that is displayed to the left. It was a buy on the opening, and sell on the close. It is slightly down as I post this chart. The green carrot indicates the entry today, and the red are the orders for exiting. Again, you can see this is very structured.

This takes the emotion out of this which is very important. My short term trading in bond my bond and S&P systems have not done well in the last few weeks. It is during these periods where emotions can get the best of you. Had I gone by emotion, I would not have done this trade today, we are really fighting a strong downtrend. However, in the end following the rules will pay off even if it does not during shorter periods of time.

A special congrats to one of my newer clients who just made their first trade, which is a nice profit in GOLD.

Here is the update

As you can see this trade was stopped out for a loss. These types of trades are very high risk. The logic behind buying an opening like this is that if the market does reverse, the trade will be a very big win. However, the odds are about even on it happening.

This is also why I had stated earlier that I risk a small amount on these trades. It is common to have 2 or 3 losses in a row in a day trading account. It is the hit and miss nature of this that is the reason these types of trades are not in my service for clients. I only want to best setups I have to be available to clients. Even though we have had a couple of recent losses in the daily service, it is much more rare for that to happen than it is for a trade like this not to work.

At times I will get 7 or 8 wins in a row with these trades, and that more than pays off for the duds like this one. Overall, though the win % is the lowest in this system of anything that I use.

DAY TRADING

I do not do alot of day trading. My system only fires of a trade on average about once every 8 - 10 days. I have displayed the one I have for today. This specific trade is based on buying a gap down opening, and exiting at the close of the day, win or lose.

The stop loss is displayed below. Having studied many approaches to day trading, I can tell you the following. Those who claim to make millions doing that are for the most part lying. There are a few traders who can do this, but it is very difficult. My approach is simply to take a position early in the day, and just exit at the end. As can be seen, at the time of this post, this trade is losing money. We will know by the end of the day whether it is profitable or not.

I do not get too tied up in all of the intraday swings. There is so much stress in watching every tick. There was a time in my career where I did that. Many intraday traders will focus on a 1,3,or 5 minute chart. Then they will use a bunch of technical indicators that they subjectively interpret, which leads to buying and selling decisions.

I may in the future, incorporate this method into my trading service. It is very volatile, and not for the average person to use. I trade a much lessor percentage of my trading accounts with this system, than I do with overnight positions.

Japanese Yen

I mentioned in an old post that the commercials were short the Yen, and low and behold, we got a substantial drop.

Notice, back in May the heavy short position the commercials had. Without anything fancy at all, just a basic trendline break, would have worked just fine to trade this setup. I do not use that for my trading, because I want to dial in a little tigher than that.

However, for those just beginning to study the markets, this is an absolutely valid way to trade. At the moment, there is no setup for this market. The trend is down, but the commercials are basically nuetral. If they were to go to the short side on a rally from here, that would set up a nice sell signal.

Here is the updated weekly Gold chart.

At this point, the uptrend has held, and the commercials are still long, at about 91% on a relative basis. Open Interest also dropped on that pullback, while the commercials bought it. This is a bullish combination.

For now the uptrend remains intact, and only long side trades should be taken. If that low at 561.50 is violated, the game is over here for a long time. These huge run up blow off type of moves that pullback, then rally again like this has, should not go below the recent pullback low.

When they do, it likely becomes a high probability multi year topping pattern. It is too soon to tell if this would happen. For now, the trend is still up on both the daily and weekly charts.

Intraday action

Here is a 5 minute chart of today's activity following the release of the employment report. This is typically the most volatile time period for the US Bond Market. All sorts of posturing takes place while people are anticipating the Fed's next move.

It is best during this report, to turn off the computer. This action is very illiquid, and often very volatile. Today was a below average range on the release of the report. I believe this was due to the report released on Wednesday, which more or less gave us in advance what this report was likely to show.

There is no way anyone can know how a market will react to a report, so do not waste time guessing. Often the reactions in price to a bullish report are actually bearish, and vice versa. You simply must stick to your system. If it says to buy, you buy. If it says to sell, you sell. Tune out all of the noise. It is way to stressful, and also less productive to get caught in the emotion of these reports.

COMEX GOLD

Here is the updated Daily chart of Comex Gold. I had mentioned recently, that the commercials had gotten long this market. At that time, we were still in a downtrend.

That trend has now been broken, and a powerful move upward has taken place. The seasonal is a little early, to make this an ideal long setup. However, rarely is everything setup perfectly for trades.

As a long term trade, I would not be a buyer here. However, as a short term trader, I would watch for retracements against the trend for entries on the long side. On this past monday the market broke through the 608 level, which was a level I had mentioned to watch in a prior post. Breaking that level, reversed the downtrend.

THE DOW

Here is a chart of the Dow Jones Inustrial Index. We have had a substantial rally off the recent lows. Notice the graph below, which is the 30 yr Treasury Bond. This market has been very weak in recent months.

In general, big stock rallies do not come from formations like this. I know, well "it is different this time because, blah, blah, blah......." It could be, and we could see this carry up a bit. The commercials are long the market at this point.

However, as I describe in the recent newsletter, there are a few fly's in the ointment here. I do expect a buy point later in the year to develop, for now it is cash for me in stocks.