CONUNDRUM

Since the nature of this blog is essentially an inner monologue by yours truly along with some educational material thrown in, you get to live through this past month with me. This was one of the worst trading months I have had in quite some time. I started off with a huge profit and gradually got it whittled away almost back to a break even point. Of course a brokerage error accounted for a large portion of this, but at the end of the day the balance barely moved. I can blame some things on them, but short of a lawsuit or arbitration, at the moment that money is gone.

As hard as it is to do for me when I fail at something to review my errors right away, it is a must do drill. Face your demons immediately or let them later get you at a less opportune time. One of the things I constantly try to do is trail stops on trades, giving them a chance to produce large wins. I know I will select my share of clunkers, so I have to get large gains to offset them. If I scalp in and out just one day at a time, I generally can make some money doing that, but not enough to really get me anywhere. This leads to something I am now going to do moving forward, that I never would have done before.

We are seeing a interesting occurence around holidays, where due to the electronic markets now we get trading sessions on holidays that are lightly traded. There is tendency to get large moves during these periods either that day or the day after. I have now been severely burned by large moves on both that day and the day after that showed large profits for me, that evaporated the next trading day. Now I will view these as one day trades and take the money on them if it is there. If they go on to larger moves so be it I will miss them. I had such a large swing in this during February that it literally ruined my month and more importantly heavily impacted my thinking on other trades I entered. I could not get over in my mind a 24k swing in one day from gain if exited, to loss when the moves were reversed the next day. Since I have now seen this on the last 2 holidays, that is enough for me to make a rule. Admittedly this is a small sample size but between those 2 days alone it was a 50k difference in my account balances, enough said.

Discretionary trading is so tricky, I call it Caddyshack Trading. It just reminds me at times of the scene in Caddyshack where the caddies cut loose at the pool. It is just so chaotic and random at times that it is easy to get lost in how you are making your decisions. I have a basic platform which readers should have a feel for by now, as to how I decide where and what I am trading. The art of trading is using individual tools to enter and exit when the conditions are right to make a trade. At times I can do no wrong, others no right. This is why it is imperative to get large wins when they are available. That being said, lets look at some markets where large moves should be coming.

First, the Dollar Index/Euro Currency. Due to weighting, these markets are essentially inverse of one another so basically the same trade from opposite sides.

Once again the picture has not changed here, huge commercial selling and conversely big small spec buying. Also the open interest is rising while commercial longs are decreasing. This is a good setup for a decline. I shorted this market Friday with a tight stop. We could break up and out of here and do a moonshot like GOLD did before it made it's peak from a similar situation.

Next is the Euro which is basically the inverse of this. The news is full of stories about the demise of the EU and how that will decimate their currency. That may be true, but it also could be a headline we look back at that told us capitulation on this selloff had happened. I do not know. I went long this market yesterday also, and already have enough gain to lock the stop at breakeven and see if it goes onward. It also is in a downtrend, so a rally actually would setup a shorting opportunity also at the red line.

Again you see essentially the reverse of the dollar index here. Record commercial buying and small spec selling. It is also occuring right at a time when the seasonal low typically occurs. A rally should follow here.

Next the agricultural markets have a couple of things setup pretty well.

The same picture here in Soybeans, big commercial buying and large spec selling. This should lead to an upmove however, we are short term in a sell zone based on a retracement in a downtrend type of setup. We need to break out above the lines here.

Next Live Cattle.

Same picture here, huge commercial shorts, but one difference. You also see the large small speculator short position. In the meat markets, small specs are basically the commercials here, so they should dance together. No questions on that please, study for yourself as to why that is the case. The bottom line is that this is a very bearish setup right at a time when the seasonal high is also due. The daily chart does not have a sell here yet but may soon.

These are just a few things I am pointing out. The one ironic twist to all of this is that the stock market appears to be setting up a sell on a larger scale. Since we have seen the tight correlations across the board, some of these things do not jive. That is the title of the post, Conundrum. What this likely means is that some of these setups will not be correct. I do not believe we can have a rally in the Euro and dollar decline, if we have a stock market decline. That would drive down the Euro and the dollar upward. This is why these are just setups and the actual trades need to be made off daily charts. Some of these setup markets will never setup daily trades in the above directions, so that is how we will know. Trade the daily charts and the signals there, but look for the bigger moves to come in the direction of larger scale setups.

RETRACEMENTS

One of the best ways to trade is simply wait for trends to develop, then enter in the direction of the trend on pullbacks. This is a what I like to call a conceptually correct approach. There are so many ways to trade that an individual can adapt his or her own style to what they are most comfortable with. However, the one guiding light in this process needs to be that just because you are comfortable with something does not mean it is a good approach. There is so much random activity that with some brain power along with computing power, you can data mine and make even the most obscure approaches appear to look good in back testing of data. What winds up happening often, and this has happened to me in the past, is that you zero in on something that has won 33 times in a row. You get so excited, you have found the grail. You are so proud of yourself you say out loud, I am not telling anyone about this, I found it. You cannot wait for the next occurence to show up to put all your chips on the table.

Sure enough, your trade setup shows up, you place your trade, and clank you get stopped out for a loss. You shrug that off knowing that there are always going to be some losses and this might be the only one. You take the next trade, wham another loss. At this point at least with me, I know something is wrong, you can just feel it. Sure enough the method just never works in a profitable fashion in real trading. You put your tail between your legs and go back to trying to figure out what went wrong. Chances are you had isolated a random event, data mined it and dressed it up, and it was never a causative event. Most often I would argue that was because it was not conceptually correct. This is not higher math, it just means that on a basic level it has to make some sense.

I love to hear things like "this market always makes it highs on Tuesday so I am shorting on Tuesday." That is an example of something that does not make conceptual sense yet, I know someone who trades like that. He has not done thorough enough research into this to discover that over large data sets, there are no tendencies in this area that are tradeable. Highs and lows are randomly made on different days of the week. This is something I have researched in detail, so I know what I am talking about here. There are some tendencies in the bond market specifically but they are few in number.

One conceptually correct approach is entering in the direction of larger trends on reactions against those trends.

In the chart at the top I have COPPER but it could be any market. I have marked off the trend retracement entries. You can see that in general the best entries are when price does not retrace very far. These are always difficult because we always want to feel like we are getting a good deal. When price declines ever so slightly we always feel that it has to go further, then wham it takes off again and we are left standing alone. There are some deeper retracements that would have caused losses had you entered when that retracement was shallow. Guess what, trading is hard, nothing works all the time. It is a probabilities game so losses occur trying to catch market moves. Deal with it. There is no approach I know of that can tell you when a retracement starts, how far it will go and whether it will be large or small. I am constantly trying to find something that can tell me that. If I find it you can be sure I will not post it here, that would be the greatest discovery of all time and I will hog it. I doubt very seriously I will ever discover that.

My advice would be to just establish some triggers that once a retracement begins and the market begins to resume it's trend direction, you enter a trade. This requires that the market prove itself before your dollars are at risk. This is in general why I buy above highs and sell below lows. I want to market moving in my desired direction to pull me into a trade. That is just my style and it is also from years of research. In almost every test I have done buying strength and selling weakness has shown superior results vs entering at the market. However, when I first started trading I just entered at the market and had very good results. There is no absolute answer on this. If you enter at the market you use a dollar stop, if you enter on High/low breaks, you use a prior high or low as a stop.

The overall point to be made is this. Entering on pullbacks in trends is a very good way to trade, but do not get caught up in hoping for large pullbacks. The best trend moves give small pullbacks then take off again. Sometimes you may enter once and get stopped out and might have to take a second entry if the pullback is deeper. That is life. Once you catch a few large launch moves on short pullbacks, it will get easier to take those trades going forward.

DOUBLE VISION

This is a 2000 tick chart of Crude Oil with the E Mini SP 500 overlayed in Purple on it. Can anyone looking at this tell me this chart pattern is literally not exactly the same? The only even minor difference I can see is that at the highest high here the E Mini SP 500 did not make a new high there, so it diverged from Crude slighly there. Other than that these markets could be swapped. Why do I display this?

I harp constantly on monitoring risk and making sure when you trade that you take into account correlations in markets so that you do not have too high of a risk % in any one trade. In these absolutely ass backwards markets we have right now, there are correlations that have never before been in place, that are very tight now. As much as they make no sense whatsoever, they need to be honored until they decouple. If you want to short Crude Oil you sure as hell better not do it when a big stock market rally is happening as you can see right here.

If you look across the board, these types of correlations are everywhere. For me now if I want to trade alot of different markets, I need to be very careful about position size. I like to risk 2% of my account per trade, but if I take 5 trades now that can become 10% really quickly if I am not careful about these correlated markets. Almost all commodities are directly correlated to stocks right now except the Softs and Natural Gas. This is the case with currency markets as well. Just be aware of this when making your trading decisions, I have no idea when this will end.

Ironically, the Dollar is not up much as I type this, with the Dow - 160 so that has been a pretty tight inverse correlation lately, of course also making no sense at all. The Short setup for the dollar I posted yesterday was not filled, I have orders in again today to sell below yesterdays low. It does not appear right now that order will be filled but who knows. If the stock market were to rally here intraday, the DX could tumble. The fact that it is not up much may be telling us this stock dip is a buy intraday, it should be up quite a bit more.

I also have some sell orders in the Grains and those markets are not open yet. Bean Oil in particular I think is in an area to look for a short sale.

WILL THIS GIVE?

Here is the Dollar Index and how it looks coming into today. I have sell orders in just below the trendline on the chart above. As I have stated consistently, I have been expecting a short term decline that would setup another large leg up in this market. I had hoped the bigger trade would be on the long side of this market. So far it has refused to cooperate and has maintained it's upward trend. I view this as meaning this market is even stronger than I thought. Anyone who has read my comments over any extended period of time knows I was bullish in this market before the low was made last November, even in spite of all the poor man's ecnomists who railed on about how it had to crash. They were much like Leslie Nielsen in the movie Airplane. He went into the cockpit after the plane had already landed and wished the pilots good luck on the landing not realizing they had already landed.

People hoping for the dollar crash just failed to look at a chart and realize they were late to the game, it had already happened. The masses are always wrong at the turns in almost any asset class. Anyone remember the top in housing and how bullish everyone was? I sold my Newport Beach McMansion in the fall of 2005 right at the top when the frenzy was going on. This still remains the only trade I ever made where I made over 1 Million dollars in one transaction. Maybe it was not a trade per se, but I viewed it as one. Needless to say to me it could not have been more obvious housing was going to crash, just like it could not have been more obvious the dollar was going to rally, and not just a little. A couple of my friends, one in particular who is one of the most successful commercial real estate brokers in the world, teased me that I missed the top in the market on my sale by 2 hours and that my timing was way off. I had dinner with him the night of my closing and had the check for over a million bucks in my pocket as we toasted the closing. He was also dead convinced this roll over would happen unlike many of his peers.

It does not always pay to be a wise guy and just be opposite everyone because in the middle of powerful trends and bubbles that are always early signs that a large top is forming. It is letting the momentum run it's course that is where the art of trading comes in. I try to make things as mechanical as I can and I am sure readers here see that alot of  my trade setups look the same. I just want whatever momentum indicators I use to confirm my trade direction, then I go to bar patterns for my entries. I am not always right, but readers here know that over any extended period of time, a good percentage of my market calls and trades are correct. That is what trading is, playing the odds and having a method that puts those odds in your favor. Once you have that, you just try and get volume in the transactions knowing that over X number of trades you will get net profits.

So it is with the Dollar above. This is a good setup that over time will produce more wins than losses and the wins will be bigger than the losses. This does not mean that this trade will win, and I really don't care. I know if I trade every setup that looks like this, over time I will make money. I really like having obvious trend containment lines being in place where my entries are, but that is not always the case. If I wait for those I can miss trades. You may remember the shorts in Gold and Silver where I caught the exact day of the high. There were no trendlines that had broken at that time, but everything else was in place.

Here we have all the elements of a good short term trade setup for a short, and the orders are in. Let's turn on the machines and see what happens.

Stocks on Fumes?

Here we have the daily chart of the VIX, my favorite tool to predict short term market swings. I have some bands displayed here. There is no magic to them so no sense getting hung up in the calculation of these. You can use Bollinger Bands or standard deviation lines, etc.. The whole point is to get a short term measure of extension in one direction. We have breached these on the downside, which is actually a buy in the Vix which conversely means a sell in stocks. But hang on a minute. In the other panes we see the momentum indicators here are solidly in a down trend. If you look at the last time we had a similar situation, we needed to wait for the momentum indicators to cross their trend lines, indicating a momentum shift to support the buy signal/sell in stocks. We had a 5 day lag last time, so that is at least a possible outcome here. That is to say we crawl up for a few more days, then rollover in the S&P 500.

I do believe that is what we will see due to looking at alot of individual stock charts. There are not alot of sell signals or divergent momentum patterns. We need several more days in many of them to set them up if they set up at all. As a result, I will be looking for short entries towards the end of this week/beginning of next week. This is also tying into several things I have posted previously, including the Bradley Model and Larry Williams Will Go Long Term indicator. They both have been indicating a turn down at the end of February.

Ironically, we have across the board commercial buying in many commodities markets. Since we have been joined at the hip with stocks in almost every market that exists, this is a very interesting development. We do know often commercials can be very early or out right wrong also. It is hard to imagine a big commodities rally if we get a significant stock decline. However, in the past that could have easily happened, so maybe we will finally return to a normal world, but I would not hold my breath. So far extreme commercial selling has failed to stop the Dollar rally, which is in itself bullish for the Dollar. If it can break out again in the face of the record commercial short position, we could see a sharp move up that coincides with a similar sharp move down in stocks.

This is eerily similar to Gold at the end of last year, with the small speculators having a huge long position. That is rarely the right bet to run with them over a long period of time so it will be very interesting to see how long they can bid this up. I personally think not much longer, but have openly stated I am looking to buy a dip in the Dollar after shorting this rally. An up close in the Dollar tomorrow could give me a short setup for Wednesday.

HIATUS

I had to take a couple of days off from posting due to some other things in my life both personal and business. This has probably been the most stressful month of my life, and it has effected my trading. I am still ahead in all of my accounts, but I have made just a ton of mistakes. I am now embroiled in a battle with Tradestation over some orders that vanished in their system. I have proof in my log they were placed, they say they weren't. Such is the life of a trader. Politicians will become honest men before a broker ever admits to a mistake. So be it, they are going to say goodbye to a substantial amount of money I have in various accounts with them over this BS, when I transfer it all away soon. This has angered me so much that I took a day off from the markets Friday.

Below is one market that is just a wonderful setup for a trade right now, albeit against the current trend, the EURO.

Just look at the commercial buying and small spec selling going on in this market. What this tells us is the big boys are heavily long and the small fries are heavily short. The problem of course with this scenario is that these types of situations do not always turn markets on a dime. We saw in Gold it took 3 months before this condition finally resulted in a top being made. However, for me this is just such a unusual situation that I have to pay attention here. For you Fibonacci players, we are in retracement zones right here. I personally think those numbers mean nothing. As Larry Williams once said, if you draw enough lines on a chart something will happen at one of them. That is the case with Gann and Fibonacci analysis. You overlay a spider web of lines on something. A price stops at one after ignoring 30 others, and bingo they say see how well this predicted the next move.

The whole business of living is based on all of us trying to figure out what the future will be before it happens. There is just too much random activity in our world. The best thing we can do is try and figure out what causes things to happen in general. Once we figure that out we look for another type of occurence of a "cause" then we try and conclude that was it has preceeded previously will occur again. At times it does, other times it does not. It is an odds game. If we can find things that give us an edge, that generally precede a certain event, that is all we can ask for. Once we see them we place our trades and see what happens.

Commercial activity is such a cause. It will drive market moves in general. It is not always accurate, and at times dead wrong. However, I would ask you, what is perfect? If you find it you had better keep it a secret. This cause and effect with commercial activity is the best big picture cause I have ever learned about, so that is why I often cite it in my market analysis. It gets me looking a certain direction. Here it has me looking for a reason for a rally. It does not tell my to just blindly buy, we are going straight down right now.

The next chart does however give me reason to look right now for a buy.

The one thing that just jumps off the page at me here is all the divergence in the momentum oscillators. All 3 of these show price above their trendlines meaning up trend in momentum. This is against a very steady downtrend in price. This type of divergence typically produces at the very least a good sized counter trend rally, and often a trend change. I know alot of people use the MACD and other oscillators. I always felt many moons ago when I used to use those, that the 3 point divergences were the best, and we have that here in the first oscillator.

You can see the trendline on the chart above. If we get above that we could see a quick move up here which would also mean a dollar decline. The DX chart is very close to the inverse of this one.

ROLLER COASTER

The life of a trader is rarely a contented one

I talked about an upcoming short opportunity in the Dollar and I took that trade the day after the holiday, marked above. When we had the big up day in stocks it obviously drove down the dollar and I had a very large one day gain. I had also delved into the Swiss Franc and went long some Grain markets. Since every trade is so highly correlated right now and completely dependent on the stock market, I adjusted my risk accordingly.

In this ass backwards world we line in, long the Swiss Franc and long Soybeans is the same trade. Makes no sense at all, or does it? Let's get to this in a minute. I had a very large one day gain, what I call a one day wonder. Yesterday it all got reversed and taken away. Even though I trade short term, I am not a scalper, so at times this happens. It was a bummer to see 20k evaporate and turn into a 1k loss. However, I trade setups that I expect to run for 3 to 10 days or more. I cannot modify what I do for these odd circumstances as much as I would have loved to have that money in my accounts to pay all the medical  bills I have for my dogs at the moment.

The Euro/Swiss on the long side and the Dollar on the short side still remain very solid setups for big moves, so I will play them again any day now once the bar patterns setup properly. This is what trading is, probing areas of opportunity. In the old days when I traded mechanically I almost never had losses. Some of my systems were 85% accurate in real time trading, so it was odd to have more than a loss here or there. However, one of the negatives was I never caught large moves, just constantly trapped small ones and eventually the patterns I used broke down and stopped working. Now at times I may have to take 3 swings at something to hit it. This is rare but it does happen. So the above scenario is business as usual as much as it ticks me off.

It is hard to tell but the DX loss above was very small only $150 per contract. As you have seen my wins generally are over $3000 per contract, so you can do the math on how well overall that works out. I will short the DX again today if yesterdays low goes but that is highly unlikely. That potential entry is one the chart with a large red arrow.

As to the correlations I mentioned above. These have now persisted for a long enough time where something is going on here. I think even the biggest wise guy has to be aware at this point of the government manipulation of the stock market. They are almost making no effort to conceal it at this point. What I suspect is happening is also a coordinated inflation attempt. The only way out of the mess being created is either massive default on everything or huge inflation. Readers here know I am in the deflation camp, but we also know the PPT has created one bubble after another in recent years to allow people places to go to make money. I think behind the scenes this is going on again in a frantic attempt to fight off deflation for the time being which is the prevailing force at hand.

Since the prime market they are manipulating is stocks, when they rise everything else goes with them. Funds with pools of very smart  people I suspect have written trading programs to take advantage of this. They go all in or all out. There have certainly been enough spectacular hedge fund debacles for us to know they do not honor normal risk paramaters at times. If you just watch the screen intraday it is very clear, stocks move first, then everything else follows about 30 seconds to a minute behind. Net net, I do not believe this is a conspiratorial effort, the PPT is just doing this in stocks. However, they know the trickle down effect it is having, and they do want some inflation to fight off the deflationary pressure that is underlying. This trickle down effect is what they want.

As a result, I do not expect these correlations to decouple until we get out of this mess which could be quite some time in spite of Barry's recent BS about jobs created etc. He should be nicknamed Pinocchio, we have never had such a dishonest president. In the end you have to take these correlations into account when determining risks in the trades you place.

MY MY

I was on record here as saying stocks looked good for this week, so it was not a suprise to me that we rose yesterday. What was a surprise was the magnitude of the across the board strength. I had predicted gains in metals, grain, energies and a dollar decline. All of this happened and in force. My prior view had been to play this bounce on the long side and that the larger trade would be the next move down. I am not so sure about that now, let's look at yesterday.

If we look at the main momentum/timing oscillators that I use to guage strength or weakness, they all look very strong. Before shorting into this I am going to require a rollover in these or any one of a number of other things, none of which are now on the horizon for the rest of the week. Just by how these indicators are created, I cannot foresee anything happening in just the next 3 days that would turn these bearish. The values change slower than that. I have learned by losing money doing this, not to short against these sharply rising values. They tell us we have very strong upward momentum.

It would certainly be expected to have a consolidation day within yesterday's range today and I do think that is what will happen. It is hard to make larger projections over a period of months based on what daily momentum oscillators are telling us. I have mentioned that the recent composite buying in the indexes by the commercials was bullish as a whole but might be misleading looking at the individual indexes. Below you will see again more evidence of this.

Notice how the Hybrid there in the middle once again is pegged in the buy zone, yet at the bottom when we look at the total gross long position at the bottom, a separate story shows up. In digging into this further, I have found that the pit contracts of the Naz and SP 500 is where the buying is going on, and there is actually net selling going on in the other indexes. It used to be that just the small traders traded the E Mini contracts and back then the commercial activity in them was not a good guage of what to expect going forward. The pit still had the highest volume and the large players traded that contract.

Over time with the broadening of the hours of trading and the electronic access increasing, we have seen a change. Eventually traders got tired of the terrible fills and slippage on the pit contract and gradually started trading electronically instead. Now we have transitioned into a situation where over the last couple of years, the commercials have been much more accurate in the E Mini contracts than the pit contracts. As a result I pay more attention to commercial activity there than what is going on with the pit contract. By that measure this decline is not a buying opportunity. This is why I had thought we would bounce but not by too much.

When yesterday took off on the upside it did put us in a position where now I have to see a few more days before I can make a judgement as to where we go next. I did not expect a rise of this magnitude, I had expected a more muted bounce that would setup a sell for the larger move down. That is in jeopardy at this point. I do not believe new longs should be initiated here, but it also not a shorting zone. Time to stand aside for a few days in the indexes and see what happens.

I do have some positions on, long in currencies, short in the dollar and long in the grains, that I will review over the next couple of days.

IT'S EARNINGS THAT MATTER, OH REEAALLY?

Well I hate to pick on people because all of us traders have our moments where we just simply cannot get anything right. There is no sense kicking people when they are down. However, when I hear BS propogated I feel obligated to respond. Again going back to a radio show that airs out here in Southern California, the name will be left out to dodge legal actions. It was put forth the other day that it is earnings that matter and really all that matters with stocks.

Is this really true?

Above I have a chart of Fastenel which I just picked randomnly. It is a stock I watch because it swings alot and is a good momentum stock to trade. Below at the bottom I have their earnings. You can always pick an individual stock to make a point, but if you look through alot of them you will see this relationship or lack thereof is for the most part the same. Let's match up the price swings with earnings just to see how valid this claim really is.

First we begin with a move up that does have rising earnings alongside, so far so good. Now we roll into the next year and see a huge decline with earnings still rising. Hmm... I suppose we could say well it was an obvious buy because earnings were rising during the decline. I would actually agree with that. However, you would not wanted to have been buying when that decline started unless you have very deep pockets. There is a nice way to trade stocks with a few caveats added to this above situation which I will explain below. That decline leads to a great rally, again on rising earnings. OOPS a crash on rising earnings, how can that be? Keep in mind that earnings are reported after the fact so we did not know at the time of the crash earnings were going to decline because they were reported afterwards. Now we roll into a very nice rally on declining earnings.

What we have here is basically a somewhat random relationship. I think you might be suspecting what really rules the day here, but let's get to that in a minute. Now I have the same stock a little bit further back in time with estimated earnings added. After all haven't we learned that Wall Street can be implicity trusted? Any earnings estimates must be something we can trust our lives with? They would never manipulate numbers to get bonuses would they?

Here we now have a 60% rally on declining earnings, how could that be. We can see though that we have estimated earnings rising sharply so we should feel really good about things now. This stock should definitely keep going.... Huh!! Part of that decline is that the stock split, but even with that being considered there was a nasty decline that occurred here. I could go on and on with chart after chart and the same story emerges. This is another Urban Myth, but it is designed to keep your money invested "for the long term." As I hope most people have finally learned, all that does is give nice management fees to fund managers, it does not enhance your investment accounts.

You should always trust but verify anything you read including what you read here. The real problem that exists today with earnings, is the manipulation that goes on. There is so much pressure to meet the numbers, that jobs depend on it. Isn't it funny how they always magically beat them by a penny per share or something along those lines? Oh it is just the analysts really did great work and had the company's pegged.

PLEASE

I know alot of people are busy working their regular jobs and want to be able to leave this up to the professionals. There are good ones out there so you cannot throw the baby out with the bath water. However, please take it upon yourself to at least get a little educated. Do not blindly buy into the Wall Street BS. There are good ways to trade off earnings and I alluded to one of them earlier. Run a moving average of them for several months. When you have a rising line and a decline in price down to at least a 20 day moving average or less ( preferably a greater deline than that ) on a weekly chart, you can buy into those dips assuming the valuation is reasonable which it should be in that situation. However, do not blindly buy stocks on declines because earnings are rising, or short based on them declining. Earnings do not drive short to medium term stock movement. I would suggest not using a money manager who invests based on that premise.

PLAYING TO THE CROWD

Since all most people want to hear about is why Gold will rise to the stratosphere and I get booed every time I come out with bearish remarks, I thought I would try and get a few votes from the electorate. During our recent decline we are now starting to see a significant decrease in the commercial short position. You can see from the chart that their net position is still nowhere near the last large long position that kick started the huge rally up. Also, this again is a natural function of how commercial hedgers work. As a result, this makes me short term bullish for a bounce, but does not change my long term bearish outlook. Those record positions should result in a much larger move than what we have had so far. However, if we see the commercials buying record another huge historical position size on the long side, I will change my viewpoint here. This business is not about ego, it is about money. If it turns out things change enough where the $600 level is not going to happen, I will change my view and get bullish. You cannot get too stuck on your own positions, you have to adapt to what is happening. If stocks go up to new all time highs, the Gold market will soar along with it.

You can see from the chart the gradual unwinding of that huge long position recorded in March of 09, that ultimately wound up in a record net short position. This took almost a year, we are looking at the inverse of that right here. We should overall move down for awhile, but I do think we should be looking long right now. This market is tracking the stock market, and stocks look good at the moment to continue the little rally they have going. As a result, this market should follow along. You have seen what happens on large stock down moves, so if we get a resumption of the stock decline, the market will collapse. Use tight stops on longs, the path of overall least resistance is down here. However, I am looking to try and get some money on the long side first.

For this market to be bullish, the dollar "should be" bearish. Here is the DX chart and yes it is bullish, in fact I think there is a short trade there right now.

Again what we see here is a record net short position with the commercials and huge small speculator long position to go along with it. Also, we see the Large Specs have their largest long ever, yet price has not advanced anywhere near where it was when the Large specs were heavily long last time. This is a textbook setup for a short, just like GOLD was at the high. There is one significant problem with this, the gap on the chart between price and those secret lines I have on here. Basically that indicates a trend change, so the trend is now up. I cannot tell you how much I wish that were not the case here, this would be a sell with both hands without that. What that tells us is that dips are buys here. So, we should look for a short near term, then look to get long on the dip for the big ride up. We need to watch the commercials to see if they buy the decline. If they do, we could be off to the races on the upside. It is possible that again this is normal hedging here against the new trend. If that is the case this selling does not mean anything.

However, when we have long established trends that the downward one here overall, it pays generally to get short when commercials get short. My trend change gap does make it a little more complicated in that it says the trend really overall is not down any more.

Here is the daily chart which in my view shows that if Friday's low gets taken out this is a shorting opportunity, and I will be a player there if that happens. I have price projected below that low to show how the indicators will look if that happens. One thing to note that also speaks towards the bigger picture bullishness here, is the third panel down. This is Larry Williams and what he calls a flat lining market. This means basically that we have such a strong trend that the momentum is flat lining in the bullish zone. In these situations you want to buy all the dips. First things first though, I want to play that dip.

Overall this week most markets look bullish, Grains, Energies, Metals, Stocks, and the dollar bearish. Let's see what happens.

ANOTHER DANCE?

This is probably a disappointment to many readers when I cover something other than Gold or stocks, but there are other markets out there. Above is a Sugar Chart and you can see we are setup for another decline. We have a momentum rollover in the top pane, with a rally against it. The bottom 3 panes also show basically the same thing, downtrends with a reaction against it that is still under the downtrend line.

I always want to get the first one, which is why I am often active towards perceived tops and bottoms. The trades are harder to get right in those areas, but when they change direction often a quick windfall shows up. That is what happened on the last Sugar trade I posted here. I was able to get it right at the top and got a nice quick ride down. Me Likey Dem!!

The sell entry is marked on the screen where the red arrow is shown with a 1 next to it. This chart is from a small account I just risk about a grand at a time in just messing around. I have orders in at this level also in my larger accounts. My usual size is 10 lots or so just to give a general idea of the size I trade. It depends on the stop amount as far as how many contracts I trade. I use fixed perecentage risk amounts. Once I know the risk on a trade I divide that into the total dollars I am willing to risk at a time, and that is how I get the number of contracts to trade. Today's range was pretty big, so the probability of a fill on this tomorrow is probably not very good but you never know. That is why they turn the machines on every day. So many times we just assume certain things will happen, rarely do they ever play out exactly as we expect.

This market is an example of where commercial players had been short for a very long time, just hedging against the big uptrend. Had one just noted their position they would have shorted themselves into oblivion blindly fading the big runup. This is why I have repeatedly stated in here that the COT data is really an art and not just hard numbers. You really have to know when to hold em and when to fold em with that information. This is easier said than done. However, it is worth learning how to do it in my opinion.

Stocks I am not sure still, but they appeared to do a little break out above a downtrend line today so they should have a bit to run. I personally am hoping for a pullback to setup my pattern entries up which are not yet there.

BETWEEN A ROCK AND A HARD PLACE

One of my goals this year was to trade more because I tend to be too damn picky. As a result I wind up wrestling around with scenarios like the above. This is the Russell 2000 and it represents the dilemma that exists in alot of markets right now, short term very oversold which has led to a small bounce so far. The purple line on the chart is the best accumulation/distribution indicator I have, and it is bullishly diverging. It does not speak often, so I always pay attention when it does. Going to the next panel, we have the long term momentum rolling over here and now have an overbought condition against that new down trend. This is bearish. Next the two shorter term momentum indicators. The first one is bullish, the second bearish.

What to do?

In my mind that is an easy answer, nothing!!! If a trade just not just jump right off a chart at me I do not force things. I do miss moves because of this, and I always wish I had not missed them when I do. However, there is nothing worse than looking back at a chart after a loss and thinking, "what the hell was I thinking on that one?"

I had predicted a small bounce, so far this has been correct. This bounce is certainly small. If this is all we get lookout below. The one thing that bothers me more than anything else, which I told a friend at lunch yesterday, is how the individual stocks look. All the way up in this trend all the key stocks were strong, in many cases more bullish looking than the overall indexes. This condition has reversed. Many of them are much weaker overall than the indexes. I have had a tough time finding any good long stock setups. This is not what a bull market should look like.

This is KLAC a chip company and it shows what I am talking about. This is far outracing the overall index decline. Now you can always find stocks like this in any market environment, but there are an awful lot that look like this.

Here is what this means in my view. The levels we have dropped to here are now very important. Since we have alot of underlying weakness at hand, we need a strong rally out of here for this bull market to stay intact. We know the PPT is really trying to make sure that happens, and they may very well succeed. However, if they do not, we have recently seen how a selling wave from funds can easily overcome their little futures games with volume. If we stabilize here and the volume once again slows way down, they can easily keep this propped up. The key is always to watch the 20 and 50 day low areas. This is where funds often enter and exit. We saw once we went through there on the downside how quickly the selling showed up.

These guys on TV may jawbone about how bullish they are, but I am fairly sure that behind closed doors they have their triggers ready if we don't hold here. No need to panic yet, but if you are heavily long and these recent pivots do not hold, I would suggest re-examining your view. Until then business as usual for average Joe.

ALIEN VS PREDATOR

The above intraday chart needs to be framed. This was the greatest most blatant PPT buy program move I have ever seen since I have been aware of their action. We had the nice up open and run up in our oversold bounce mode, then all of the sudden we started rolling over. As I had mentioned, we need to start watching how intraday moves hold or do not now. In all honesty, this was minutes from just plunging. Then out of the blue at a time when buy programs virtually never happen ( the lunch hour ), we get the moonshot. This was so obviously the PPT putting a stop to that rollover. I am actually shocked how blatant this was. They normally try to at least disguise a bit what they are doing. This was one of those F... you we won the election moves, just a classic. Here we are this is what we are doing and if you do not like it go jump in a lake, we won remember?

I labeled them Alien just because this is just a foreign type of control we just are not used to. The Predators are the funds. After all aren't they to blame for everything that George Bush is not being blamed for? They are predators on all us normal Joe's. Of course that is absurd, but that is what the media and our government ( aren't they one and the same? ) would have you believe. I actually heard some brain surgeon today say that the mid day move was due to positive rumors on the handling of the financial problems in Greece! This embecile was actually someone who gets paid to work at an investment firm! I have to admit at times I want to get on CNBC and challenge one of these knuckleheads into the Octagon to try and choke some intelligence into them.

Let me make this perfectly clear. Buy and Sell programs in the SP 500 futures are not launched based on some arbitrary opinion some flatfoot has about a possible future outcome of some big picture as of yet unquantified problem. This dumbkopf should know this and if he does not he should be fired. Please don't listen to this bull, and that is what it is. These programs are very mechanical based on cash and futures premiums and discounts. They are moving targets with different triggers, but at their core that is how they are launched.

Today was very volatile up and down due to these programs so there was a ton of intraday action for those who day trade. Below is the largest trade I have on at the moment.

I had mentioned recently I was looking for a sell signal in Bonds and I took a leap there today. The momentum oscillators were lagging the price upmove. Then we got a new high for the move not confirmed by the green line which is Larry Williams Pro Go Indicator. Then I was off to the races with a bar pattern that showed up. Just like most trades, I always think they are marginal when I go into them. This has moved a decent amount so now the worst case outcome would be a small loss. I also took the TBT in the stock accounts to go along with this, which is an inverse Bond ETF. I love all the ETF's that are out there because they often give you the ability to simulate a short futures trade in an IRA account which is just beautiful.

Ironically right before the PPT showed up this trade was looking lousy. Bonds were bouncing while stocks were rallying early, which telegraphed the intraday selloff that we saw. The PPT buy program then forced things back into their new normal relationship, which is inverse. It does look like we are going to carry up a bit in stocks here as I have been saying, but I do not at this point expect it to last too long. If we accelerate I might change my view on this. So far it is really pulling teeth to get any up closes in stocks.

COPYCATS

Yes the Mustard is off the hotdog as Chick Hearn used to say. Above you see an example from yesterday about the intermarket correlations that are still persisting today. The top chart is the SP 500 and the bottom one is an intraday chart of Corn of all things. I have talked about how unique the market upward move has been the last 9 months and thought showing a real example of this might have an impact. There is absolutely no reason whatsoever that an almost tick by tick relationship should exist between these two markets. I have never seen anything like this.

Some markets have decoupled to some degree in the last couple of months from this goofy relationship, but for the most part it still persists in alot of places it should not. Why am I posting this? One of the things as a trader or investor that you have to keep in mind is the bigger picture. Inter-market influences are important to be aware of when deciding what to do. For the most part I use it do help keep the correlation in my trades as low as possible. For example, if I know everything is basically moving together and I want to risk say 4% on a trade in Corn, I cannot also risk 4% on an SP 500 trade at the same time, unless I am willing to risk 8% on either one individually.

Since they are moving together, it is essentially the same trade, so you cannot let your risk parameters get out of whack. I generally risk about 2% of my account per trade, but in some of my very large accounts I go down to 1%. I am especially aware of market correlations when deciding what to play. I will only generally trade one metal at a time, or one currency etc, unless I want to take half the risk for each and play 2 at once. Really aggressive traders would say that this reduces the amount you will make when you get the swings in price right like I have done recently in so many markets.

This is absolutely true. However, I always protect on the downside. I know so many people who fail to do this, and ultimately they wind up losing all they have won on good runs and more, when they hit a bad period. We all have these drawdowns, it is part of doing this. You have to manage your money in a way that you do not get carried out during drawdowns. For the most part I have kept my drawdown periods under 10% by doing things like this, usually in the 7 or 8% range. This is critical in building your accounts up over time.

Moral of the story - Always be aware of your risk in each trade and what is effecting it and take that into consideration before making any trade or investment.

We have overnight strength again in the indexes so let's see if it sticks today. The bounce is overdue here and it might be starting today. Even the smallest rallies are being sold right now so the first step to get an up retracement needs to be one of these overnight moves holding up. Let's up Barry does not start running his mouth again today on another lame socialist program, he is a market killer that kid.

ALMIGHTY DOLLAR

For those of us who were bullish on the dollar, although we were very few in number, we were also correct. I hope John Q Public is learning a lesson here, but I doubt it. The masses are doomed to repeat the same mistakes over and over and that in reality is what provides opportunities for us who think differently. Make no mistake about it, being a contrarian is a lonely spot most of the time. It is important to distinguish from being a contrarian just for the sake of being a wise guy, from being one due to market driving reasons. I am not one to shock people at cocktail parties, I really could care less about that. I am a trader, and my family just cannot afford for me to follow the herds over a cliff time and time again. I need to make money trading to pay for my life, so if I am gathering at the water cooler engaging in the fiat currency crap, I am not doing that. Do I really want to share the same market views as the cable guy?

What the world waits for will never happen. The world was waiting for a Dollar collapse and Gold moonshot, this is why it did not happen. Although I would argue that it actually did. I never understand how someone can look at a chart like the Dollar that was pummeled for months and predict a crash after one has already happened. The move they predicted had already occurred. This is the problem with the masses, they get bullish at the tops and bearish at the lows. It is not because the economic justifications of why it "should" happen were unsound. The problem with them is that those aribtrary opinions are not what drive markets. It could still happen at some point in the future, none of us know the future. My bet is that the normal factors that drive market movements will tip us off to that scenario being on the horizon at the right time just like they tipped us off that this move was coming.

On the above chart you can see that virtually everything I watch on a daily chart is bullish, confirming the uptrend. I am looking for a sell signal up here based on the weekly chart now. I think that signal will be a brief dip when and if it comes. I do think in general we are off to the races here for the balance of the year. However, there has been a ton of commercial selling happening recently, they are trying to cap this rally. The failure of the commercials to stop this rally is very bullish so far. Remember they are often very early on their positioning which is why we cannot just blindly run out and sell when they do and vice versa. Last year should have taught anyone who did not believe that. We saw commercials opposite moves all year. They were right in the end, but very large moves happened opposite their positioning prior to the reversals.

Alot of things are in place here for a sell, the one problem is that via that gap strategy that I discussed in here awhile back, the trend is actually up now. We see the massive short position the commercials have here along with the huge small speculator long position. Also the sentiment is now very bullish. I am watching for something to develop here on the short side but so far, things look very bullish. If we do get an equity pullback, we will likely get our retracement here.

NUMBERS CAN BE MISLEADING

Before I get into anything I want to offer up an apology for any recent sharp tone in either emails or posts. My wife and I rescue Saint Bernards and are huge animal lovers. At any given moment we will have 5 here on our ranch along with our horses. There are tremendous ups and downs doing this, and we just recently experienced one of those downs. I have been trying to be conscious of not giving terse responses knowing that I have been deeply effected by this. Based on a couple of emails I have gotten I may have failed in trying to avoid this. I want to apologize if anyone was taken back by something I have entered here or in a response to an email.

There is much to talk about this weekend after this recent week, so let's get to it. First, here is the conclusion of the Sugar Trade I made that I had mentioned previously. We got a large down bar yesterday which hit my 25.95 limit order to exit the trade. This was a large win for this market. Rarely does this market move this much, but as we are seeing, the recent volatility is effecting virtually every market.

I have noticed a big uptick in the readership of the blog, so I am venturing a guess that is in relation to the stock market decline. This is another sign of how complacency had set in, now people are paying attention again. As easy as it is to get lulled to sleep during times like we have had recently, there have been signs all over the place that things were about to change. Investing is a 24/7 endeavor nowadays, so keep that A game going at all times.

The one thing we know about markets is that cycles will always change, lack of volatility begets volatility, up goes to down etc. Once any cycle gets extended in one direction, there will always be a reversion. Timing the reversions is not always easy, but they do come eventually. GOLD and SILVER are perfect examples of this. We are seeing that in alot of places right now. I do feel alot of these experts are just missing the big picture here.

You are going to have to enlarge this chart to see all the things I am going to discuss. First, you can see the Commercials Hybrid is still solidly in the buy zone. This in my view is misleading, hence the headline of the post. If you look at each time it has been up here, on the surface they have been good buying spots. If you look underneath the hood, something else appears. This index is run based on a comparison to prior readings, in other words it is relative to where it has been in the past. I used 13 weeks on this. However, when the look at the gross numbers on the longs, you can see that even though on a relative basis to the last 13 weeks it is high, as a gross number it is not. The prior three good moves that came out of the higher reading all featured a noticeable increase in longs in the gross number. I have these marked with red arrows. At the current time we are not seeing that yet.

We are now drifting into a couple of key time dates for peaks. I had said the other day that we could be setting up a tradeable bounce. My feeling now is that bounce is not going to last very long. I think we are at a very short term low right here, but the bigger picture is not looking very good. I have stated that the technical damage to individual stocks has been extensive. The indexes as a whole are manipulated by the PPT, hence they look better than individual stocks do for the most part.

As to the PPT, it does appear they made another appearance yesterday, although that late rally did come from a very obvious fibonacci support level, so it could have been others as well. However, late Friday saves are a trademark of the PPT in action generally speaking. They won't let this go without a fight. In summary, I think we will rally up a bit here, then have another significant decline. This rally could just be a few days to a week. I will be on the lookout for sell entries, but am going to be trying to trade some stocks if I can find any to buy, from the long side for the next few days.

Since GOLD is the market now the world loves to watch, let's see how things look there right now.

Not too long ago in here I pointed out the reason why this market was going to decline sharply was the record high in Small Speculator Longs, marked on the chart. This coupled with a record short position with the commercial players, made this a once in a generation setup. We have now seen this decline begin. Along with it we are seeing some commercial short covering as their short position is getting smaller indicated by the red arrow. Coupled with this, Small Speculators who got clobberred buying too late are running for the hills. This is where using the COT data gets a little tricky.

All else being equal, when you get commercial buying on dips in an uptrend on the weekly chart like this, that is a buying situation. In spite of this big decline, the uptrend here is still intact. We are into a buying zone on a shorter term basis. Since we have seen conclusive proof of the current link of this market ( makes no sense but it is there ) to stocks this week, if we get a stock rebound, this market will also rise. It is my view here that when we get a unique condition like we had that jump started this selloff, that should create a very large downward move that would take place over many months. However, even if that takes place there will be opportunities on both sides of the market. We are at a short term buying zone here, it is time to look to the daily charts to see if there is anything saying to buy.

There are some divergences going on here with the accumulation and momentum oscillators. I do see something potentially setting up here this week maybe on Wednesday. However, this is far from a great looking setup. If I do any trades here I will post them, I have not really looked at this in enough detail at this point to be sure what I want to do here. For you short term traders, I would suggest looking for long triggers here on things, but if we were to take out Fridays low on Monday, the short term buy setup would be off the table. I still think we are going to $600 or lower here, but it will not be a straight move down. The bad news is that if that happens, it would likely mean stocks have taken out the March Lows also and that would be bad for everyone.