I GUESS SOME CALLS ARE BETTER THAN OTHERS

I had no idea we would fall out of bed today ( Monday ) when I said over the weekend that the Euro was a sell right here. However, I did say it and it crashed 300 points today, so obviously this call was not half bad. I was not short so it does not matter. As I have said time and time again, predictions are for cocktail parties not account balances. In any event it was a pretty good market call and it is simply proof that when you look at larger picture fundamentals that is when you get on the correct side of the bigger moves. I suggest people spend more time on setups and less on the wiggles in the oscillators, they are more important. If you get the bigger picture correct you can almost enter in any fashion you want and still do well.

I did also say I thought since we had advanced 20% in the indexes, that a pullback would happen because it was not sustainable. I appear to have gotten that right, but I blew the call at the low missing the huge up move, so overall a C -  on the stock market or worse. It does appear to me now that my short term indicators could very well setup a sell signal on a bounce up now and high re-test. Since there is somewhat of a cyclical tendency to go down into a late November buy point, I will be looking for this sell signal to develop. It is not there yet and I am not short the indexes at this point. Overall though I do think the market is going to close the year higher than where we are right now by a decent amount. Maybe that means any sells are short term or maybe no good. The political stakes have never been higher, and there is no way they let this thing fall off a cliff to end this year.

One comment on the European situation which I know is out there in the press now, that absolutely irks me. The big banks have once again been saved by the governments by the terminology is the agreement indicating the 50% bond hits are voluntary therefore not defaults and not subject to default insurance. When in the world are they ever going to establish a level playing field and quit picking winners and losers? The answer is going to be when the meddling they do creates a massive implosion that makes the last one look small. I don't know when, but I do know what. It seems in life the rules are there but if you are special, they don't apply to you. The other problem is what it takes to be special, but that is another subject entirely.

One trade I was in that I exited today probably poorly, was Live Cattle.

I am going to work through my logic of why I exited here where I did, and admit it was actually a mistake. I had mentioned this recently along with Hogs as two markets that I thought were due for a decline, which we got. The Hogs went down ahead of and more than the Cattle market. However, these two do trade quite differently at times, so I really don't consider them to be the same. We had four consecutive down closes here with a lot of overlap on the bars each day. I did a pattern search for that and found that on average this type of occurrence tended to be a short term low more so than a continued decline. I also noticed that we were heading now into a seasonal low point, and also that we were very close to a short term target I had been looking at.

I had not decided whether or not to take the near target or shoot for a bigger one coming into today. When I saw the overnight implosion in the indexes which we know drive the world right now, I thought it would likely cause a gap down opening in this market which does not have a Sunday electronic session. Since my near term target would be hit if we gapped down and traded just a little bit lower, and the pattern history showed a tendency for a bounce, I watched the open, and exited a bit below it. At times gaps can be the end of a move, an exhaustion so to speak, and this trade was just not moving a lot.

At the moment it appears to have been a blunder, but I still made a good profit on the trade and finished off last month adding another $16k to my total, so it was not a disaster. Time will tell if this was a prudent exit or not, my gut is that I should have held this for a bigger target. However, the trade is over, my logic is now exposed for me to be revealed as a pinhead or a genius, so it is time to move on. I really can't stress enough that you cannot get hung up on individual trades be they wins or losses. It will eat you up. You have to examine the trades, what you did right and wrong, and what if anything you can learn from it. After you have done that you have to look forward, so that is what I am doing.

I mentioned the bullish Bond setup was still in place, and right on cue they rise 3 full points today. I did not see a short term long entry there so I am not long that market. The path of the stock market retracement here will dictate what so many other markets do. It appears to me that towards the end of this week from a cycle stand point, we should be in the sell zone for quite a few markets. It so happens the Government Fraud report otherwise known as NFP is released Friday. Perhaps that will be a trigger for a few declines. I do find the spreading going on between Crude and Unleaded Gas to be interesting here. I cannot remember a time when it has been this pronounced. Corn and Wheat are also starting to look interesting to me on the short side but not yet.

At the moment I am flat and do not see any new trades for tomorrow as I write this.

Good Trading

When will the chickens come home to roost?

Living in California is almost like living in Greece. What I mean by that is that it is inevitable that a bankruptcy will occur, and there is basically an attempt to shift as much money as possible to the unions and others on the public dole away from the people that do currently have it. I rack my brain constantly trying to figure out a macro way to play what is in my mind inevitable, a bankruptcy filing. One way that some people think is counter intuitive, is to buy bonds when they can be bought at fire sale prices, assuming that the outcome will not be as bad as some think, and the bonds fall too far in value at certain times. That to me is a problem because when you see the GM and the Greece bailouts, you see the bond holders get completely wiped out.

I have no idea how in the world the governments strong arm these bond holders into taking losses of this magnitude. Taking a 50% loss on a bond is something that is unfathomable to me. Why in the world don't these people sue these governments, I guess I am just stupid? Some of the big funds that held GM bonds that got wiped out when they basically gave the company to the unions and told the bond holders to piss off, have substantial money. Why in the world did they go so quietly?

It is those types of scenarios that make me stay clear of trying to buy bonds at fire sale prices. The alternative situation is also at hand in the above chart. If you think the European situation is a bad one, shorting the Euro is certainly one way to play it. Had you been doing so you have certainly had a rough ride in the last couple of months. Every time it seemed to be lights out, a huge rally took place. We have had one such rally this past week on the bailout news. However, now we are in a prime sell zone once again for the Euro. You can see the commercials are heavily long, but.....

Look at how bullish the sentiment is for this market and what has happened the prior times sentiment has reached similar levels. We have had big declines each and every time, and I expect this time to be no different. I still cannot fathom how in the world we get out of this global mess when the solutions they are choosing are more of what got us here, loaning too much money to people who will never ever be able to pay it back. We are expanding credit again, inflating another bubble. However, virtually 70% of the people on the planet know this, so that is not enough to guarantee a winning trade. So, just knowing that is not enough.

It is very difficult to time bubbles as we have all seen in the last decade. The governments of the world do everything they can to extend them. It is interesting to me that Greenspan, the KING OF BUBBLES, is commenting on the European situation in negative fashion. Has anyone ever gotten a bigger hall pass than this guy did? I do think from a bigger picture perspective, it is a lead pipe cinch that the whole European situation blows up for real at some point and it won't be in the too distant future. Of course the question is when, and I do not know the answer. What I do know is that it is likely to be at a time where we have excessive bullishness in a downtrend like what we have right here.

The Euro is a sell in this price zone

BONDS

I did make a losing trade in the 10 year Notes this past week trying to take advantage of what I perceive as a good buy setup. I covered that here, where I went in, why I bailed out of it quickly, and the net result. The problem of course is that when the stock market rallies 20 percent in a couple of weeks, the bond market is going to be hard pressed to move up. The whole world is being driven by stock prices, so that always has to be kept in mind. The daily charts do not show anything close to a long entry opportunity yet, so this is more of a larger picture setup that is in place. If you notice the last time we had a setup like this we did rally for 2 or 4 weeks. The main driver of this setup is the sentiment is very bearish, which is of course bullish, along with a seasonal up bias.

This next market is the Canadian Dollar, which is setting up a good short entry possibility.

Once again you can see the very bullish sentiment reading here and the seasonal coming due for a decline. The commercials are heavily on the long side, but remember I alluded recently to a very prominent newsletter writer about the COT report. He has once again swung and completely missed across the board on his reading of the recent decline, having called for more. The point is if he can't get this correct after all these years, it is not the end all what the Commercials are doing. Regardless of the commercial heavy long position, this market on a weekly basis is close to being a sell setup.

This is all I have for Monday, there are not any immediate daily setups I can't live without right at the moment. I do think we are going to retrace some in the stock market since we have risen 20% just vertically for the last few weeks, and that is unsustainable even though overall I think we are going to rally through the end of the year.

Good Trading

GOOD QUESTIONS

ya said...

Chris, Thank you for your insightfull blog. Trading diversified set of markets on a short term basis seems to have many appealing characteristics. However many questions arise so your answers (public or private) are highly appreciated.
Minimum & Optimal account size suitable for this style of trading?
Annual rate of return you were able to achive?
The biggest drawdown? (% of capital)
The longest unprofitable period?
Total return over time?
I think your results over 25 year trading career can be very illustrative.

Lets start off today by addressing these questions that were asked yesterday, I think they are good things to discuss. There are so many BS stories from people in so many businesses about how easily you can get rich etc.. The false claims in our industry are really outrageous at times. In spite of all the false hype I can assure you of one thing. Most of the people who sell these systems or methodologies promising great riches will come from them, do not make much if any money trading themselves. How do I know this?

For any of you that are regular readers of my commentaries, you are aware that I do mention at times that there are tools I use that are not shown in some instances, that help me dial into an exact trade entry. The main reason I do hold a few things back is that if I were to show everything, at some point these tools might stop working for me. I make my money from trading, I don't sell anything here. I don't make any advertising money here. I trade. Why in the world would I sell my lifeblood material for any amount of money? If those sales were to result in the tools eventually no longer being effective, that potentially could cost me millions of dollars in potential lost trading income.

I ran into one group recently that talked to me about coming aboard with them and I told them I was not interested, but I did sit down with them to listen to what they were up to. They were developing a trading system that was essentially mechanical scalping across several markets, mostly forex. The system was automatic and the trades were done through IB (Interactive Brokers). This on the surface was not necessarily bad, but I can tell you that you are competing with the smartest people in the world trying to do this. I found out the guy writing the program to generate the trades was not a trader and never had been! So picture that, one guy with no experience writing a program about something he does not understand, and they are going to compete against the largest hedge funds in the world scalping! Their advertising indicated pretty good returns, but it takes about a million trades to get them.

I asked them a few questions just so that I could understand completely where they hoped to go with this. During that time "their trader" happened to come into the room. He seemed a decent enough guy just in general, seemed bored. Their system is completely automated so what exactly does their "trader" do I wondered to myself? They are now out marketing to the public so we will see how they do. I suspect they won't do as well as what they are representing but that is just me being a party pooper.

The reason I told this brief story is to make a general point that sudden riches in anything in life are possible, but be very cautious with those that promise them to you. You can obtain them for yourself through hard work and perseverance. One of the best tips Kevin Haggerty ever gave me in my very early days as a trader was this. "Trading is nothing more than a bunch of probes. You have to put yourself in position to get lucky." 

With this in mind here are my responses to these questions.

Account Size

This is always a tough question to answer because many people simply don't have the optimal amount which is my view would be $50,000 or more. You do not have to have that much to succeed. However, to trade multiple positions and have the correct amount of risk, meaning it is not so high that a few losses wipe you out, the larger the better. If you start with $10,000 you can still succeed, but keep in mind you probably have to trade one mini contract of whatever it is you are looking at, so it will take you a very long time to build up anything substantial. Also, with that small of an account, the numbers of markets you can trade shrinks down quite a bit just because of margin requirements. I think many traders start off with small amounts and trade the ES, and in my opinion, that is the hardest market to trade there is. As a result, that is a tough road to go down.

In summary, to trade the way I do completely without worrying at all, $100,000 would be optimal, but $50,000 is acceptable. You can get by with less but trade offs start happening as you go down like what I mentioned above. You will have to cherry pick your trades so much that you may miss the best ones due to lack of margin. You also have very little wiggle room in case you start off poorly, if your account is small.

Rates of Return

This somewhat ties into the preface in today's post. It is much harder to make a higher rate of return on a larger amount of money than it is on a small one. Many years ago a friend of mine who was quite intelligent created a way of predicting one day price direction and turned it into a trading method, and found some obscure place where you could bet really small amounts. The details I don't completely recall, but he was bragging about a 100% return which obviously sounded impressive. When we dialed it down, he had actually taken $5 and made $5 for a total of $10! It was actually betting on the daily direction of the DOW. Obviously turning $5 into $10 is not really much to brag about for most people.

The one constant of this which will not change regardless of account size, is the ratio of return percentage to that which is risked. If you have a $10,000 account and risk $2000 on a trade, it is a 20% risk and if you make $4000 on the trade, that is a 40% return. If you risk that same 20% but have a $100,000 account it is a 2% risk and the same gain is a 4% return. The ratio between the risk and reward is the same, 2 to 1. You should never risk 20% on a trade once you get a decent sized trading account, but you really can't avoid it when starting off and you only have a small amount to trade with. As a result, those with small accounts are going to have higher percentage returns. Therefore, I think return percentages are not as meaningful as people think. If you made 100% on $10,000 that is only $10,000. If you made 20% on a million dollars that is $200,000, which would you rather have, the lower return or the larger amount of gross dollars?

As to what to expect with all of this in mind? If you were able to make 20% per year for 20 years in a row, you would be considered the greatest trader who ever lived, assuming you were trading a reasonable amount. I could do that without any doubt just trading $20,000 each year only. In other words, Jan 1 establish an account with only $20,000 and by the end of the year have $24,000. This would be a layup, but it would not amount to any real money. Again, it would be misleading. As a result of all of this, when you have smaller balances you should be able to get much higher percentage returns if you are successful, 50% or more on an annualized basis. For those who want to do a bunch of fancy calculations with a spreadsheet about how you compound your way into a fortune, starting with $10,000, keep the following in mind. The returns are not linear in this business. There could be a losing year, and I can guarantee that you will not make the same return each year no matter how good you are. There is far too much random activity in the markets for your returns to be the same every year. I have never had two years with the same gross dollars made or same percentage return as another year.

If you learn how to be a profitable trader you should be able to make 50% a year on smaller amounts, and 20 to 30% on larger ones. I am hesitant to get into my exact returns because it gives people a false impression. However, what I will say is that my return percentages are higher than that. I have had years where they have been way way higher, but also years when they have not been. I also had some losing years when starting out, but never have had a big loss. This leads us into the next question, drawdowns.

Drawdowns

The largest drawdown I have had as a percentage occurred last year, and it was just under 17%. Keep in mind that I risk 2% per trade, so it was a pretty bad period when I got hit for 17%. I just could not get anything right for a couple of months. However, if you consider that even in that case, I only dropped off just under 17%, I think it was 16.7% to be precise. My accounts have pretty good sized balances in them especially when I add them all together, so from a gross dollar standpoint, it was a good chunk, but on a percentage basis, not a big deal. It sure felt like one at the time!

When you have smaller balances, obviously once again the math works against you on drawdowns. The percentages will be much larger. I do think percentages in general matter, but they do not mean as much until the principal amount gets large just because of the math involved. I know traders that commonly have 30% drawdowns yet make good profits. I personally could not stomach that over and over, so this is a matter of personal choice. The more aggressively you trade the bigger your drawdowns will be. I like risking 2% because I know that even in the worst case scenario, 17% is how far I will fall. A couple of years ago I was in talks to run a fund and we ran into a problem that I did not anticipate.

When we showed potential investors my returns they did not believe the percentages I was achieving with the drawdowns being so low. These were brokerage statements we gave them, so there was no way to doctor them, they were what they were. These were affluent people who were happy with 10% every year. One thing you will find with very wealthy people is that they know the math works for them if they just make 10% every year compounding it, so they do not like risk. They thought that somehow there had to be more risk involved than what my statements were showing. This makes me wonder how wealthy people got snookered by Madoff having this experience myself?

After we had trouble, I was asked to modify my trading style to make less money, it would be easier to sell clients on! Of course that was the end of things and back into my own little world I went.

This is the best I can do covering drawdowns. I think if you have a method that is decent, the drawdowns should not be greater than 20%. It is always possible to have one outlier event or some one time odd thing that carries you a little past that. If you are regularly going 30, I think you should change what you are doing.

Longest Unprofitable Period/Return over time

Once I became a profitable trader, I am not completely sure, but I would venture to guess 4 - 5 months is the longest period that overall I did not make a net profit. I do not track such things so I am not sure on this. However, bad memories tend to last, so I think this is accurate. I also have absolutely no idea at all as to what my Total return over time has been. I pull money out of accounts to pay for things, so that makes this type of thing a pain in the ass to track and I don't really care anyway. Over time I have mad a decent amount of money. Some of my accounts are IRA's and they have some pretty good profits in them which I could calculate percentages on, but I don't really care.

I used to make things very mechanical. I had to know what percentage would win or lose. I had to have high percentage probabilities, I had to know every nook and cranny. Then something happened, I grew up and got it. It is the gross dollars you make that matters, the rest is just BS. Gross dollars make mortgage payments, buy GI Joe's with the kung fu grip. They get hot chicks, and get them boob jobs to make them hotter. They get nice cars, etc.. Percentages won't get you any of that, they just make you sound smart at cocktail parties. If you develop a decent trading approach, the percentages take care of themselves. The most important percentage to pay attention to is what percentage you risk per trade. I don't think any other percentage matters at all. The extension of that is that whatever that risk percentage is, your wins should be double that mark or more on average. If you accomplish that you don't even have to be right half the time to succeed.

I think what most people have to do is grind this out, take your lumps, and find your own way. What works for one will not for another just as it is in anything else in life. Once you get going you can dial some of these things in a little better. I know how much money I need each month for bills, a staggering amount unfortunately. That is my minimum goal every year, make sure I make at least that amount of money. Once I get beyond that, the fun starts.

I hope this is helpful. I am not showing any pretty pictures today other than this one which illustrates small, medium, and large, like what I was mentioning with account sizes. This little shrimp Vinny wants to be a big account some day just like all the rest of us. He has his little stick which is his version of one contract of the E Mini S&P.

I don't have much market commentary today. After you get a day like yesterday with the big ranges everywhere, we often get these quiet crappy days like what we have going right now. The way things look to me know, we are working into some selling opportunities the first or second week of November in several markets.

Have a great weekend

MADE A MESS

It is days like today where I distinguish myself from most blogs on the markets. In an age where most never admit to ever having lost in a trade, I am going to review a couple of awful trades I just made, where I got out of them, and why I exited them. The first trade is the 10 Year Notes trade I mentioned I was in. I also said at the time that I had small size in it and that time would tell if I would be happy or glad about that. Time has now given us the answer, I am glad! Also, I decided to front run my stop and get out way before we got to it. Typically this is not something that you should do. However, you have to think your way around the playing field, and I saw something developing that I felt invalidated my trade, and I was not going to stick around just to give the house more money and feel good about myself that I honored my stop.

This business is about minimizing losses and maximizing gains, not about being right. I noticed after the entry bar that got me in, which was that big outside bar that closed right on it's high the day the stock market went down 200 points, that some pretty strong divergence was forming with the POIV indicator. Even though this indicator has been speaking quite a bit recently, it typically does not. It is the nature of this indicator to typically confirm current price action, diverging rarely. When it does diverge I pay attention. Once I saw this with price confirming it by retracing sharply as stocks rose, to me it was a no brainer to pull the plug on this last night. Readers know I have been very bullish starting about 2 weeks ago for stocks, and I was now seeing confirmation of the moonshot there taking place. It has become clear I was dead wrong about even a short term pullback. If you remember the chart I posted over the weekend, it  showed virtually no pullback was going to happen if history was to repeat itself. 

There was certainly no reason to be long in the Bond markets with a huge stock rally taking place. Ironically, the catalyst on a very short term basis appears to be a deal with a bunch of countries with no money, lending to others that have no money and no ability to pay it back. This is why logic at times can kill you in the market place. Common logic would tell you that making a deal to allow someone you just loaned money to recently to default on 50% of it, is not good news. Aah but in our world today it is!  So with this back drop of a stock rally and a bond decline, I knew I had to be careful about short positions in general. Recently I mentioned I was bearish on the Energy markets. Unleaded Gas in particular I mentioned the other day at the end of my post, was setup for an entry. As is typical, when I say that, I do it. There are some exceptions and some game time over rules that take place, but in general the setups I point out I trade. In this case you can see where I entered this trade.

The good news was that initially this trade went right in my favor, and I mentioned the other day how strange it was to see Crude up big and Unleaded down 300 in the same day. There obviously was some spread trading going on with big volume that day. When Crude sold off hard late in the day, the Unleaded Gas rallied hard, that was proof of some type of spreading going on. However, the risk on risk off nature of our world right now is that most commodities rise when stocks rise and fall when stocks fall. As I watched this frustrating trade just go nowhere when it should have fallen off a cliff in my mind, I noticed something going on similar to the 10 year notes. The POIV was diverging, in this case showing strength by diverging substantially upwards on the 2 bars with similar lows. When I considered this along with the stock ramp up that was going on, I quickly decided to head to the exits. In this case I got about $600 a contract out in profit, whereas with the 10 year I lost about $375 per contract.

Overall, two crappy trades, one win, one loss, but a net gain of a small amount. The point of this is just to show that you have to think on your feet in this business, and also I do have losing trades, lots of them. Show me someone else that admits this.

I had been looking at a pattern in something I use that is not shown, which indicated if we traded below Wednesday's low on Thursday, a short entry could be taken in the NAZ. My opinion was that the market was going up, but I don't trade on my opinions. I trade based on my patterns that I use. Well pre-market open we are up huge, so this trade is off the table. The travel amount on this trade is way too far. The market would already be really over sold by the time it reached the short entry point if it went down that much. It is time to forget the short side for the time being. I do have some things looking forward that could potentially give a mid November short term sell signal, but balls to the wall for now. This market has been difficult to say the least recently, but it has for the most part conformed to the seasonal bias for a rally. As I have said over and over, cast aside your opinions on our economic situation, the markets and the economy are two separate animals, never more so than what they are now. My short term indicators are not confirming this rally, so I won't be trading the long side of it yet. At times these indicators diverge against market trends for months, one of the problems with any technical tool. It is knowing when to ignore them that is the art of trading. At this point I am just sitting on the sidelines in the stock indexes.

This last chart is Soybean Meal, a market that appears to possibly be setting up a long entry. I have to confess that I am not wild about this one so I do not know if I will do it or not. Everything else has launched, yet the Grains are kind of stuck in the sand. I generally don't like playing laggards so I am contemplating this one. We do have a pretty clear trend line drawn in here, and the seasonal is up here, so it is a matter of looking at my confirmation tools and they are not glaringly saying must do yet. They are however telling me I could do this one. Well that is the wonderful world of trading isn't it? Another judgement call is at hand.

I hope I have made my point today which is mostly that no matter what you use to trade, you have to be constantly on your toes and thinking about what is happening. We trade because we think we can predict what will happen next and make some money from doing so. However, sometimes things go wrong and you have to think your way out of a few messes. Today I went through how I just did that and came out ok. Keep your losses under control, the wins will more than take care of them if you do.

On a house keeping note I know someone who I think had good intentions and was not spamming, sent some links about maximizing blog traffic. I did not let that comment through just because I was not completely sure. However, the name at the bottom was the same as someone who does make comments here, so I apologize on this. I have no idea where this blog will take me, or where I will take it over time. For now I am just interested in posting each day and hopefully helping people. This is not a money maker on any level, so I am not going to pay for traffic. It does seem that as time goes on more and more people find it. I don't know how they do, but my traffic is steadily increasing and that is good enough for me. Thanks for the thought.

Good Trading

YOUR OWN PRIVATE IDAHO

I may be  misquoting this, but I think Steve Jobs was the one who said " we are born alone, we live alone, and we die alone." If he was not the person who coined that phrase my apologies, but someone prominent recently was quoted as saying that. When I first heard it my initial reaction was that it was a terribly negative view of life. However, after I thought about it for awhile, there is actually quite a bit of truth to it. One of the negatives to being a trader is the isolated life you wind up living at times. Most of your friends if not all of them, have no idea what you do, and really don't understand it even when you explain it to them. Further, you need to isolate yourself to some degree to not get caught up in all the noise that is out there that can distract you from making good decisions. For those old enough to know the song by the B52's, I am living in my own private Idaho.

I have a little private Idaho I constructed just off my front porch for little Vinny, so he can go outside but not get loose. We have coyotes all over the place where I live and although he has the worlds best bodyguards with my crew, I can't be sure they will always accompany him any time he has to go take a pee. He will be big enough pretty quickly where the coyotes won't pick on him, but he is not at the moment, so I guard him with my life. One day he will guard mine with his.

I don't know if it is instinct or environment, or both, but my Saint Bernards have always lived to chase those pesky little coyotes. God help the Coyotes if they ever catch them, they will tear them into 1000 pieces. The coyotes know this innately, so they really motor when my dogs catch scent of them. They like to set traps, but there can't be enough of them to trap the big guys I have when they are traveling as a pack. It is interesting how nature seems to have it's balance. Animals prey on what they know is easy pickins, and flee from what is not. Since I live in the hills, I can observe this every day. My horses run from Coyotes, who would think that, they could kill them with one flick of the wrist. However, they don't know that and horses are prey animals not preying animals. They know what is good for them and their instinct is to flee. I have seen many times my horses charging up toward my barn, while my dogs run at full speed in the direction the horses are running from. When I see this I quickly grab my 12 gauge and go after them just in case it is a mountain lion. Nature in balance, although I guess I am tipping the balance with my shotgun, but as I always write, I like the odds in my favor. We need to do the same thing as traders. We need to flee from trouble ASAP like my horses do. We also need to accept that there are cycles of life and that applies to our results.

Forget about the challenge of trying to figure out the markets complex puzzles, even the easy ones are difficult. If you are looking for a challenge, there is plenty here to challenge you just trying to ferret out good trades. Do not get carried away trying to grind over one you are not sure about. Whatever  the setups you use are, be they moving average cross overs or complex quantitative analysis, stick with the high probability setups. If I find myself hesitating over something like I am with the stock indexes right here, I just move on to something else. When I force trades I get bad results. When I said the stock indexes could be traded either way the other day using a stop and reverse type of strategy, those are situations I usually stay clear of. I miss some that I would have been right on by doing that, but I also dodge a lot of dumb trades that might effect my psyche.

As Clint Eastwood said, "a man has to know his limitations." I do know mine or at least some of them. I think the best way that you gain confidence is through success. There is no better feeling than a perfectly executed trade, literally. You feel like you have mastered the world. At the same time there is nothing worse than a bad trade, it has the opposite feeling. What we have to do is eliminate those highs and lows to the best degree we can. One of the reasons I don't watch overnight trades that I hold for days to a couple of weeks, is that it takes out a lot of the highs and lows. I don't like that "wow I am up 23k awesome, oops hang on, no now I am down 5k" etc.. It does not make me more money babysitting trades that I know I am trying to hold for longer periods than a few hours. I know I will make a bad decision to exit if I do this, so I don't. There of course is the moment of truth when I pull the charts up after the close to see what happened. However, interestingly enough, even when they turn out poorly, the reaction I have ends quickly. The opposite of just living watching something just go against you all day long until you get stopped out, it just too painful for my taste. Ignorance is bliss. When I looked today and saw I got stopped out of Coffee it had almost no emotional impact at all. This is ideally the way it needs to be.

Cattle at this point is an example of a market I was not sure enough about to make a trade Tuesday. I know I want to be looking for sells there, no doubt about that. However, some of my short term indicators were not quite giving me the correct "look" coming into Tuesday, so I found myself trying to justify selling a break if one occurred. I then realized I was forcing that trade, so I bailed on that market for Tuesday. I did appear at the time of analysis that something could be set up for Wednesday if the market does not break Tuesday, so that is what I put in my notes and I moved on. Ironically, Cattle dealt us a tricky outside bar that then went back down and closed low, what is called a Search and Destroy day by the market profile people. Had I traded that market today I would have been stopped out most certainly for a loss.

A bit of housekeeping here, Coffee and Bonds/Notes. First the Coffee trade that wound up crappy after a dynamite start.

I had the general area of the target I was going for, and I did have orders in that neighborhood today as well as a stop below yesterday's low. Unfortunately, this market got crushed today, so the stop was executed, taking me out with less than half of the max closing equity that the trade had at it's peak.

Get over it! When trying to catch larger moves, this happens, it is the nature of the beast. I had an inkling and put it in my notes that I thought the stock market was going to decline Tuesday and it would likely drag some of the commodities with it. However, that was just a gut feeling, and I don't trade off those types of feelings. Even though you may guess correctly at times, over time that type of trading will get you wiped out. It is still better than a kick in the ass since it made some money, so time to move on.

I mentioned that I thought the Bond market was setting up a buy, and I got into that trade today. I tried to get some of the contracts on via pullback and we never pulled back, so I don't have the full size on. Time will tell if I will be grateful or pissed about that one.

You can see where I went long here. I felt Notes were a bit stronger than Bonds, but it is basically the same trade. You just wind up with more contracts here than in Bonds since the stops are always smaller. This trade clearly rests on the stock market. If we just quickly reverse back up in stocks, this trade will likely fail, just as stocks drive virtually every other market as well. I mentioned recently I felt this market was ready for a rally, now we will see. I also mentioned Gold was setup for a rally, and that has moved up nicely.

I think the Naz of all things is actually setting up a sell signal depending on how tomorrow closes. I also think Cattle is setup now for Wednesday as a sell if it breaks down some. Today was the wildest intraday swings in crude I have ever seen. I still think the energies are sells here, but today was radical. At one point Crude Oil was up over $3 and Unleaded Gas was down 300 points. There obviously was some intraday big time spread trading in the energies today. By the close when Crude sold off Unleaded rallied. The whole day made no sense at all. Nat Gas and the Grains are also tempting on the long side.

Good Trading

NEW SHERIFF IN TOWN

It might be hard to believe, but little Vinny is 8 weeks old, you think he might be a big guy by the time he is full grown? I think we have our future center for our hoops team. My wife and I decided to get one puppy to try and get one dog to live a long life with us. That is what we had been trying with our youngster Reggie when we lost him, so we decided to try it one more time. We were fortunate to be able to get him from one of the top breeders in the country who had planned on keeping him and using him as a stud/show dog. They changed their mind at the last second, and we were lucky. We have also rescued a 3 year old from Vegas, so we now once again have a full roster of 5. Four rescues signed as free agents, and now a lottery pick. I will never completely get over the heartbreak of the loss of my two boys we just lost, but there comes a time in all of our lives that we deal with tragedy and we have to try and move on.

One thing I have learned as I have gotten older, is that moving on does not show disrespect to those we loved that are no longer here. It is part of the natural cycle of life, and losses are what make us appreciate those things in life that are important to us. I do not consider myself to be in any position to tell anyone else what they should do. I simply tell people what I do and what I learn, and those who read here can hopefully benefit from it.

These types of things are no different than trading. No matter who we are we will have strings of losses, and we cannot let them get us down when they come along. It is easier said than done, a string of losing trades can shake your confidence, and get you out of sorts very quickly. One thing you have to learn is that you have to move on and not dwell too much on bad trades. Study them, learn from them, then move on. I was actually trying to remember the one bad trade I made this month right at the beginning, and I could not remember what it was. I had to look back in my trading journal to find it. I guess I practice what I preach! It was only a couple of weeks ago and I could not remember it. I suppose it is always possible that was a senior moment, but I hope not.

I am still holding out some hope albeit minor at this point, that we get some minor type of retracement here to setup a long entry to hold for a bit. It is not that important to me, but for anyone who might have been waiting for the green light from me to get long, I blew the low point. I usually try and get a higher short term low when trading against a trend this strong, but we got a V bottom. These types of spike lows do happen at times, and I usually but not always, miss them. When I was younger I had all types of fancy formulas to try and catch them, and just never got it right. It is no way to trade trying to pick spike highs and lows. I implore newbies to pitch the efforts to try this. It is easy to craft systems to pick these based on past data, and I can tell you that it is virtually impossible to do it consistently.

Here is something I came across tonight during my prayer session for a pullback, and it is somewhat alarming.

The above chart is that of the weekly Naz 100, the leader in this recent rally. You can see we are almost back to the yearly highs with this already. However, look at the huge amount of divergence in the POIV accumulation/distribution indicator. The readings in it are barely off the lows! This is very surprising. If you notice just the last rally, this led the way as it typically does during trend moves. I have to view this as a major red flag, and under normal circumstances, it would tell me to look aggressively to short this move.

However, we have the PPT lurking along with the seasonal and election year tendencies, so the prudent bet is probably this will catch up. It does bother me enough to back me off on my long entries I was contemplating for the time being. I do not like trading against this even though at times I do it. The other indexes are still under their 200 day moving averages, and extremely overbought. I am still waiting for a pullback, and this tells me it might be bigger than I thought if it does happen. I think the PPT will aggressively buy any pullback here, so this could be very interesting. I am still leaning to the rally scenario in spite of this, but this cannot be ignored. Look how it telegraphed the decline in both May and July.

Here it is again in the Sp 500. I think it is telling us at least for the moment, that this is overdone temporarily. We are also seeing light volume on this rally, but the whole rally off the lows of 2009 featured light volume also. In spite of what is written and commonly talked about in regards to volume or lack thereof on market moves, and what that means for their staying power, there is no consistent relationship between these two. Do your own research and you will see that quickly. Of course that 2009 - 2010 move was driven mostly by the Fed and their buy programs during the last hours of the trading days. 

I do not know if that is happening now or not, but it is not as obvious as it was back then if it is. Sometimes it is blatantly obvious and other times it is not. Once QE3 is launched we can throw out all the technical stuff we look at and just look long. One great pattern after another that has worked for years broke down during the 2009 rally, so it gives us good precedence for the power of the QE programs. It could be that a sharp retracement could give them the footing to launch QE3.

Other markets that seem in play to me are Unleaded Gas, the meats, and Natural Gas might be setting up a buy here soon. I also think the 10 and 30 year and setup for a rally still so buy signals should be taken there if you have them. I am still in the Coffee trade with trailing stops and targets above, so time will tell where I get taken out of that one. My trailing stop insures a profit now so it just becomes a matter of whether this is really going to run, or if it is just a small little move. I guess I am the only writer who does not know, everyone else seems to always be sure and never be wrong!

Good Trading

LET HISTORY BE OUR GUIDE

Those of you that have been regular readers here of my commentaries know that I base much of what I do on historical patterns as opposed to forming complex economic views of what I think will happen, then acting on that theory. I have found that although history does not usually repeat itself exactly, it generally shows patterns that play out in similar fashions. The reason I think this happens is that price graphs are essentially summations of collective human emotions. They include the calm, the lethargic, the frenzied, and the irrational all in one line on a chart. Since the collective human psyche has not changed in hundreds of years, I think it is the best probability to bet that it will not.

There are those that prefer to take the path of the different this time argument when they predict things to occur that have never happened before. To be clear, there are events that do happen for the first time, and if you are able to correctly call those in advance, you will be very wealthy. The GOLD price move is one such example of this, there has never been anything like this that I can find, and those who predicted it and went long 10 years ago have done incredibly well.

I am willing to miss those types of things due to the rarity of them, and perhaps I am just not smart enough to figure them out anyway. This brings us to the discussion of the day, have we seen the low in the stock market, and where do we get long?

One of the reasons I am a short term trader is being exhibited by the stock market right here. It is so difficult to pick the exact low, and if your success requires you to do that, your results are going to be mixed. When you miss a major low like the one we have just seen, you find yourself in a very tough spot as to where to "get in." As a long term investor you cannot afford not to be in, so you have to chase it. As a short term trader, it is just another trade and there are plenty of other markets to play in if you miss one somewhere. I miss trades all the time, and I have missed this one, or have I?

The top two charts show a search result for capturing when we have had a price pattern like what we have had, while accompanied by bullish sentiment, and commercial buying. I was surprised to see that the best match I found also occurred at virtually the same date during it's respective calendar year that we find our self at this year. In that instance, we never had a pullback of any kind, and the market just took off. If you are a long term investor at this point, with us being at the time of year we are, and the long term cycles as bullish as they are, I think you have to get long here.

I am glad I am not because it would be very uncomfortable for me to get long after a monster short term rally like this where the market is incredibly overbought. In the 1998 example above that I think looks remarkably similar to our current situation, we were also just underneath the 200 day Moving Average. If we had dialed down to the daily chart, there was about a 5 day very small sideways to slightly down pullback that shaped up right about here. At this point I think if that were to take place, it might be the last chance to get aboard here. For my purposes, I will go on my short term indicators to drag me into this. They are really a marginal call right here. There technically is a buy pattern, but there also is a potential sell pattern if Friday's low were to be taken out in the next day or two.

In situations like this you can stop a stop and reverse type of strategy. Certainly if we were to trigger the sell signal and the market reversed back up quickly, that would be a green light special to go with and and go long. The Naz has been by far the leader here being close to it's yearly highs already, so from a short term perspective, that would be where to look for longs.

Net net, the price action is speaking here in my view, this market is ready to go, in fact it already has. As to whether or not it pulls back now as I have been stating I thought it would, I do not know. I do think we have seen the low. I have also scrolled through a ton of individual stock charts just to get a pulse on what is going on underneath. I do not see very many setups in either direction for trades Monday. So many stocks now look just like the indexes, that the diversification idea has jumped the shark. I just don't get a definitive read in either direction from that review, so it does not help much. Since I am on record as saying I thought a pullback would happen, I have to stay with it. However, if I am being completely honest here, which is what I always am, I am unsure about this market now.

I wish I could give you a definite call in either direction, but I just don't see a trade here. When I am unsure, I don't make any trades and I look elsewhere. From a long term perspective, we are close enough to where a low will be that if you have a long time horizon, it is probably time to get in and live with a pullback if it happens. You could also get partially in and add on a dip if one occurs.

What else do we have to look at here?

Here is the Coffee market, one I had mentioned a couple of weeks ago as a buy candidate. I have marked off three possible long entries that I saw. I just entered on the most recent one on Friday buying at Thursday's high. So far it looks ok but you never know, I have seen days like this followed by days just like them in the opposite direction. This came down to judgement as to when the price action was actually confirming a trend change had happened. The very first entry to me was not enough of a price confirmation with how strong the down trend had been. Had I been in that I would have been stopped out for a scratch on that large outside bar down. The second entry I have marked off, was in hindsight the best entry. My entry was very close to that same price and I did not have to sit through that one bar that would have almost stopped me out. As a result, I am comfortable that I have entered this trade decently. In reality I should have played all 3, but I did not. I doubt I will ever do everything perfect, so I don't sweat that too much.

I have one short term target displayed on the screen. Because of the larger picture bullishness on the weekly chart, I will likely go for a higher target on this one. One thing I do know, most of the time when I have large targets they don't get reached. Most of the time the trailing stops get hit, or something changes, like it did with  the Sugar trade, and I decide to get out differently.

Unleaded Gasoline is a market I am looking for a sell in. The energy complex in general is all setup as a sell. There are a couple of proprietary things that I don't show, that are telling me this is the one of the three major energies that I want to short. It remains to be seen if we can get a decline in anything while stocks rise. Now that there is talk stirring about QE3 which anyone with a pulse knew was coming, we may see the FED to another inflation attempt. These guys are just unbelievable. Who in their right mind would be willing to trade off ruining the lives of hundreds of millions of people, just to artificially raise stock and hopefully, real estate prices. Yes you read that right, if they create big inflation, it is going to screw a lot of people but they don't care. They want to try to trick everyone into thinking everything is alright and they should start spending to lift the economy. The whole premise of our economy is so screwy. The whole thing is based on people spending beyond their means and the FED creating bubbles so people can reap windfalls to pay off the debt they stack up.

The problem of course is that people get greedy and don't take the money when the bubbles are there. They actually ramp up the spending even further beyond their means due to the wealth effect of the bubbles, and it creates a death spiral.

Someone needs to tell these jerk offs to stop doing this. It is incredible the hall pass Greenspan got, he started this whole damn thing.

Good Trading this week to everyone.

PRICE RULES

We all are guilty of analyzing til the cows come home, trying desperately to cheat the future. We have all of our fancy little squiggly lines that supposedly tell us where prices are going in the future. The sobering bottom line to all of this activity, is that price rules the day. Price determines everything about our livelihoods as traders. I went on record as saying I think we are going to have a retracement before the year end rally kicks in. Guess what, who really cares about my opinion, even I don't! I never trade based on my opinion. I won't take any shorts up here even though I think we are going to retrace until price tells me it is ok.

 What exactly do I mean by that? If we look at both the stock indexes and Crude Oil ( a market I said was potentially setting up a sell signal ), you will be able to see my point. I am just showing the SP 500 here but if you look at Crude on your own, the same argument holds.

Here are two scenarios marked off that should amply demonstrate what I am talking about. Prior to the July meltdown, I was very bearish, but had not shorted the market. We were kind of drifting along and although I had all sorts of fancy math telling me the plunge was coming, the price had not confirmed it. You certainly can take positions at the market when you are really convinced a move is coming, but that is a very difficult proposition. Trying to manage an entry like that, where to put your stops etc.. becomes very difficult especially if you are a short term trader. In my view you need to have some type of price movement in the direction you are looking to "pull" you into the trade. This will give you defined risk, leaving you with a stop and exit point nearby. It will also confirm that at least for the moment, price momentum is in the desired direction.

If you test systems out the one theme that constantly rings true which is in contradiction to this is that stop losses always diminish the test results. Virtually every system I ever developed or traded live, performed best with no stops when in the development stage. However, a funny thing happens when the opening tip off occurs. Many of these classroom results get completely whacked! It is one thing to look at a bunch of SP 500 trades and see that 83% of them won with an average profit of blah blah blah. It is another to be in one of them where you are long with no stop and the trade is 40 points against you and accelerating away.

This could have been the case right here for me. I had indicated that price entered my Weekly sell zone around 1200 and we are at 1228 as I type this. How would you like to be short and be that much out of the money? That is just not prudent, and if you trade like that at some point you will get wiped out. The solution is pretty simple, just wait for the price action on a short term basis to make some type of pivot, break a trend line, something basic like that. When this happens you at the very least have an indication that the freight train may be stopped for a time, and you can take a shot. What does get confirmed in testing things mechanically is usually the accuracy gets better with stops, it is just the dollars won to lost never improves. Since we know in general the real world will treat us more harshly than the same lab where we develop things, I always defer to what works in actual trading not what should.

Back in July we did get a trend line that was nothing fancy, just a very obvious one, to break. I have to admit that I had shorted a bit before that front running the trend break by a little. However, I did this with a tight stop knowing that it was possible I was early and we were not quite ready. When price broke the trend at that point I deemed it as confirmation that the trend might have changed.

Fast forward to today. I have said that I thought we were going to retrace one last time before a big rally to end the year. I am not bearish like I was in July, it is more of a cyclical timing thing. However, in either case, we are nowhere near breaking a trend line or forming a lower short term high or pivot as some would call it. As a result, no shorts yet. Today, if we were now to take out yesterday's low in the Russell, I would deem that a possible short term shift or trend break, and it is a shortable event. I probably will not take the entry if it develops, because overall I am really bullish, but it will be a game time decision.

The point of all of this is that price patterns keep you out of the trouble that the larger picture analysis can get you into when looking at setup markets. Market setups are often against the very short term trend, so you don't want to get run over. This is why I always stress setup markets are not entries. I need to have both a setup and a price confirmation to trade, even on day trades. In this case with both Crude and the Indexes, both are not there so there is no trade.

Here is another example, GOLD. I am bullish here due to the weekly setup as I have explained recently, for a rally into the end of the year/beginning of next year. However, there is nothing in the price pattern at this point that confirms this to me. There has not even been a basic trend line broken yet, and price is making lower highs and lower lows. There is no market structure in place to justify a long entry to me yet. As I have said, if the lows from last month go I could be completely wrong on this long setup. I am letting price tell me when to get in, not a bunch of fancy wiggles that tell me I can go in right at the market and hope I catch it right.

I hope I have made my point today. If you happen to be a long term investor who is really bullish on something like GOLD and want to hold it for years, this type of logic does not apply. In that instance you always want to buy on extreme weakness whenever you can find it. I think most readers realize I am a short term trader, so these discussions are along the line of how I go about doing what I do. I am not attempting to "convert" people.

Have a great weekend

TIME TO GO ON THE RECORD AND RISK BEING A FOOL

One of the things I risk every day doing this is be thought to be a fool by people all across the world when I am wrong about something. One harsh reality, is that the only thing I can be sure of is that I will be wrong about some things. That is not meant to be a negative thought, but if you think about it there is logic to that statement. I remember in the days when I had my trading service, I always told people the only thing I could guarantee was that there would be losses. I certainly could not guarantee there would be gains. Let's face it, when trading we know that every trade will not be a win, but every trade could be a loss. A sobering thought, but it is reality.

Now that I have picked up readers from literally every country on earth, I risk being a transcontinental idiot and not just a domestic one! With that aside, the following is how I see things at the moment in the stock indexes, which also defaults to just about every other market as well.

First, we are still in the trading range on the daily ES chart, albeit right at the very top. We had a false breakout and reversal at the bottom of the range which is what led us up here. We now appear to be setup for the opposite situation. However, there is an alternate scenario, if you are really bullish. We had a small inside bar yesterday with a down close. These bars often lead to explosive up moves when the highs are taken out the next day. You could argue that there is a legitimate long entry above yesterday's high today and you would be right. So what to do?

On one had we have had a huge rally right at the seasonal time window that came out of the blue, this should be bullish, and in general I think it is. However, now we have extended a long ways upward to the top of a very well defined range, with almost no pullback at all. You could certainly argue that price is speaking, and that we are in lift off mode. We very well could be. It might be that we will look back after another 1000 Dow points and say,
what a no brainer that inside bar entry was."

Here is why I do not think that is going to happen. First, we are right up into the weekly sell zones in a down trend that I showed the other day. Generally these are good spots to get into a continuation trade in the direction of the main trend which is down. At times with trend changes we do just blow through these zones, so they are not a guarantee at all. However, if I also take into account my synthetic COT which is clearly telling me sell as well as a few short term oscillators I use that are projecting down even with an up close on Friday, it still tells me to look down for the moment.

As a result, I am going on record as saying we retrace from here to setup the year end buy, and do not just explode right out of here today or tomorrow as it appears it could. I think if we do break out it is going to quickly reverse, if that happens in the next couple of days.

Here we have the world's favorite market GOLD. We are rolling over here at the moment, and in the danger zone. I posted recently that from a weekly setup standpoint, this is a great buy setup. That is still true. However, that is a setup not an entry, daily price action still has to generate a buy signal to get it in line with a larger time frame setup. This recent low marked on the chart is the line in the sand. If we close below this level, the whole up trend is now broken, even on a weekly basis. As I have stated here over and over, and I will do it again at the risk of once again being a fool, this market is going to collapse just like real estate did, it is just a when not an if. I do not know when that will be. What I am fairly sure of, as it has been with every other asset bubble in history, fraud will be exposed, and everyone will cry foul. Millions and millions of people have been suckered into thinking this market can never decline, just like they were with stocks in the late 90's, Oil when it reached $140, and real estate in 2005. The core arguments were the same for all of them. They all had some assumption about a large scale economic phenomenon, that was infallible. In all of those cases the arguments turned out to be invalid, so it will be here as well.

What people fail to realize in my view is that this asset just like any other is subject to up and down cycles. It has had an historically long up cycle, it is due for a reversion,  just simple math. Those who had the insight to pick this up 10 years ago have made an incredible killing, those who bought it late will get wiped out. It is always the same with asset price cycles. I personally do not care either way, since I don't hold things for months or years, all I am trying to do is point out what to me as a trader of 25 years is obviously a trap trade.

With all that aside, pay close attention to this recent low. As long as we hold above it, I think there is a dynamite long trade coming here. What has to happen is we need to start making high highs and higher lows, in other words, put in some type of short term market bottom. Once that happens breaks to the upside need to be taken. Until that time if you are short in a short term trade, just trail this down and see where it goes. I would think about exiting against that low or slightly above it if I were short this market, since I am expecting it to hold.

I think where some of my readers are getting confused with my position on this here is this. Those of you that are bullish are synthesizing economic fundamentals and concluding a certain outcome must occur due to that. My analysis is strictly based on technicals. I do not consider my opinions on economic fundamentals when I trade since I know they are arbitrary. This is why I say don't email me on this. It is more because we are just analyzing this from different perspectives. It is not because I am sure I am right and don't want to consider alternatives. Numerically there aren't any. However, discretionarily looking at economics, there are thousands of alternatives.

If someone wants to show me examples of mean reversions that never happened, that is welcome, because that is more in line with my core argument here. What I don't want to get into is someone telling me because there is big jewelry demand in China, Gold has to keep going up etc.. That is just an arbitrary opinion. Also, if you think we are returning to Mad Max days, and GOLD will be this precious bartering item, that is also an arbitrary opinion. I want statistical reasons in terms of someone giving me a commodities market ( not a stock ) that has gone in one direction with no reversions, indefinitely. Keep in mind that if those types of reasons are what you base your trades on, there is not necessarily anything wrong with that. It is just not how I trade, or how I form my views on things. More power to you if you can make those random guesses over and over and make a market killing, I can't succeed that way. Your arguments might be right for all I know, I could be wrong!

If someone can convince me of that and that there is a high probability that means reversions will no longer happen, you will find I am flexible in my views on things when I learn something new. In other words, convince me in my language why I am wrong.

The bigger picture to me is a rally up that fails the yearly highs that tops early next year, setting up the return under 1000 for this market and potentially much lower than that.

So there you have it, a fool going on the record. This fool does put his money behind his mouth.

Fool Out!