STOCK MARKET NEW YEARS EVE FIREWORKS?

Late Friday everyone ran for cover as they knew the stuff going on in Washington was dangerous in the short term. You can see my Emini S&P Trading system and the trade it generated Friday which I took, a short on the opening. It works similar to the Bond System in that it exits the first profitable opening. I have to admit that due to the crap in DC I exited this trade at the close and took the big gain so I did not completely follow my own rules. It was a good trade for just one day in the trade with a gain of more than 21 points.

I will be debuting this at Robbins trading next year in an auto trade program. We need to let it run for a couple of months live there first to get actual trades in their system. It has worked well this year. I made a couple of tweaks to it like I normally do at years end with my systems. I do this when I see a few things happen that indicate some fundamental changes have happened. They are generally very minor or none at all.

This system has not been as good as the Bond system over the years in all honesty, but it has been profitable. Since everyone seems to love to trade this market I have decided to let this loose publicly and we will see where it goes. It is only going to be available through them and details to that will be forthcoming. We have to let it trade for a couple of months there first. I have opened up a $15,000 account there that will just trade this exclusively so we will see what happens. There is no reason for any BS on it at this point, the results will be what they will be. I certainly like the trade it gave me to do Friday, but obviously they are not all as good as that one.

I have been thinking some about this situation in Washington and here is my take on it for better or worse.

1) It has been BO's plan all along for no deal to take place, especially anything that cuts spending in any way.

2) I find fault in both parties and the way this has been handled, both leaders are terrible leaders

3) This paves the way for BO to let the unemployment rate go up to where it really is and gives him someone to blame it on. I have wondered for months how in the world they would ever let the rate go back up to the real number since they have doctored it clearly the last two reports for political gain. They can't keep it fake for 4 years, so they need a crisis to move it back to the real number. Now he will have one.

4) Nothing much will change in the big picture regardless of how this is "resolved." Democrats want to spend without any checks of any kind and Repubs don't want taxes to go up. The big picture problem will not even be addressed except on some microscopic level by any of this garbage being bandied about.

5) We need to check all of this at the door, he is a terrible president of that there is absolutely no doubt, HOWEVER, he is good for business!

Let me explain what I mean by the last point for those conservatives who just erupted. He is not good for business in general since his policies are very anti-growth. What I mean is that he is good for business for us as traders. The huge dislocations he is creating and will continue to create, will provide us with very volatile markets to profit from. We continue to roll on with the philosophy of never wanting bubbles to ever pop. In spite of this they ultimately do and when they go they create huge opportunities for us traders who are willing to play both sides of the market

It is understandable to me why no president would ever want to be the one who presided over what needs to happen to allow the world to get back into economic balance. However, it will get there one way or the other. Manipulation can only go on for so long before it just breaks down and natural market forces take over. This will happen like it always has. The way they want to keep spending recklessly with no checks or balances or any cutting whatsoever, will ultimately lead to both huge spikes upward in things as well as devastating collapses. Let's try and ride the waves.

The reason to use technical analysis and other such tools, is for us to be able to tune out a lot of this crap. The tools I use have been telling me to look to the short side in several markets over the last couple of weeks and I have stated as much here in the blog. It is for that reason that I felt the bias was down in stocks and it had nothing to do with this mess in Washington. Come the first of the year life won't change much from the prior day regardless of the outcome. Even if things don't get resolved BO has cornered the other side into having to consider cutting taxes back on the lower incomes afterwards, so you may see a pay check or two have the payroll taxes back, but before too long the Bush era cuts will be back. They are intent on raising unemployment by penalizing rich people, so that is what is going to happen. I don't think in spite of people who tell us who don't run businesses, that raising taxes will result in a boom in new hiring of employees, that it will come to pass. Rich people are not going to expand their businesses after having their taxes raised this much. Anyone with any common sense knows this. I thought it was really interesting that the courts in France struck down as unconstitutional the tax rate of 75% on rich people, what a blow to socialism that was.

We will survive BO on some level, but I am worried what that level is going to wind up being. Maybe everything will be just fine and his plan of reshaping us to Europe will magically work but we can all see how Europe turned out so I am not too hopeful on that front.

For the time being I think we will most likely see sharp down then sharp bounce backs throughout the course of all of this. As bad as things may wind up looking at certain times, there will still be great buy spots this coming year so be ready.

There was an interesting call that came out recently from Goldman Sachs that the top for Gold is in. I think readers of this blog know I agree with that and said it quite some time ago. This is not of any value for short term trading, but I thought it was interesting to see that type of call from them. They handle huge trading volume and are rumored to also do trades for the PPT, so their opinion on something like this should matter.

We are already pretty short term over sold here in the ES so it would not surprise me to see a quick down and reverse back up.

Good Trading and thanks for reading this year

THE BOND SYSTEM

We are getting whipped around some this month in the Bond System. This is going to be our first monthly loss with that system this year. What to do? The simple answer is there is nothing to do, let me explain.

Systematic trading is not always the panacea some people think it is. When the winning streaks are going like the one we had it is raise the roof time and then when we get into bad streaks like this it is jump off the cliff time. Actually neither of these are true. I hate losing as much as the next person, I would argue I hate it more than most. However, I have been telling everyone right when the winning streak started heating up that it would not always be that way. Now everyone is seeing what I was talking about. Even good systems have periods of losses. I am going to be writing in detail about exactly how to measure these when they occur and what to do about them, in next month's Newsletter. When we go through a losing period it is no fun. I have people bailing out on the system and I knew that would happen the minute one of these periods developed. I tried to warn everyone that no system is infallible but I think people thought I was just crying wolf since all the trades were so darn good. I have been at this a long time and have been through plenty of periods where systems had bad trades. As a result as much as I don't like it either, it is the nature of the beast. ( Sorry about this paragraph, Blogger won't let me left justify it no matter what I try to it gets centered I guess ).

For the time being I will offer a general overview of analyzing systems but leaving the details to those who get the Newsletter. You have to measure and deal with equity runs in systems in some ways the same way you deal with analyzing a market. You look at trends and retracements etc.. and then determine whether or not the trend has changed or not. At this point in spite of the losing month the trend has not changed yet so we still keep plugging away. That may seem like a simple answer but making things complex does not make them better from my experience.

I know some people are tied up in the fiscal cliff crap and the whole point of using either systems or technical analysis is to get that Noise out of our heads. Our systems and or tools will tell us what to do and we don't have to rely on some arbitrary opinion we might have one day about politics. Trying to guess our way through trading is not going to work over the long haul, even if you happen to be able to do it for periods of time successfully. I personally can't do it so I don't try. The whole Fiscal Cliff media hype is irritating to me and if I never heard another word about it that would suit me just fine. I am not going to pick sides, I think both of the two parties leaders are clowns at this point so how could I pick a side? It seems all they agree on is that smoking is a good idea.

I mentioned that I was looking for some down side action in the indexes and we have gotten some of that. This was based on mostly a COT type of sell setup plus a few of my proprietary tools pointing down. Those tools are still pointing down so the view has not changed. It is certainly possible Washington could create a big rally if something happened, but I can't concern myself with that. I cannot predict the future or how people will react to the future events. My tools are telling me to look down so that is what I am doing.

This is still a choppy mess so there is not an entry that I can see other than some things my short term mechanical system is flashing for tomorrow. I don't see a reason to take a position type of trade in this market here. I see no reason to force something that is not there. If you are inclined to short play the Naz it is the weakest of the indexes.

I think the Gold market is setup for a buy here based on the some strategies I use that I don't discuss in here.

That is all I have for tonight.

YEN COT ANALYSIS - WHERE THIS CAN GO WRONG

I went through a COT analysis of the Yen about a month ago saying it was setup for a buy. I live in a different world than most where I actually admit when I have blown something. This is a bad habit the book says lie lie lie, market market market. I don't like that book.

One of the challenges of using COT data which I have stated over and over, is when you get strong trends going and the commercials setup shop on the opposite side of the trend. This is not a signal for action, it is more an indication they are hedging which is their primary function. For the record I have not done any long trades in this market and the main reason for that is the seasonal. Look at how precisely we have followed the seasonal pattern in this market. 

Using COT data is an art not a science - I guess that is why you need me?

The logic I had used for stating I thought this was setup for a buy is displayed on the chart. I felt the big boys were setting up to defend the price level we are breaking below now, I was wrong about that. One distinction that has to be made is that between setups and trades. A setup is just that a setup. It does not mean we just go right in at the market and do a trade. It means the conditions are there from some stand point, in this case the COT data, for a move to happen. That is far different from a trade entry setup. 

Often on weekly charts you can have setups in place for months that do not generate a trade on a daily chart. This is not a perfect world. I am surprised how many people don't understand this difference. I recall a year or so ago watching a few of Larry Williams weekly videos on setup markets and then having friends bad mouth him when they did not instantly move the way he predicted. They just did not get it even after I explained to them that fundamental setups don't mean you go to a 5 minute chart and enter at the market. I guess that is why most people lose money trading. 

When I talk about setups on weekly charts what it means is that I feel the fundamentals favor a move in one direction over another, the probabilities are on our side. That does not mean it will always happen. I do point them out when I think we are close to moving in the direction I point out but that does not mean I expect it the very next day. It may happen the next day but that is not the reason for the commentary. There are only a couple of setups I have been able to identify that have been right 100% of the time and they occur very infrequently, perhaps once every few years.

Summary, the COT setup is not valid in the Yen at this point, it is not a buy setup now. It has not held where it needed to for this logic to apply.

ES FOLLOW UP

My buy signals did not ever trigger on Wednesday so the dilemma of a sell setup with a short term buy signal never materialized. I still see this as a sell setup on the weekly. One day of price action will rarely change a weekly setup. My short term indicators are also still going down but I don't see an entry here so on the sidelines in the indexes I stay. Trading is usually slow during this week so there is no reason to try and push something.

I am watching the Euro right here for a short entry.

Good Trading

E MINI GOING TO DECLINE?

 

It appears to me we are setup for a decline right here. We had the odd spike the other night on the news story. I heard someone say that was an HFT skit but I doubt that because of when it took place. You don't execute HFT trades when there is light volume because there is not a deep enough market to get in and out of the trades quickly, which is the whole point of them. Again another article by someone who does not trade and therefore does not think through these things like they should. In any event I suppose it could have been an error by an HFT firm, some young clerk, fat fingers etc.., but I doubt it.

In any event I think bars like that need to be ignored and since we held the trend line during the next session conveniently, it still is significant. We have the basic COT sell setup here with a rally accompanied by commercials increasing short positions. Along with that we have some divergence in the accumulation/distribution indicators telling us price underneath is weaker than it appears. As a result we have what appears to be a situation to look for a short.

I have not had a great feel for this market the last week or so admittedly and ironically my ES mechanical system is flashing buy signals for tomorrow. As a result I still have conflicting information. However, strictly from a COT perspective we have a sell setup at hand. It also appears to me that quite a few other markets have COT sell setups, so I have to lean to looking to the short side of things overall right now. However, we are getting some detachment with certain commodity markets and the ES for the first time in a couple of years so let's hope that continues.

I hope everyone had a great Christmas and I am going to begin working on one of my new years resolutions which is to cut down on the editorial comments which probably aggravate half of you anyway.

Good Trading

MERRY CHRISTMAS

Here is a pic of my posse which is our Christmas card. I want to wish everyone a Merry Christmas and Happy New Year from all of us. Thank you for reading the blog this year and also for having the confidence in me to subscribe to some of my services. We have done well together this year and I am looking forward to next year being a gangbusters year for us.

From a personal perspective due to the PFG disaster this year has been probably the most challenging year of my life. In some aspects I have handled it very well and others not so well. It is difficult to understand how tough something like that can be on you until it actually happens to you. I remember in the Madoff case and MF case I felt terrible for the people but moved on from it quickly. When you are a victim you cannot move on quickly, especially if you are a person who lives on your trading income. It is one matter entirely if you lose some disposable money that does not effect your life at all. It is entirely another when your whole life is changed by something like that. You can see what I have to support with trading at the top, so not being able to trade for as long as that freeze up has really hurt me. I have to generate significant money to pay for all of this each month as you can see. I was not able to generate any for several months and even when some money came back it was not nearly enough as a base to generate the returns I needed to cover this. 

I have been very very angry at times over this, but for the most part I have accepted it. Harboring anger does you absolutely no good at all. I do have to admit I do have thoughts at moments of using all of my training to give Wasendorf what he deserves as well as a few others I suspect had roles in this. It is a thought that leaves me quickly because I will never have that chance anyway. It is better to focus on what you are going to do positively as a result of something like this. I have a plan to do something about all of this that will benefit everyone, but it is going to have to wait until I get back on top financially. Once I do I think the regulators are going to wish there was no me. It will all be legal and above board, until that time it is parked in a file and life goes on.

I have also tried to spend a lot of time in here discussing this because in spite of doing so I still don't sense any real sense of concern in traders about their money being safe at FCM's. When our next cycle of difficulty shows up trust me some FCM's that "seem" fine are going to POOF and your money will be gone. It is clear with the MF situation that the authorities have no interest at all in doing a thing to people that break the laws in regard to segregated money. That should tell you there are going to be more cases like this. When we get another bear market you are going to see some of these firms steal the money to try and survive. Even if the NFA catches it through electronic monitoring of the bank accounts, the money will still be gone. Depending on where it went you still may not be able to get it back through a clawback process. Even if you can it will take years and you won't get all of it. I understand if you have an odd $25k or so that you don't care much about and are learning to trade with, but if you are someone who trades like I do with much larger amounts, you had better be on top of this issue.

LEARNING CURVE

The daily signals are just that, daily signals. All we can do is give the trading signals, how they are managed is up to the individual. We cannot and will not give advice on this. Data providers have differing symbols for the same markets so it is up to you to determine the symbols that correspond to the markets.

We are also going to roll out some things once the new site is done that will be very helpful. We are contemplating a few things and I would like to get feedback on what level of interest there is for these following items:

CHAT ROOM

DAILY VIDEOS

DAY TRADING

WEBINARS

MEMBERS ONLY SECTION WITH HIGHER LEVEL CONTENT

ES TRADING SYSTEMS

I think I can guess on some of these but please let me know. The goal is to take this to the next level although it may be one step at a time. We are not sure what people want so please give us comments. Others in our business seem to be doing some of these things.

cj@wearefuturestraders.com

jmp@wearefuturestraders.com

We had some very unusual action in the ES tonight in reaction due to the move in Congress. What was peculiar was how isolated it was to basically just the ES. Even the Russell and Naz had nowhere near the reaction that occurred in the ES. What was also strange was the lag in the movement. It started down slowly well after the news, then all of the sudden after a pretty good time lag, crashed then immediately bounced right back to where it was. This appears to have been what I call an electronic death spike which rarely happens in this market anymore. However what was strange was the lag, it was almost as if someone big was trying to decide whether to sell or not..... HMMMMM. I will let you take that where you want to. An argument can be made for the PPT being on either side of this action.

Maybe I am nuts but I am not sure this is going to crash right here. This whole market just has a strange feel to it I can't quite get a handle on. For my taste now the ES has too big of a range for me to trade it Friday now so I will sit on the sidelines.

Here is a trade I just did in Soybeans and the signal was also in the Swing Service.

Again the intention is to try and catch large moves in this and even though this was only 2 days, it was a large move so I took the profits after the 3 big down days in a row. Could it go further, of course. However, when I get a move this big this fast I often take the money. This was a 3 to 1 on the risk reward scale so that is a good enough payoff for me. They don't all work out like this unfortunately, life would be grand if they did.

Merry Christmas a bit early from my posse

Fiscal Cliff Best Summary I Have Found

http://www.zerohedge.com/news/2012-12-18/jeff-gundlach-fiscal-cliff-circus-and-why-investors-should-hold-cash-through-2013

If you read through this summary from this guy, it is in complete harmony with what I believe, I could have written this myself. The best take away from it is the the incremental gain you may eek out by pressing the long side will not outweigh the hit you will take when this thing rolls over. I completely agree with that.

For those on the opposite side of the political spectrum than who is control, you just have to let it go. BO is going to smack talk for 4 years and do what he has done for the last 4 years. This is going to be great for us as traders so get over it. He is going to create the greatest shorting spot in history for us at some point so be ready. It will be a hold for a huge gain and I can't wait for it to happen. It will be a bad situation for many but they voted for this so it is what it is. In the mean time don't get too negative, this is not going to be anywhere near a straight slope down. This massive stimulus is going to create big up moves at times as well.

Here are a few things going on that I think are interesting. Some of these I have mentioned recently.

First, the markets appear to be on the verge of de-coupling.. If this continues it will be very exciting for us as short term traders. The world is one trade scenario has made money management very challenging, there has been no way to diversify. If each market could return to trading on it's own merits and fundamentals it would sure be welcome.

Second, the layers and layers of stimulus seem to be successively losing their mojo. This is like pushing the roller coaster to the top of it's peak spot in the ride. It gets steeper and steeper and requires more and more effort to get small movement.

Third, the stimulus has seemed to zero in on just the Indexes alone all of the sudden. I think this is probably disturbing to the Fed as their plan is to elevate everything by getting the stock market to rise. This is another out growth of the second item. The effect of the stimulus is wearing off slowly.

Fourth, the payoffs vie entitlements to pensions seems to almost be accelerating. This probably will create some opportunities in the municipal bond markets when these pensions bankrupt the cities where they occur. I think it will be to buy them when these cities file bankruptcy due to the union pensions. This is a bit tricky and I will leave that stuff up to anyone to do individually. I am just pointing out what is going to be a good opportunity. Those bonds are likely to sink as these bankruptcies happen and then ultimately be bailed out by the Federal Government. I don't know if I will do any of these types of trades or not. The reason is that the bailout can always be a union payoff  like GM was where the bond holders get wiped out, so this is not as simple as it seems.

There was a local story last night of a Police Captain in a small city who made $500k last year and is getting a pension of $175k per year for the rest of his life. If you are interested in this type of play go read about that. I would assume that city is a prime candidate for bankruptcy based on this type of thing.

Here is another article on the beating the tax payers are taking on GM, the biggest union payoff in history, from Zero Hedge. Look at the staggering amount of money that was lost bailing out this company, zeroing out the bond holders and handing it over to a union. I love the people that talk about what a great success this was and why it proves how great bailouts are. From a trading perspective these bail outs are tricky things to play. You cannot automatically assume a rise or fall with them. Even trying to buy bonds cheap when they get defaulted could result in a 100% loss once politics come into play. I think in general you can play the short side on things like this but is it not as easy as just shorting at the market and waiting for them to fall apart. Do not forget about their still unfunded $100 Billion pension liability they have. I suspect the gift that is GM is going to do plenty more "giving" to the taxpayers before their day is done. If I am not mistaken the majority of their profits are coming from outside the US.... Of course!

Market Setup

This is the EURO and it is setup about as good as a market can be for a decline right now. The commercials are short, we are at a seasonal peak, and we are in a down trend. Time to look for short entries here.

That's it for tonight

EURO CHART DOA?

Do not write off this chart quite yet. If you look you can see the last two declines that appeared to be dead on were off by about 4 weeks each. At this point we are off by two weeks so we are still in the zone where this could be correct.

I read today at a popular blog that today was a squeeze, does it look like one to you? People who don't trade always eventually make a comment that reveals it. A short squeeze occurs in a down trend, does this above weekly chart of the S&P 500 look like a down trend? Of course not, ignore that type of stuff. However, this just does not feel right to me. The way this is moving intra-day is a little bit strange. For some reason it does not have the standard year end rally feel to me and I can't put my finger on it. I am not saying it is going to stall, I just am not sure. Normally at this time of the year I am very bullish and just blindly play the long side, but this is just a strange market.

We saw Gold plummet today when the ES was bought, a very odd combination that has rarely occurred during our era of the world is one trade. We also saw some other strange things happen. I do not have any positions on the long side that I am planning on keeping for a long time right now. I am still not convinced this Euro chart has jumped the shark.

Here is a market that appears to be trying to make a stand, SUGAR.

You can see where I have a horizontal line drawn at a price level that appears to be significant to somebody. The commercials appear to be buying this level trying to hold prices here. We have a small seasonal up bias also kicking in so I think it is reasonable to look at the long side of this market soon.

PFG Update

This is the story nobody seems to care about any more and I came across something today that really irked me. There is some pinhead named Wickowski or something like that who is a writer and or financial commentator. He did an interview with someone about PFG. He claimed basically that it was like Madoff and investors should be more careful. We were not investors in PFG you moron, we were traders and PFG was the custodian. Not one single person invested in Penny in Wasendorf. I never frickin heard of him until the day he tried to kill himself.

Dumbkowski or whatever your name is get a clue, we were not investors swindled by a con man into thinking he could deliver us a certain return. His firm was a custodian of money. He did not sell investment products. It is amazing a guy this uninformed qualifies as a financial commentator. He also went on to say we will get very little of the money back. Even though the situation is terrible we have already gotten more than very little back. Arghh!!! I can't stand guys like this, wanna bet he has hair on his back?

It appears there are a few large claims filed that have no merit at all especially the one for Forex involving the case from the past as well as Wasendorfs ex-wife asking for $2.4M. If these get tossed which is a possibility, it will leave the ratio of what they have vs the claims of about 2/3. Of course the attorney's will try to steal as much of the money as they can so keep that in mind. If they can run the clock long enough before giving us any more who knows how much they can Corleone off the top. Net net, it is beginning to look like a 60% or more number is possible but I will believe it when I see it. If the attorneys could manage to stall it for 3 years they might be able to get all of our money that is left. I sure hope that is not their goal but the system is setup to screw the victims as we all know.

Good Trading

GOLD CRASH COMING?

I knew if I titled this post this way all the cult members would come in here to kick my ass, welcome culties!

As I ponder the big picture view of everything that is going on, I do get very worried about what I feel is an inevitable crash in the markets that is going to come at some point. I do think it is going to be worse than the 2008 financial crisis and the reason I think that is that all the tools to slow something like that down, are being used now to try and prevent it. If it were to start again there would be limited ability for the PPT to intervene short of just closing the exchanges. Even that is not going to work because the problems are not at the stock exchanges. We have built a situation that is not sustainable by running up debts to a level never before seen and growing out of this is not going to work. Borrowing more and more and spending more and more is just a plan for idiots. Penalizing all the job creators by taking their money and re-distributing it to people who don't create anything is also not going to work.

This leaves us with the inevitable conclusion that something has to give. I read over the weekend that in Oakland, California police have had to cut back and have posted the crimes they are not going to respond to. I am sure this was a negotiating ploy by the union to try and avoid cut backs, we know unions could care less about anyone else other than themselves, so why not just tell all the burglers they are not going to respond to burglaries among other things. If I was a burgler that is where I would move and I would send a telegram to the police commissioner thanking him for the freebie. I point this out because I think the average person does not think enough outside the box. Most people assume these types of protections will always be there, but what if they are not do you have a plan? If you had a burgler in your house with a gun, how would you feel if you knew the police would not come even if you called them?

All of this dovetails into the discussion on GOLD, the worlds favorite topic. It is almost like the Yankees now fans are zealots and opponents hate it and pull for losses. I am in between on this. I could care less if it rises or falls I just look at it from a trading perspective. My bigger picture view has been for the last 2 years that it is a bubble ready to pop. Culties were furious with me for this take and sent me all sorts of emails with cute little newly found formulas as to why it has to go to $10,000. They argued that in 1903 only 3 people in Nova Scotia owned it and now only 4 do so the sentiment is still bearish etc...Folks you might be right nobody knows the future with precise certainty and that includes me.

The chart at the top of the screen is a long term view of GOLD with standard deviation bands on it. If I set aside all arguments on both sides and just look at this chart here are my observations.

When I am looking for something to have a big price run I look for two scenarios:

1) Something tremendously undervalued from a fundamental perspective. This can either be just price as an absolute or it's value relative to something else. In this case that condition existed in the late 90's. We pierced the 3 standard deviation band on the down side which marked the basic low of the whole decline from the 80's. This made sense. It was also very undervalued in relation to many other things at that time.

2) The second scenario is we have had a good trend and a nice pullback to it and in that trend ADX has stayed > 30 < 60. In this case we have gone way beyond 60 on the high side so it does not qualify for this condition.

At this point neither of these conditions are met.

Once I have looked at these two things I step back and think about the situation at hand. Is there some unusual event taking or likely to take place that could impact this situation? If there is does that event have any identifiable cause and effect relationship that has been consistent. If so that can play into the two above scenarios. I will admit as I ponder what I am fairly sure is coming at some point, I want to be as prepared as I can be and if that means owning Gold than that is what I should do.

The assertions along this line of thinking is that it is a "store of value," HMMMM...... Does storing something mean the value always rises? I can store an old Chevy but that does not mean it's value will rise. There is no precedent in history anywhere for this argument, so that is an easy one to discard. Gold has not always held it's value.

We are printing money like drunken sailors and that is going to create a huge wave of inflation. This argument has some merit and if there is one thing that has correlated with Gold it has been inflation. If we get runaway inflation it does make sense that Gold should increase in value along with everything else. That is the key, EVERYTHING ELSE. If this inflation that is being talked about comes around the corner and it may well, everything including a loaf of bread is going to sky rocket in price.

So it does appear there is one thing on the checklist that could call for owning some Gold, the inflation risk. The question is whether Gold would be the right asset to own in that instance versus anything else? There are no conclusive arguments on this to review, it is a judgement call.

However, if we go back and look at the chart you will be able to see why I stand where I stand on this at the moment. I was looking at houses back in 2007 after having sold out my Newport Beach home in the fall of 2005 and I went up to the Santa Barbara/Carpinteria area. I found the people I thought from my research were the best Realtors and started talking to them. I explained to them after I looked at some places that I thought prices could come down about 50%. At this time prices had just begun to come down. Of course they were aghast at how anyone could think that even after I told them what I did for a living. I wish I could find the chart I sent them but it is stuck on some old hard drive somewhere. I had created a chart with some real estate metrics and standard deviations of them that looked basically identical to this chart at the top of the post. Aside from any opinions the numbers just told me we were very over due for a significant price reversion. I just threw in 50% as a guess which turned out to be about right, that was lucky. It was not lucky to predict a reversion. I feel the same way looking at that chart.

When I look at it I see a market tremendously over extended in price. History is full of patterns like this in commodity markets. What history is not full of is charts like that which kept going at the same rate for many more years. There are absolutely no charts that show that, not a single market has ever done that EVER. This is why I am not super bullish long term on Gold. It is pretty simple and may be wrong, but that is my logic. It does look to me in the near term Gold is setup for a rally.

I think the chart of Apple below looks just like Gold and we are seeing the unraveling of this stock right now as well.

We took a couple of shots on the short side in the markets this week and the move down in the indexes which was brief, has turned out to be a fake/trap on the down side after it was a short term trap on the up side. It has been pretty choppy and trying to catch a trend move has not been easy to do lately.

Good Trading

TRADING PSYCHOLOGY

I suspect that this picture may represent how traders especially beginners feel at times. There is something that you have to keep in mind that most people do not, trading is like any other business. If you are in sales you have losses. There are transactions you are sure you are going to get and something goes wrong and you lose them to a competitor. If you are an athlete you lose games. If you are a fashion designer you launch new designs that don't catch on. If you are an accountant you lose clients to other accountants.

There are no guarantees in life except losing trades, death and especially now taxes. A losing trade is just like any of these other events. We KNOW they are going to happen IT IS A GUARANTEE.

HOW DO YOU HANDLE THEM?

I am going to describe a real life event that everyone is familiar with, what I did and how I handled it. The FLASH CRASH week was a time that anyone who trades won't likely ever forget especially because we are going to have another one of those and it will rekindle memories.

The good news is that I made over $100,000 during this week and was positioned perfectly just prior to this thing falling off the cliff. The bad news, I botched this trade. I was short with both hands prior to the infamous day, I was in the ES and a bunch of individual stocks as well. I was probably way too leveraged in one direction but I felt the setup was pretty good for a decline. I had no idea it would be like this but you never can call these perfectly in advance, regardless of what all these phonies represent after the fact.

I left my house to go play in a golf tournament and had my lap top in my passenger seat like always keeping an eye on things. We were down when I left a couple hundred Dow points but there was nothing to indicate what was about to happen. I lost my Internet connection of course and once it came back up we were down quite a bit and just falling off a cliff. I had some targets in mind and we had gone past them already, I had arrived in the parking lot at the golf course and knew I had made a killing. I spent 5 minutes clicking the mouse and exiting all the trades at the levels indicated on the chart. I was going to be out of pocket for awhile and drinking most likely, so I just wanted this out of my mind. However, in the back of my mind I knew I did the wrong thing and came up with a BS justification for doing so.

Had I held it like I should have I would have exited everything on the next close for reasons I won't get into in the post, but that pattern is a short term buy pattern so I would have exited all shorts when it formed. I never bothered to calculate this but I am fairly sure I left another 100k + on the table with this blunder. The reason I am using this as an example is to illustrate how frustrating this business can be. This was the single biggest trade I ever made and yet I blew it!

You have to learn to let whatever you just did go and move on.  Even in this scenario I made mistakes. We can never be perfect so don't try to be. These are big words coming from someone who is as much of a perfectionist as you will ever meet. We just can't be perfect and very few things in life will make us more acutely aware of how imperfect we are than trading stocks and futures. You do not have to get on a couch with a professional or read a bunch of psycho babble about how to handle this. You have to simply accept that this is part of life. I can't stand it when some arm chair quarterback starts trying to tell people what to do when they themselves cannot do it. A book written by someone who has never made a bunch of money trading is of no value. This is true whether it be the psychological aspects or the techniques of actually trading. Burn those things.

At some point in life you just have to suck it up. If you sat in my chair and not only took a loss but knew that subscribers took one also some of which probably have no business trading due to being under capitalized, you would realize you have to let things go. I cannot think of too many things in life where being too emotional about them is the correct way to handle them.

We took two consecutive losses in the Bond system recently and in spite of my telling everyone this would happen at some point, there seems to be some surprise element to this. This is a mechanical trading system, does anyone really think it is never going to lose? I had a few people cancel after the two losses which is fine you are free to come and go as you please, but here is what will happen time and time again and it did in this case. The system will rebound, it had a nice trade Friday for everyone and those who bailed out just missed it. Also in talking to a couple of people I found out they did not take all the trades. Why would you subscribe to a system and not take all the trades? Either subscribe or do not but if you do follow the rules for god sakes. Those who got emotional just lost out and it will always be that way in trading. I even had someone who was one of the original group members leave and that person should have still been up over $10,000 per contract had all the trades been done even with the two recent losses. I would bet my life that person did not take them all, cherry picked some picked the wrong ones and botched the whole thing.

It may sound like I am picking on them but I am trying to drive home a point. Fear and emotion is not something that is going to help you succeed trading. I have made all of the mistakes myself that I am talking about so I know exactly how this feels. The take away from this post should be this. You do not need to read a bunch of books on psychology and get overly analytical about how to "handle" losses. You need to just realize this is no different than anything else in life, things do not always work out the way you plan. You need to learn from your mistakes and try not to repeat them. Part of what makes life great is these challenges and if you did not feel conflicted emotionally at times would it even be worth living?

I had a very good week trading this week and I feel no different that I did the prior week. It was nothing  more than a series of transactions and next week will bring another series. It really is that simple. I think reading about what you should or not being trying to do in order to train your emotions just makes you think more about them, which in turn makes dealing with them more challenging. Man up!

Sorry to the penis enlargement spammer I might have been tempted if you had thrown in a free golf lesson or something.

Good Trading

E Mini S & P at the moment of truth

Since so many people are obsessed with the ES I have been trying to cover this market a lot lately. Please do not get me wrong it is probably the single most important market there is because every other market has been keying off it for the last 3 years. However, it is a notoriously difficult market to trade because of all the one lot traders with $1000 account balances who are so jumpy they trade a 75 tick chart and freak out when they take a .25 ( $12.50 ) hit. This makes this market so choppy intra day.

We had our breakout from the flat consolidation pattern I outlined and now we have immediately retraced which is not good. I mentioned that it could be a trap if we immediately retraced which we have. For the pattern to be completed the low of the breakout bar needs to get taken out. This is why I have marked that low with an arrow. If we break that low I think the market can be traded from the short side again.

We do have conflicting information in the accumulation indicators. The POIV is indicating strength and the Pro Go Indicator is diverging quite a bit. I think both of these can be used but like so many things it is a judgement call. Tomorrow is a very important day as a result of all of this. Some of my other short term proprietary tools are weakening quite a bit which are supporting a decline. However, they are also at a critical juncture and could turn up if we explode out of here. They still favor down going into Friday net.

We completed a nice trade tonight in the Swing Service that I want to show.

A couple of comments to make about this. First I don't make assumptions about where markets are going when I determine what trades I make. This helps me immensely. Everyone gets so tied up in the gloom and doom talk they assume bonds must go up since stocks have to go down. Nothing has to do anything! 

I was reading some articles at Zero Hedge tonight and it is just amazing how every one comes up with a reason as to why any rally is BS and attributable to something unusual. The suggestion is always that price always should or is about to go down. I believe bigger picture we are heading down but I think these really popular sites that people go to are often so negative they can really skew your views on things. I know some of you like to read a lot of things on the web and that is how you found this site. I just urge caution in reading some of these always negative stories. We do have problems there is no question about it. However, that does not mean price has to go down every day and any rally is a short squeeze. Even in big down trends there are powerful rallies we can trade, so don't get too fixed on a view either way, it will hurt your trading. 

After I set aside what "had to happen" I noticed significant weakness in the Pro Go indicator prior to this recent drop so I knew there was trouble brewing here before this happened. There was much more to the logic of this trade than this, I am just pointing this out as one warning sign that meant a lot more than some idle speculation about what should happen in the next week.

Second, we were trying for a target today and got within 3 ticks of it and then bounced. When this happens after 3 good days at times I just take the money. This is not a set rule it is a judgement call just like so many other decisions are in this business. There is something about establishing an exit point for me which is generally where I deem some support might be waiting for me. As a result when I get close and don't get my number, I check my ego at the door and get out. This was a pretty good trade and I was content with taking this amount out of the market.

Let's go into tomorrow not assuming anything. I have more supporting the trap than I do supporting the breakout to the upside. However, one PPT buy program and that could all change.

Have a great weekend

Raising Taxes.... That is ok except if you do it to me!

Now you know why I call him Douchefett. 

The link below is the action the king of hypocrisy himself is taking to avoid paying more taxes. 

http://www.zerohedge.com/news/2012-12-12/berkshire-avoids-2013-tax-hike-buys-back-brk-shares

I only recommend that site for news stories, the trading comments are not very accurate. Seemingly every post predicts a decline that never happens. It is always bearish. However, I think the reporting of news stories there is just great. I don't know how he gets all the stories in such a timely fashion, but he does one heckuva job. This story is more proof of why all this talk in politics is all just a bunch of BS. Nobody in their right mind wants to pay more taxes, those who pop off want others to do it, while they find loopholes to duck the increases. It is socialism at it's finest. Take other's money not mine. Everyone should pay very close attention to what happened in Michigan yesterday. Keep in mind that a state official threatened violence if the legislation was passed, he said there would "be blood in the streets." If you also go back a few months to the Wisconsin situation there is one common theme that should worry everyone. Whenever unions or other "entitled" groups don't get their way they resort to violence. We have seen this play out in Greece and other places. I can tell you this first hand, I grew up in the Detroit area so I have very intimate knowledge of what goes on with the auto unions. There is no reason at all to believe that what happened in Greece cannot happen here. People are people. It is going to happen here and this was a preview. What will happen when a broad scale austerity program gets implemented? One way or another one is going to happen be it due to a bankruptcy or a governmental decision. This can't go on forever. Please no emails from lifeguards telling me how you deserve 90k per year pension payments starting at age 50.

This is very much like the bully at the playground who has gotten over on everyone for so long, talking with him never solves the problem. You have to kick his ass. That bully won't acknowledge that his behavior has effected so many others negatively no matter how you try to reason with him. This is the same with the way unions have jacked up the cost of producing products all across the country. After a while companies just go somewhere else to have the manufacturing plant. As a business owner why would you do anything other than that? You are a fool if you do. You can try to force people to pay more to produce a product through regulations and the like, but you then have to be able to force consumers to pay more for the product to support that model. In the end the money will go to where it can be put to work the most efficiently and that is never going to be in a union based company in the US in today's economy. If you have a significant cost disadvantage in today's world you will get "arbed" out. The world is done supporting this nonsense and it could not be more clear.

I also heard a rant the other day that really threw me for a loop. I heard some commentator hammering Fannie Mae and Freddy for loaning money to rich people! HUH! The loans they do are conforming loans,  they are not for the rich people. They are to middle class on down, the very people this guy is supporting. What an idiot. This is how they got into trouble, being forced by Congress to back loans to people who had no money, not backing wealthy people. It should be illegal to be that stupid.

There are some interesting ideas out there I have read, two in particular that warrant discussion. First that when looking at Silver and Gold, one could rise a lot while the other fell..... HMMMMM. This has been thrown out by someone not to be taken lightly, who has had numerous brilliant market calls.

The second one is that the long end of the yield curve could rise way up while the short end rates stay basically at zero.

Gold and Silver

I was not one who predicted the monster Metals rally off the 2002 low. I also won't be the one who predicts the next massive rally on a 10 minute Gold chart, I operate in between.

This is a long time chart of Gold and Silver and until recently they have moved completely in sync with one another. This has gone on for decades yet now we do seem to have Silver with a very significant negative divergence to Gold. This is interesting to me. When we look at daily charts the reverse is true, Gold has been weaker in recent months. There is no conclusion to draw at this point but this one bears watching. I had never considered that these two could move differently from one another. However, I stated in a post the other day that I keep an open mind on things and I am doing so with this. There are some very peculiar things going on in the markets at the moment so maybe this will be another one. I think it is pretty obvious why I think this type of move cannot be sustained forever. How many charts have you looked at where a 10 year period of time looked like this where the next 10 years was a repeat performance? NONE, it has never happened in the history of the world.

We saw a sharp ES decline intraday at the same time a sharp decline occurred in 30 Year Bonds, which has been a very rare occurrence in recent times. It was also interesting to me that on the announcement of more FED intervention for the next 4 years, Bonds prices declined. Is it possible that the market is finally reaching a point where even it knows this is all BS and it has no reason for being up here? Could it be that where we are headed, the long end rates go way up while the short rates supported by the FED stay low? It seems to me that will be too much money playing the spreads to allow that but who knows, never say never. We are at a unique time in history right here. I wonder if this level of manipulation could overcome the natural forces that would work to keep the spread between these two within a range?

The biggest problem with everything that has been done in the last 3 years to artificially prop up the Stock Market, is that the tools that would normally be available to stop a huge decline are already being used. The tank is going to be empty when it is really needed. I suspect that this means that behind the scenes they know how bad things really are underneath all and that is worrisome to me. I still maintain that this whole thing is a huge house of cards that is going to fall at some point very very sharply. I do not know when but I am beginning to think it will happen within the next year. Maybe it will begin in January where the right shoulder of the EURO forecast chart is? It just feels like the PPT efforts are requiring more and more effort to get less and less done. It is almost like a roller coaster where we are climbing to the steepest point and slowly losing steam here. I wish they had just allowed the Stock Market to find it's own natural low in 2009. It might not have been that much lower and we would not be up where we are now, but we would be on firmer footing than we are.

We still do not have anything on a larger time frame that tells us we are in deep trouble from a charting stand point. Until we see some type of significant break this is all just banter by yours truly. However, when I see the division amongst classes that is very dangerous occurring in this country, and the FED doing all this stuff just to keep stocks elevated, it makes me wonder who is going to be naked when the tide finally goes out? It is because of this fear that I do not have any money not $1 invested in something on the long side in the stock market with a long time horizon. I may miss a rally because even in a deflationary cycle prices do not just go straight down all the time, sharp rallies can and do happen.

We have to get clear of the next couple of days in stocks to be sure we have not had a trap in the breakout yesterday. If we do I think we have clear sailing for the last two weeks. After that I am not so sure. If we do happen to break down in the next couple of days confirming the trap pattern, I think we have some significant problems in stocks ahead. I think the next two days are very important. I am still thinking we are going to get a year end rally now but I trade what my patterns and tools tell me and not what I think. These tools tell me the next days need to get us clear of this short term area. I think many of you get too tied up in pre-conceived notions of what a report will say or a holiday will do and lose sight of what your indicators are telling you. They are all that should matter including what I say.

It is very easy to let your opinion get in your way, don't. I have made this mistake many times when I was younger. If you have a strong opinion, wait for the market to confirm it then take action.

YEN

I keep looking at this market now in a major double bottom area with heavy commercial buying and I think we are in a general area where a significant low could be made. It has not happened yet but this is one I am watching even though I have not made any trades there yet.

Good Trading

Bull Market Returns ........as long as we get past the head fake possibility

We got our breakout of the congestion area today to the upside, it just sort of felt like this was where we were going, but I don't trade on feel and the charts until today were still telling me to trade this as a retracement in a down trend. Now that we have the end of the year rally rolling it appears, we just have to watch for one last thing. I have marked on the chart the low of today that needs to hold for a couple of days.  If for some reason today's low were to be taken out quickly we would have to call this a trap pattern. I do not expect this to happen but if it does I will likely be shorting this. I think we will just work our way higher through the end of the year now.

The Naz is still in a down trend on the weekly but the other two indexes are not. If you decide to try for a short do it in the Naz. You can still argue the trend is down on the weekly there. We did also get a break down in Bonds today which confirms the up side break in stocks. It looks like our Euro chart has finally missed a beat. You could still argue a turn could still happen and it could, but that has been so accurate that it has not really missed like it has recently for a while.

One thing to keep in mind with cycles, we can't expect them to be perfect. I have marked 1/4 where there is basically a lower short term high in the forecast and price could do the same. If we get back up and do a high test and turn back down we could still argue this forecast was pretty darn good. I think it is easier to stay with a long term up trend until we get a clear and definitive break of the trend. When this happens we will all be able to see it. 

I think this next chart is interesting, the huge lag that is developing with Gold vs the Stock Market.

On this recent rally both Crude Oil and Gold have gone down while stocks rallied. That is a clear departure from the tight link we have had for a very long time. It tells us we should be looking to short those markets before we short stocks due to the comparative weakness.

I get a lot of emails of why we do this, why we do that, and also suggestions on what we should be doing. The trading services are what they are, they are our trades. It is up to you how you use them. I am not going to change how I trade because I have had two weeks of bad trades. I am not going to trade more or less because of two weeks of bad trades. Folks some people go through 20 years of bad trades. The trades are how I trade and I am not going to change them. I don't make money in every trade I do and neither does anyone else.

Good Trading