Heavy Lumber

The Lumber Market has been under heavy pressure for quite awhile. The steady downtrend is obvious when looking at this chart. However, this market is setup for a possible trend change. POSSIBLE.

The commercials have become heavy buyers of this market for quite awhile. This is an example of what I have mentioned many times about how they are early at times. The typical seasonal low is in October, so if this downtrend line can be broken in that month it is a breakout that should be taken.

Also notice the strong divergence in the ProGo oscillator at the bottom. I am watching this closely and plan on taking this trade when it comes along.

Here we are in the midst of this rally in the S&P in the face of a seemingly questionable economic climate. How can this be? If we keep things simple which is of paramount importance in trading, look at the chart on the left.

Bond prices are rising (rates dropping), and the commercials are increasing their long positions on the rally in price. This does come at a time when typically we see lower stock prices.

Both of the above mentioned conditions are conducive to rallies, and we have the cyclical election rally bias at hand as well. It is yet to be seen whether or not a decline will happen into the OCT/NOV time frame. As long as the bond rally holds, I do not think a big drop will occur. If one does and bonds hold up well, we will have a very good buy setup to take advantage of.

I have not as of yet established a long stock position, so I have missed the boat so far. However, I am content to follow my rules for entry and wait for them to line up properly. I am more concerned about being correct when I enter, than catching every single move in the markets. I do not have any good short term sell patterns at hand, so nada here for the moment.

Golds Moment of Truth

In May I posted current charts of Silver and also the Silver chart from the all time high and asked if anyone thought they looked familiar? They were identical (the correct answer).

Following up with this at a later date, I described a pattern with a large run up followed by a sharp drop, then a rally attempt that fails to make new highs. As "luck" would have it this is exactly what we have gotten. This is a GOLD chart not Silver, but the formation and concepts are the same. In this formation, the low of the sharp drop 574.50 becomes the key support point. This is marked by the red line on the chart.

When these support points get taken out generally a large drop follows. We are very close to that low being taken out here, and if it does get penetrated the game is over in this market. Keep in mind there are no absolutes in trading just tendencies that we need to be aware of to more effectively manage our risk.

For those of us who have watched these types of things painfully punish the chasers over the years, it is clear when people start talking about outlandish price levels like $1300, $1800, $2800 that the top is in. This has not been easy to short by any means and I have not done it. However, I have completely stayed away from the long side mostly due to this big picture pattern that has been forming. Had a strong short term buy pattern setup while the trend was still up, I would have taken it, but nothing did.

SP 500 Up Up And Away?

Here we have a SP 500 chart with the uptrend line marked. In spite of what "should" be happening, this shows what is actually taking place. A very solid rally backed by dropping interest rates.

As many of you know I have been looking for a decline into the fall setting up a major buy spot. Will we get it? There is no reason at all to be short this market other than short term trading, until that uptrend line breaks. It comes in today at about 1310.

Before we can get any exictement going about a selloff, we have to break that uptrend line. Until we do the trend is up so be careful about shorting. One of these days we will probably get one of those "shake the tree" days where they break the market hard and the trend changes. However, it is very difficult to fight a trend day after day looking for that one home run. I do not suggest doing it.

S&P 500

Once again yesterday the seasonal effect failed to have an effect. The fact of the matter at this point is that the seasonal pattern is just not playing out this year. I was aware of it, so I only had 2 contracts on yesterdays day trade compared to the 30 I normally trade. As a result the 5 point loss is barely a normal commission.

This is where some judgement has to come into play with trading. I did it yesterday not by screening a trade completely but through the modificiation of my risk. I know that the day trades to begin with are the least reliable, so already they get half the risk allocated to it that overnight trades do. Next, if we have something so obviously amiss, I reduce the risk further.

The seasonal being completely opposite this year represents that "obviously amiss" category. Maybe we will still get a dip into the fall, but at this point unless that occurs we have to disregard the seasonal pattern, it is out of sync this year so far. I "think" the reason for this is the strong rally in the bond market.

S&P 500

Here is a market that is not "behaving." There is a very strong seasonal tendency for this market to be going down but it has a strong rally happening. Further, today is one of the most bearish single days of the year, the 7th trading day of September.

I do have a short position in a day trade that was entered at 1317, which is right about where the price is as I post this. There are a couple of other bearish patterns in place here. An outside bar following and inside bar where the outside bar has a positive close is also a short term bearish pattern.

As a result, my trading system has generated a sell signal to be exited at days end. This is a counter trend trade, so it is not lined up anywhere near perfectly. However, when your method says to sell you sell, when it says to buy you buy. It really needs to be that simple. You take the trades when they favor you and just accept what happens.

Still Waiting

The yen is a market set up for a buy signal, yet nothing has happened yet that justifies being long. Having worked on this pattern for awhile, it actually shows as a sell signal for tommorrow as long as the open is not less than 8611.

Since the fundamentals indicate a long, and the pattern is a short, I will stand aside. This is part of not fighting the trend, because it is still down. Aggressive traders could still short this based on this pattern, but this trend is a little long in the tooth so the odds of success are diminished.

I will stay on top of this one, and post any long side opportunities that develop in the bar pattern.

Trade Location

I had a few people recently ask about Silver and Gold. Here is a chart of Silver with two possible buy entries marked. As you can see the lower one was clearly the better entry than the higher one. In fact after the second one, the 5th bar after the breakout is actually a very good sell signal, trading back through the gap of the false breakout upwards.

How can we ever know this in advance? The answer is that you cannot. A great trader and friend by the name of Kevin Haggerty once told me that you should always buy at the lowest common denominator, translated, the lowest price setup. He feels that minimizes your risk.

So many people have fallen in love with the concept of diversifying into precious metals, which I feel is due to the media coverage these areas have gotten. One of my replies to someone recently was that Gold is setup better fundamentally to rally, but Silver has a more bullish chart pattern. These are both still true, but there is not a solid entry setup on a short term basis for these markets. Neither one of these markets has a pattern that I would buy here, especially Gold, which has been hit very hard the last couple of days. Silver, short term traders should have been short yesterday about halfway through the day.

Trade Location is of the utmost importance in making profits. Great ideas and bad timing will equal losing money. Make sure and try and take your bigger picture fundamental views and tie them into short term patterns that have the same bias. There are never any guarantees, but this will enhance your odds of success. Just because you think metals prices are going up, do not just run in and buy the futures or stocks blindly. Beware of "Location."

BONDS

For those who subscribe to my service you are already aware of the selling opportunity I pointed out for BONDS. In this chart you can see that right on cue this market has started to head down. Before patting myself on the back too much I have to admit that I also had mentioned this sell setup the month before. I was early on that call, but timely in this one.

The Trendline drawn in red served as an ideal entry point into this market. I do not believe in drawing a bunch of lines on charts and then claiming that "see I was right it stopped right on this line......etc." However, if there is a clear trend line that can be drawn between two points like this one, it has to be taken into consideration for larger picture views on things.

Also notice down below that the commercials went heavily to the short side recently right as we were kissing this trend line. Our service did get a short trade marked on the chart that made 19 ticks profit. That is a short term trading method that does not ride larger moves. This setup has the potential for a larger move than that, so anyone short from above should just have trailing stops to try and ride this for a bit.

Normally taking half of your position off at an equal point to the intial risk, and then trailing the balance at a break even from your entry price, is a good way of both catching large moves and minimizing risk.

Yen and ledge patterns

Currency markets are challenging markets to trade due to all of the gaps due to overnight action. One effective technique that can be used is defining these small ledges drawn in on the left and taking breakouts from them.

What we are looking for is matching highs or within a tick or two, and also matching lows within a tick or two. Each of these must be separated by itleast one bar or more. Once the ledge is defined just trades the breakouts. In this market I would suggest not taking the breakouts with big gaps up like today's. Also, trading them in the direction of the trend is preferred.

Some of these work, but the risk increases quite a bit. Also, today's gap is not from a ledge, I just showed it to have a real life look at a large gap as it occurred. This market is poised for a rally so this gap could hold, but a better entry is likely. Ledges work in all markets, but like any technique cannot just be traded blindly.

Crude Oil

Lewis, here is a current chart of crude in response to our exchange on this market. We are in a downtrend in price and the commercials who had gotten heavily short as marked by the downtrending red line, have moved back to neutral ground.

Open interest is not declining which is what we would want to consider long positions. That is somewhat simplistic and has exceptions, but is the general rule.

So we have a downtrend in price, and really nothing fundamental telling us to buy it, so short the pullbacks until this changes. If you go back to the post from mid August on this market, you can see how we have fallen further from the spot where I pointed out that the commercials were short.

Things do not always follow the script this perfectly, but it is suprising how often they do when you are keyed in on the right fundamentals.

Here is the latest on GOLD

It has formed the infamous triangle on a weekly chart. High level triangles the technicians will tell us are generally a bearish formation, and breaks below the downside of them should be shorted.

At the same time the commercials have been moving to the long side and open interest has been dropping. What this tells us that a larger and larger % of the positions on the long side are commercials.
This is bullish, yet we have a bearish chart pattern.

What to do? At this point I do not see a high probability entry into this market, so for me I will just stand aside and let the economists tell us what will happen here.

Profitable Trade

Here is the exit this am in the S&P trade I mentioned in the previous post. The market felt weak this am early so I exited just before the open for 5 point profit/$1250 per contract. This was not a great trade but still was a profit.

This market looks a little heavy to me here, so I am expecting a drop to begin any day now. However, this trade was with the trend so the odds are always in your favor when you are in sync with the larger time frame trend.

S&P 500 Update

Here is an update on the SP 500 chart I posted the other day. You can see the small b indicating a buy spot in one of my trading systems. I have been long this market the last 3 days. It is in an uptrend and we have had a small breakout of a flag pattern in the direction of the trend.

The Bond market below is supporting the upmove in stocks by being in an uptrend also. I will be exiting this trade tommorrow in all likelihood depending on the opening. If it is a profitable open, it will be exited.

There are a few storm clouds on the horizon potentially which will be covered in my newsletter coming out at the end of the week. There are some divergences setting up that could signal this upmove in stocks is about to end, but for now the trend is up.

HOUSING STOCKS

I have been asked quite a bit recently about shorting housing stocks and lenders. Many people know of my forecast about a year ago for a drop in the housing market. If I am so bearish on housing, am I short the housing stocks?

The answer is no, and the chart to the left of TOLL Brothers shows why. I have learned over the years that there is an upward bias in general to the stock market, so taking short positions really requires a "loaded deck." Loading the deck in stocks for me requires, trading in sync with the trend, and having valuations that match that trend.

In uptrends I want low debt and low valuations and good earnings, and in downtrends I want high debt, high valuations, and declining earnings. As you can see from the chart to the left we do have a downtrend in price. However, as we review the other 3 categories we see that we have rising earnings, low debt, and low valuations. These are the opposite of what I am looking for to short stocks in a downtrend.

As a result of this there are no short trades. It is really as simple as that. I do not inject my opinion into my model because opinions can be so arbitrary and hence unreliable. I do believe housing is in for some trouble here, but I do not ignore my model EVER! I may miss some opportunities, but I focus on the ones I do pursue, not the ones that got away. There is always another trade, but there is not always more money for the next trade if you have chased too many marginal opportunities.

SP 500

Here is a chart of the S&P 500 Futures. We have a bull flag formed as indicated by the red line. We have had a nice rally off the lows that has broken the downtrend, and now we have formed a small consolidation flag.

This move up has also been supported by dropping interest rates ( higher bond prices ) charted below. Notice how the bond market started it's rally while the stocks were making their final drop down. This type of divergence often happens at market lows.

I have been looking for a drop into the fall to set up the mid term congressional election buy spot, but we may not get that. Seasonals say that we will, but this setup right here is fairly bullish for the very near term. I did not expect to see a rally like this at this time, so I have been wrong about this so far. A breakout above this flag is a legitmate long side entry in the market.

SP 500

Here is a chart of the S&P 500 Futures. We have a bull flag formed as indicated by the red line. We have had a nice rally off the lows that has broken the downtrend, and now we have formed a small consolidation flag.

This move up has also been supported by dropping interest rates ( higher bond prices ) charted below. Notice how the bond market started it's rally while the stocks were making their final drop down. This type of divergence often happens at market lows.

I have been looking for a drop into the fall to set up the mid term congressional election buy spot, but we may not get that. Seasonals say that we will, but this setup right here is fairly bullish for the very near term. I did not expect to see a rally like this at this time, so I have been wrong about this so far. A breakout above this flag is a legitmate long side entry in the market.

Housing Futures

Here we have an update chart on the LA region housing futures. I hesitate to even call this a chart, it is just a bunch of dots on a page. The reason it looks like this is the complete lack of volume.

There are not even enough trades during the day to create daily ranges. This is a shame, as it undermines the usefulness of this product. As I have stated before, until the housing insiders become players in this market, it will not even be viable as a hedge play for individuals.

You could take a position, and be correct, yet not be able to get out of the trade with a profit due to the lack of liquidity. Now is a great time to be short housing just based on what appears to be a large scale dropoff that is beginning to unfold. However, you can not play it here with any degree of certainty due to low volume. I think the large scale players(builders) are hesitant to take a public short position for everyone to see for fear of undermining consumer confidence in this sector. That is just an opinion which may or may not be accurate. I do not know of another way for these companies to hedge their land cost positions which is currently cutting into their margins.

Here we are waiting for Mr. Goodbar

We are short the bonds here and awaiting that nice down bar. The trade is going against us a little at this point but we are about at the average draw down for this particular pattern.

Notice how we continue to have the indicator that measures professional activity within the day lagging the price move upward. I have displayed many of these in the past and it is typical for them to last for a bit. There is no magic to things like this dictating the minute it appears, price will crumble.

We are in a period of seasonal strength in this market, so we cannot be surprised that it is carrying on a bit. However, in general, when we see this type of setup a correction normally ensues. Once again, I display this as a tool. This trade entry does not have this as part of the rules for the entry. Divergences often show up against the direction of the main trend like this, so we need to be careful not to get too carried away with how we use them.

It should be noted, that a trading methodology could be constructed with this tool at the core of it, but it is a tool not the grail. In general divergences should be used to take profits in trends, not to fight the momentum of them.

Blogger seems to be cooperating now. Here is a chart of the US DOllAR

Notice how the seasonal trend is heavily down from here on out. Also, we are in a downtrend, with a rally against the trend. The commercials are in middle ground, but are heading toward the short side of this market.

If we can get a small rally, or even sideways move, with the commercials shifting to the short side during that period, we will have a nice short sale setup.

Once that happens, just look for short term pattern entries on the short side to enter the trade.

BONDS

Here we see the 30 yr bond chart. We have had a nice rally off the lows and have broken the strong downtrend on the daily charts. Monthly charts still show a downtrend in place.

Notice how we have the ProGo indicator showing a divergence against this upmove. We have 3 higher highs in price with 3 lower peaks in the indicator. These 3 point divergences speak loudly that the insiders are not buying heavily into this upmove. The COT report comes out today, so we will see if the commercials are moving out of this market. As of last week they were reducing long positions.

The daily trading service does have a sell signal for today that has not been filled yet as I write this. It is NOT based on this graph. The daily service is a completely mechanical system and this type of visual is not programmable. However, I do like to see this type of thing backing a mechanical signal to take action. It combines a little art with alot of science.

CRUDE OIL

I am posting this Wednesday after the close. Crude Oil has come down a bit here in recent weeks, so let's look at the dynamics of this market.

First notice how the commercials have been steadily moving to the short side since the beginning of July and are now heavily short. Also at the same time look at open interest rising during this same period. What this tells us is that a rising percentage of positions were by the non-commercial players which is always a bearish sign.

Also notice how bullish the sentiment index is, yet another bearish sign. So at the beginning of July we have rising open interest, declining commercial longs, and bullish sentiment. These are what tops in price are made of. Does this mean we will have a huge fall, no. What it meant at the recent highs was that this was a selling opportunity until the above fundamentals change.

S&P follow up

It was good that I followed my rules (I always do) on this setup. We had a strong up day today, and that short trade I mentioned earlier would be underwater so far. This is why it is so important to have your trading rules line up as many things as you can supporting your decisions. That approach will keep you out of trouble for the most part. Trouble will find you in futures anyway, so why not avoid it when you can.

The chart I have here shows what I consider to be a bearish setup in the works. Notice the negative divergence between the ProGo indicator at the bottom and price. Insider buying is lagging this push up we are having. The bond market is supporting it, which is a positive. The commercials are currently in middle ground.

We have a seasonal tendency for a decline, so when we combine this with this lack of insider buying intraday, this sets us up for a fall. Ideally, what would happen is that we take out the high of 7 days ago, with the ProGo lagging this move. This would setup a short sale opportunity. What we currently have is a developing situation that needs to be watched. My system does not have any sell signals yet, but I am studying this closely to see if there is a pattern at hand to act upon. Nothing yet, but if I find one I will post the trade here.

S&P 500

I wanted to short this opening so bad I almost had the tie my hands behind my back to stop myself. A gap open above a day like yesterday just "looked" like a shorting opportunity to me.

However, although my pattern book does show a downward bias from several different angles, I could not dial this in tight enough to meet my criteria for trading it.

We can just watch it and review tommorrow what transpired. I will also continue to research this to see if there was something that I missed which would have given the green light for this trade.

I think it is of the utmost importance to have discipline in determining when and when not to trade. I may miss alot of trades, but all I am concerned with is what happens in the ones I do select. I have displayed the TICK and TRIN with this just for a different look than most of the other charts I post here.

STAYING WITH GOLD

As we keep following the story in gold the value of waiting for the breakout above the consolidation for entry has proven it's worth. The price never rallied enough to trigger a long position in this market (the area marked buy above), and look at the selloff we avoided.

It is generally not advisable to trade the downside breakouts of these formations unless it is with the overall trend. In this case it would have worked for a nice profit, but it is clearly against the trend in the market.

Just look through old charts and mark off these tight consolidation periods, and then note the breakouts which we call continuation patterns, in the direction of the overall trend. It is a very basic way of trading with the trend in the financial markets. This can be done with stocks as well.

T BONDS

The bearish divergence that I pointed out in T Bonds last week has finally resulted in a price drop.

I mentioned that these can go on for awhile before anything happens and that is exactly what occurred. This is case in point about why you should not just blindly fade a market move just based on an "indicator" reading. This may not seem like it took that long in days, but if someone is trading a 60 minute chart, this is an eternity. The divergence first showed up at the end of last month.

To sit in a trade for two weeks that is based on a 60 minute chart pattern would rank as a poor trade in terms of timing. The whole point of using a 60 minute chart is to dial in the timing of a higher time frame setup

Thankfully, Paul McCulley from PIMCO said don't short bonds right at the high. So I shorted them. ( Just a wise crack - I did not short term due to his comments ) As a result the shorts did pay off from up there. Of course, his comments were based on a higher time frame than this. I doubt he cares about a one basis point move.

However, as a short term traders, that is $1000/contract or the equivalent of a $10 move in Gold. This is more than enough movement for us to profit from.

GOLD

The consolidation/flag pattern in Gold continues. Today is a good example of why "front running" the breakout as I mentioned yesterday, is not a good idea. Waiting for a clear breakout of these types of patterns is important.

I would recommend waiting either for a close outside of the pattern, or at the very least a break above the high of 4 days ago, not including todays bar. That would mean the 2nd bars high that the red line connects to.

Discretion is required when playing these types of formations. This is why I do not trade like this. However, you have the fundamentals at your back so a breakout of this pattern, with the underlying trend and seasonal tendency, has a reasonable expectation for a profitable trade.

Historically the 7th trading day of the month ( yesterday ) and the 12th trading day of the month, have been the 2 best days in August to buy for a short term move. Yesterday, the 7th was profitable buying the open and exiting this am. It remains to be seen if the 12th will be. It would be a nice combination if a breakout were to occur on that 12th(bullish day) trading day of the month.

Rarely do things work out that perfectly in futures, but it is something to be aware of.

Our gold pattern continues to tighten up. Now we definitely have the tightening range type of breakout pattern we want to look for on a long side entry in this market. The seasonal tendency favors an upmove as well here.

I have bracketed the pattern for those who are not familiar with the flag terminology to see that it resembles a flag when presented like this.

This is a very basic continuation pattern that traders have used for years.

GOLD

Here we revisit the Gold market. I had discussed in the past trading little flag patterns with the trend. This is a smaller, tighter type of flag setup offering a better entry point.

This is just part of the general education I offer in this blog. If you are inclined to be a player on the long side of this market, a breakout in the direction of the longer term trend which is up, is usually a fairly low risk trade.

I want to also repeat what I have said previously, which is that I do not trade these types of patterns. In the old days I used to trade these almost exclusively. They do provide an overall edge in trading. We are at the time of the year that seasonally has an up bias in this market.

This is a short term pattern, if you are a long term player you should already have been long at 608 at the very worst.

T BOND FOLLOW UP

Here is a prime example of what I spoke about the other day regarding indicator divergences. I have mentioned the negative divergence that had developed in bonds between insider buying and the price. I had also said that these can carry on for awhile, and were not a trigger by themselves.

Notice how the bond market has continued to rally in spite of this divergence. I have seen this happen many times during trend runs like this. Make no mistake, on a "short term basis," this market has a strong uptrend going. All these types of things are is tools to give you a general direction of what to look for next.

It it tough to go with markets, against the direction of the divergence. At times this is exactly what one must do. I do have a short position on that is based on a bar pattern. It needs to be stated, that it was not put on because of this divergence. It was based on entirely different parameters. These divergences are not programmable, they are just things you can see and observe.

Housing Futures

Perhaps the only thing that is a bigger bust this year than housing itlself, is the housing futures launch. This is a textbook example of what we would call an illiquid market.

If you just take a cursory glance at all of the other charts I post in here, you will immediately notice a big difference. This chart is just a bunch of dots. Also, looking at the volume at the bottom, there is not much if any trading going on at all in this market.

I had stated openly, that I feared this would not be the vehicle everyone hoped for prior to it being launched. There were a couple of reasons why I felt this way. First, to fully hedge the amount of equity many homeowners have, someone would have to take a very large position. Since everyone would be looking to take the same side of the trade, liquidity on any exits would be unlikely. As a result, you could be right about a drop in price, but by the time you got out, you could actually lose money.

Someone has to be on the other side of the trade for this liquidity to be there. The second reason was that I thought the homebuilders would be hesitant for PR reasons to hedge in this market. They are the ones who could place enough money in this market to create liquidity. However, can you imagine what would happen if a story came out that said a large builder had just recently taken a big short position in housing futures?

Time will tell if this market has a future. Maybe as the price drop picks up some steam, volume will pick up. However, I would suggest that it will not. The big players (builders) already know what is in the process of happening, and they are still not putting any money here. It would be contra to the nature of insiders to chase something down. The hedging they generally do is on the front side.

Participation by the "big money" is always needed to provide proper liquidity for trading. Until this market picks up some of that, it is not worth looking at.

GOLD

As a follow up to the post from a few days back about GOLD, here is how we look at present. The breakout from the flag has actually been successful. I had commented about how those types of flag setups, with steep wide range bars were low probability, and that I expected this to fail. I was wrong about that, but not wrong about the probabilities. These types of patterns, even though this one worked, are not high probability trades. I am not going to catch every move. I just want to catch the ones correctly that I choose to trade. This is done by trading only the highest probability setups, and having the discipline to stand aside during these types of periods.

Trading can be very exciting, but there is no need for there to be excitement caused by foolishly losing money.

Notice how the commercials below are exiting this market on this rally, and that open interest has declined significantly. The open interest decline only is significant in that it is declining due to commercials exiting. If it were declining due to non-commercials exiting, it would not be a negative.

I would expect a sell spot to potentially develop if this trend continues.

This is a Cotton Chart. This is beginning to look interesting. Notice how we are approaching the typical seasonal low. The commercials have been increasing their long positions in general on this dip the last few months.

The Red Line is just a basic trendline, nothing fancy there. This market is in a pronounced downtrend, so we do not want to get too carried away with catching the knife on dips. We need to watch this to see if the commercials increase their longs on a break to new lows in the next few weeks.

If this were to occur, then one good place to buy would be on any break above the downtrend line. We could buy weakness on that condition also, if we got some type of divergence. The Pro Go at the bottom is diverging somewhat at this point. If price were to make a lower low, with Pro Go not following, that is another possible setup. We will follow this here to see what unfolds.

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

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

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

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

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

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

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

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

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

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

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

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

30 Yr Bonds

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

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

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

POT OF GOLD

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

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

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

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

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

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

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

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

Thanks for your help

Chris J

Here is the updated GOLD Chart

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you sir, may I have another?

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

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

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

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

Here is the update

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

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

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

DAY TRADING

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

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

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

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

Japanese Yen

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

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

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

Here is the updated weekly Gold chart.

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

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

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

Intraday action

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

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

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

COMEX GOLD

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

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

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

THE DOW

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

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

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