GOLD

Instead of me bragging about how great I am as in the last post, in this market although I have traded it profitably, my views of where it was going have been lousy. The red S followed by the dotted line down show the last trade I made which was a short with a nice profitable exit which is the bottom line. However, I have been expecting lower prices in this market and we have not gotten them.

The Weekly chart still shows lower highs so until that is broken we are in a downtrend, but a very choppy one that is hard to trade. There is not alot of commercial selling going on yet so that is one bearish factor that is not in place. If we look at the whole metals sector however, there is an overall bearish position by the commercials.

Ideally for me here I want a push up that serves up a false breakout that reverses down to get short or I will just sit and wait for this to clear up somewhat. There are always opportunities elsewhere. I want to shoot fish in a barrel not in the ocean, and this market is just sloppy right now.

Strong Dollar



Indicated on the chart to the left was my call for a rally in this market, I happened to get the low exactly which I was not trying to do, just lucky. However, I know there is a longer term upcycle in this market that should last several years, and we were in an uptrend that had a pullback, so it was not really that lucky.



This is where actually being a trader vs an economist or some big picture theorist trying to sell you Gold coins on the radio comes in handy. I cannot afford to have some macro economic view that may or may not be correct, I need to be able to determine when and where the moves are going to occur, so I can position real money in the markets and benefit from it. This is a prime example of watching what is actually happening and getting past being hung up on what should happen. The fact of the matter is that the Yen and the dollar have become the flight to quality vehicles in this stock market wipeout, so why would anyone believe that stocks and the dollar will decline together? That is not what is happening, they are moving inversely from one another. Until that changes don't make investment decisions based on a dollar decline if you also think stocks will decline, they are moving in opposite directions.

Today we are having a huge breakout to the upside in this market not shown on this chart, further extending this rally.

SELLIN' TIME



This is a follow up to the post I had on 30 Yr Bonds. We have gotten this rally up I had indicated I thought would take place. If you notice the oscillator at the bottom is severely lagging this price action, a bearish indication. However, even without that we have had the bounce that has set up this short opportunity. It also coincides almost perfectly with the seasonal pattern. As a result it is time to look for whatever entry patterns you might use to get into this trade.



I will not disclose all of my proprietary entry patterns in this venue, but I will say that I have not shorted this yet, but will be looking depending on how today closes, for a short entry tomorrow. I do not believe in just entering on strength when looking to sell so most of my entries require some short term move in the direction I am looking to enter, but the patterns vary depending on the situation. The stock market crash that is happening right now is supporting this market for the time being but if we got one day of stable stock prices that could quickly change.

How do you like me now?

Obviously my post on the Stock Market was pretty timely. I did say to wait for a break which came the next day indicated by the yellow line at the top and confirmed by almost any oscillator one could have looked at.

I have maintained all along that we are nowhere near done on this decline overall and there is certainly nothing here that indicates anything different to me. I hate having that position because it is the common view unfortunately, but it is what I study tells me.

I see no reason to buy this index or stocks at this juncture even though we are now clearly short term oversold.

WHAT THE BUCK?

Here is a weekly chart of the US Dollar Index. It is clear the uptrend that we have been in and also equally clear why I have been bullish on this market. Notice the blue line indicating the commercials buying the market during the recent pullback in price. This is exactly what we want to see the go long a market.

There are alot of geniuses out there citing one reason after another as to why the dollar is going to take a mighty fall. They may be right, but for trading purposes all that hyperbole is worthless. It comes down to having a way of knowing what your signals are and tuning out the noise. This was a buy signal at the recent low, and I was outspoken about this in many forums including the piggington blog where I post occasionally. This chart shows why. At times I may trade short term against these types of setups, but big picture, these are what you want for large moves in the markets.

First off, Joshua thanks for the nice comments!

Today I have a daily chart of 30 Year Bonds displayed. The historic upward move is clear to see, just for some perspective, 112 to 142 is $30k per futures contract in a market where in the past a good trade was $2k per contract or thereabouts.

We have had a sharp break down from an odd flat ledge at the top. If we couple this with the strong seasonal bearish tendency in January, we should be looking for a rally as indicated by the arrow to setup a shorting opportunity. I do not know if we will get it but I think we will. As far as translating this into actual borrowing rates, that is a waste of time. There has never been the degree of disconnect between Mortgage rates and the underlying longer term bond yields than there is right now. There is so much gamemanship going on with banks pricing in outrageous margins on loans, which I suppose they justify with an anticipated increased default rate. Mortgages should be 4% right now or less based on the underlying.

Following up on yesterdays commentary, the rally has continued. One of the things I have learned the hard way over the years is not to fight trends. The short term trend is decidedly up so even though there are reasons to look for a short sale, until we get some type of breakdown I am staying out of the way of this.

Some of the shorter term timing things I use have already failed to pick this top and we are working on 7 consecutive up days in the SP 500 pit contract. Contrary to popular belief that does not indicate a good short sale entry. We are having extended bounces in most markets right here, energy, grains, currencies, softs, metals. I think most of these are shorting opportunities the challenge is timing them properly.

I have been away for a long time working on several different things. With all that is happening I thought it might be a good time to resurrect this blog.

As we head into 2009 this is how things look in the S&P 500 Index. The most important thing to note is how the commercials in the bottom graph have been on the short side of this market for quite some time. This has been typical during long bear markets in this Index. There is no reason to look for big rallies as long as this condition exists. If I had displayed the other indexes, they are much more bearish with the commercials than this chart shows with the SP 500. What this means is that rallies are shorting opportunities. January has had a recent tendency to have early upward moves which started Friday. The Vix is indicating low relative levels now which is bearish, so this rally on a short term basis could rollover at any time. I would suggest using whatever short term timing techniques you use individually to time shorting this market, it is time to be looking.

I will post some things on other markets soon. I am looking to short Gold on rallies this month, it is not setup quite right yet. Also, although a short term sell is setting up in the Dollar, longer term I am bullish on the Dollar going forward.

GETTING CLOSE

I have not posted here in awhile for a few reasons. First and most important lack of feedback. I have stated often here that I would prefer comments vs emails to encourage discussion. Since that has not happened I do not feel compelled to tackle the technical challenges of making these entries. Satellite internet and it's slow speed make this very difficult.

Secondly, in this day and age where so many people read one article from someone they don't know, and then they are the expert on every subject on earth. I am seriously contemplating retreating back away from the public and just trading like I always have. At times it is just not worth the stupid comments that are made towards you. The most recent was the accusation of me getting killed because I am a long term investor. An average hold time in trades of less than 2 days and I am a long term investor being killed by this decline? Just read the last post and several before if you view me as that.

Now with all that aside, and referencing my last post where I thought the low would come in March, we can see that a potential low is in fact setting up here. The strong seasonal tendency for the decennial pattern to have March Lows, combined with the commercials stepping up their buying here, and interest rates tanking, is the perfect storm. This is setting up very nicely for a major rally. We will see how we look at month's end which is the ideal cycle spot, but it is sure looking good right now.

One more dip would be ideal, but we do not always get what we want. FYI, this particular setup is actually a buy and hold for about 6 months when it goes unlike most of what I do.

Without having posted anything for awhile, there is some catching up to do.

First, the year end rally at the end of 2007 did not materialize which led me to exit the long side on the last trading day of 07. I felt that the weakness during that very strong seasonal period was a warning of things to come. There are times when you have to make judgements regardless of what your systems are telling you.

As we are now in free fall, with the commercials heavily short, and in a seasonal down time period, is there any reason to look at buying this dip? As I type this the globex S&P session is down a staggering 52 points during this holiday. Whether or not this is a buy is up to an individuals trading or investing view. As an investor, stocks are clearly on sale here being undervalued by a number of measures, in particular, vs bond yields. It is at these times that you simply must put money to work, but also not to expect immediate gains. Investing and trading are two different approaches. As I have stated all along, the end of the first quarter is where I was looking for a low to be formed, so we are a ways from that as traders but not as investors.

From a short term trading perspective, the market is severely oversold and these types of declines have to be bought into, but timing them is difficult. First, your stops need to be much wider than normal to adjust to the volatility, and second, your size needs to be smaller for the same reason. I do not look to make a killing during these periods because that is how you get blown out. I want my risk to be the same during all market periods for consistency. That means trading smaller size with wider stops.

If the market does gap down to the degree that globex is indicating on Tuesdays action, that is an opening so extreme that it is a buy in my view for a short term trade. It is completely counter trend, but it would represent a several standard deviation move, that statistically is probable to reverse. However, overall I think we will trade down for the next week or two, then find a meaningful short term low, work into a more significant one in March, then head upward into the end of summer.

Going Nowhere



If you look at the bigger picture here in the S&P 500, we are essentially just trading sideways in a trading range. You can see the commercials have shifted to the short side of the market on a relative basis. However, if you look at the green line drawn across horizontally, they are still at a high level compared to where they have been over the last several years. Short term, they are at lower levels compared to 6 months ago.



I have researched the number of times that the WillVal indicator with these parameters has gone into an oversold condition as it was recently, with the market moving sideways in an uptrend, and there is not one single instance of a large decline that followed.



I also researched how often the market declined when the commercials were in this type of position in December, and there were no instances of a decline in the last week of the year when this happened. What this means is simply that the seasonal year end bias has been stronger than many of the other fundamentals at this time of the year.



As a result, I am holding my longs into the first week of January, where I will lighten up or completely exit. I do think we will have a January short term top, possibly the first week. I am looking for a March re-entry, for a big rally up from there. Oh wait, I read on another blog the other day that we all should "be very scared." I love that type of thing because that is just another person for us to take money from, the more the merrier especially during the holiday season!

COME TO PAPPA

The year end rally is solidly underway and I would like to point out something here. Notice how the market is pretty short term overbought here. Even the bottom indicator, which is inverse to the others, with low readings being sell signals, is pegged at the sell point.

One of the most painful things to learn about trading is that overbought can get more overbought, with the reverse being true for oversold conditions. I have found that once an indicator gets into these zones, if the reversal does not occur immediately, the move generally continues. As a result, prolonged readings of overbought and oversold need to be ignored.

Eventually a correction will occur once this condition is established, but I have never found anything that is a stalwart indicator to tell me when this will happen. If I ever do I can promise that I will keep it to myself! For now just ride your longs for the year end markup.

MAKE UP YOUR MIND





Cnbc reported as we were approaching $100 per barrel in Oil, that the fundamentals were strong and therefore we should continue upward. Some guests called for $150!

Now this morning they are reporting that the fundamentals are weak therefore prices should continue lower. PLEASE ignore these morons! They have some very qualified traders they interview, and paying attention to them might help you, but the commentators themselves just have no clue. It is shocking to me that these people can be in the pits, and talk to top traders daily, yet have absolutely no idea what is going on. What the hell are they doing down there every day.

My favorite one is the gal in the energy pits, I would wager my Saint Bernards could out trade here! How in the world could the fundamentals change this dramatically in two weeks? The answer is they haven't. They never supported that momentum driven move above $99. You can see the commercials did move up their long positions compared to a few months ago, but did reduce them over the last couple of weeks. They have tailored off somewhat here below a level that justifies long positions. However, if we were to get an increase there during this decline, we would have a very good buy signal.

We can only hope that knucklehead who reports on this market will be bearish at the time a buy signal shows up. That would guarantee a win.

Going back a couple of days you can see where I had stated that I thought there was a high probability of a short term low being formed. Obviously now that we are 600 points higher on the Dow, that call was correct.

I went "ALL IN" at the close of Monday in most of my accounts. One in particular is a retirement account that does not like market timing. I can't wait for the conversation scolding me for this move. It was "lucky" to have bought the low close, but sometimes you get lucky when you know what to look at.

It is too early to tell if this will be a major low, but what appears to be happening is that what began as short covering is picking up some new buying which could propel this sharply upward. That is conjecture, but this is the time of the year in general when you want to be long stocks to take advantage of the seasonal bias to the long side. The bottom line is that lower rates are good for stocks, and that is the environment we have. As a result, when you get dips during low rate periods, you need to be looking at buying stocks.

What is this mess?

I realize that this chart has a ton of clutter on it. Rarely a day goes by that I do not have another idea for finding the Grail for timing short term lows. Alas, none of the ideas ever pan out as anything other than another tool. I have several things displayed here which are all telling us the same thing, there is a good probability that a short term low is being formed here.

Notice the very large difference between new lows and new highs. This is extended to an extreme level, similar to what has often been the case at major lows in the past. The Advances vs Declines is also at a very low level. If we couple this with the seasonal tendency for a low point, we have the makings of a possible starting point for a good move upward. The pundits would have us believe these readings are very bearish and indicate further weakness and perhaps a crash. I like to fade the market at these times. Not every trade will be a win, but the majority of them will be in these instances. We are already long the S&P from Fridays open, so we have already placed our bets on this.

Here is the summary of the Gold trade we just exited in the trading service. The initial entry, and an add on entry above it are marked with horizontal red lines and an S for each of them. Our exit was a bit lucky in that we exited on a limit right before the market zoomed up today. The add on entry was not in the service, that was something I did in my own trading only. Was this luck?



Keep in mind that although the fundamentals the way I look at them are bearish, but we had reached a short term oversold area, in what is still a long term uptrend, so it was prudent to take some profits. It may not look like much due to the scaling of this chart, but this was a profit of $3270/contract on the initial, and $4270 on the add on, so a substantial gain overall.



The big picture plan here is to wait for a pullback and re-enter the short side if the fundamentals are still bearish at the time it occurs, then try and ride down what could be a very big move. It is possible that pullback does not occur, but based on the relative valuation compared to the dollar at the moment, I think it will.

Is this the low?



That is impossible to know. As I had stated previously, I was legging into the stocks I wanted to own on this dip, and bought fully into 2 of the 5 yesterday when they were down on the session. Both exploded upwards, and would have been incredible day trades. However, I plan on holding these longs for awhile.



I had been of the opinion that had we had one more significant down day, this could have been the low, as many of the oversold indicators were about one day away from being in a perfect zone for buying. The market rarely accomodates our plans perfectly, which is both the beauty and the frustration of trading.



As you can see on this chart, the S&P short term timing system has been on a fantastic run, getting us long very early yesterday and enabling us to cash in on the big up day. Since those signals are also now on my trading service, they will not be posted live here.



I do think it is too early to call this the low and celebrate, but I do have a substantial long side position that I will look to lighten up into years end if we rally, and add it back on during what I think might be a first quarter decline. The cycles still favor a December low point, and the announcements this am that the worst of the subprime fallouts are behind us, seem difficult to believe. All it will take is another scare there, and poof, 500 points can come off the Dow instantly.

When you build the perfect storm, there can be no surprise when it hits, the phrase on the chart is from FIELD OF DREAMS.

I had been telling people a huge drop would come out of the blue in this GOLD market, and it has happened. How did I know this? The commercials have been heavily short, the most in history. This huge run up has been driven by speculators and not insiders. When this happens, often the rug is pulled out of the blue like this. In a situation like this we could see $100 drop or more in a very short period, because of panic selling by the small individuals who now realize they have once again been sold a bill of goods.

I have no idea if we will get a drop of that magnitude, just that it could very easily happen because the fundamentals favor it. You do not have real insiders buying at this point to help prop up a drop. The ideal seasonal high is due in January, but when you get conditions like this, you have to act when they develop. Things do not always line up perfectly with the seasonals.

Is this sideways move a bottom in progress, and time to hop aboard?

I have currently been legging in to partial positions in the stocks I have identified as undervalued/bargain material. I still think we will work along the red line sideways to down for a month or two more, then launch upwards.

However, I did not want to get caught at the station in case the train left early, so I put some money to work. You never can be sure what will happen, so I put about 40% in. Hopefully, I can average down into full positions in the next 30 to 60 days at lower prices.

Of course if I happen to get a sell signal in the mean time, I will exit everything. There does not appear to be a sell in sight at this point with my timing system.

COLD WINTER COMING?

One of the megatrends going on right now is energy costs rising. Here is a daily chart of Heating Oil, with a blue line just stating the obvious up trend. The fundamentals are actually bearish at this moment, and it is a time of the year where the seasonal high is typically made.

I am actively looking for a short entry in this market, although I am in no hurry to stand in front of this freight train. You can see the small speculators are the ones that are pushing this market higher. All else being equal, we want to fade them in a situation like this. However, we need to see a break in the uptrend in price before anything will happen on the downside.

I have learned the hard way over the years not to fight a moonshot like this, so look for sell signals, but only on price action that represents a break down of the trend.

As I sit here hoping the fire doesn't reach me I realized I had not posted yesterday in the midst of all of the turmoil.



As expected, we did not get a crash at the beginning of this week. It amazes me how after a big down day, how many people come out calling for another day just like it. The odds are so heavily against that, you just have to take the emotions out of investment decisions. It is hard to do, but it is what you need to do. If you run the tests on buying a gap down open after a day like Friday, there is a very strong up bias to that, not down.



I still expect us to meander sideways to lower for a bit, and it would be awfully nice to see the WillVal indicator at the bottom here drift into an under 20 reading for a buy spot. I do think this will happen. Next year should have a heavy upward bias, so the question just becomes where to best enter to take advantage of it? The end of this week has been the ideal seasonal low buy point. I am more than likely going to wait to see what the commercials have done in this Fridays report, and then make my decision. I think I will wait for an oversold reading in the WillVal at the very least, before going back in. I am not satisfied with the list of under valued stocks my methods are cranking out because among them are C and HD which are subject to further weakness due to housing. They may just languish, which is not what I am looking for.

I do have an alternate list of undervalued stocks that I got from a friend who uses a different approach than I do, which also has a few selections that I am not too pleased with. Sometimes you just have to go with the numbers, but I am digging deeply to find a numeric way a discrediting a few of these stocks. Until I get that resolved, I am going to stay flat.

The problem with C in particular, is there seems to be some funny accounting going on there, which may in reality make it over valued and not under valued.

CAN I SAY I TOLD YOU SO?

It is worthless in reality to make predictions, all we can do is observe what we see as we go along and try and make prudent bets on what will happen next. I did not outright predict a sharp drop like this, but I did predict a sideways to down move for a month or two. We obviously are getting that now, so what to do next?

The ideal seasonal low would be at the end of next week. Seasonals rarely repeat exactly, they just give us ball park views on what to look for and at what time. The market is getting very short term oversold here, so that does seem to be matching up well with the seasonal low point at the end of next week.

I am currently evaluating which stocks I want to get long when the buy signal pops up. I would suggest waiting for some short term strength just to avoid catching the falling knife. Nobody can consistently predict when these sharp drops will turn on a dime. The subprime effect is seemingly re-asserting itself today with some of the comments being made publicly. This is impossible to quantify, and is not even a consideration in my analysis of when to buy and sell.

The big rally in bonds is good news for stocks over the longer term, and those of you in my trading service got a very nice long side trade there this week, our biggest win in the last 4 years on an individual trade. Lower rates are good for stock prices. Maybe we get lucky and get a huge waterfall here to buy into, but I doubt that. Maybe a little bit more weakness, and then a short term low could be made which would be a buy point.

GOLDEN OPPORTUNITY

My apologies for having missed a few days, blogger was not allowing chart uploads. It is my intent to post something each day, so keep checking in.

Gold has had a very nice upward move that is continuing today as I post this. The trend is your friend, so if you are currently long there is no reason to change anything. However, notice below that the commercials have their largest net short position that I can find in the history of the data that I have. What this means is that if we were to get a break in the trend here, it would be a green light special for a short sale.

This is a trade I am lurking on with my trading service on a daily basis, looking for an entry. You cannot just go out and blindly short a market that is this strong because that just becomes a guessing game against random luck. However, at the very least do not commit to any new longs here, and tighten your stops on any long positions.

The one fly in the ointment is that the ideal seasonal high is in January, so it would be best if a sell set up at that time. With the commercials this short, I will overlook the seasonal if the pattern sets up properly.

FLY IN THE OINTMENT?

With the markets sailing along wonderfully, how could anything be wrong? For the most part we have the perfect storm going, lower rates and insiders bullish, right at the seasonal rally point. There are a couple of things that are a bit troubling. First, the A/D line has not made new highs yet while the DOW has. This divergence is pretty small, so not a huge worry yet, but it is something to keep an eye on.

Second, notice the large negative divergence in the Pro Go indicator at the bottom. I have explained what this is in the past, so scan the archives if you do not know. This quite frankly, is very troubling. I am looking very closely for a spot to buy back in, but this makes me think we may have a bit of a rough patch of a month or two. Rarely does the market continue upward, when this diverges by this amount.

One thing to keep in mind about divergences in indicators, they often occur against the trend and are not anything but profit taking indications. This is not ever a green light on it's own to short a market. However, this is occuring right at a point where we have a broadening formation at all times highs, so this is not a point to initiate new longs.

My guess is that we will go sideways to lower for a month or two, then launch a pretty good upward move again. I will be looking during this period for the stocks I want to buy, and when to enter. It is frustrating to have been out the last couple of weeks, I have missed a nice move, and my timing model still indicates a long position is appropriate. This tells me that just a blip for a short period, then off to the races again.

COTTON

This is another market that is setup for a decline. The short entry was at the red line with a stop above the highest high point by 1 tick. Again notice the heavy short position by the commercials and heavy long by the small specs. This by itself is not a lead pipe cinch, but it is a good starting point for an entry.

Some of the internals have not diverged yet which would make this a better setup, but it is good enough without them to take a shot. This is not a mechanical approach like many that I use, but the reality is that some discretion or judgement has to be used to trade profitably. If you can establish a basic structure that is somewhat mechanical, you can then use your experience to fine tune how you get in and out.

I do want to stress though, that it is imperative to establish how you will exit a trade before you enter it. This will help eliminate the emotional tugs on you that will develop as the trade progresses.

Heating Oil





For subscribers, here is a visual of the Heating Oil trade we currently have on, with the red line indicating our short entry at 2.2205. I have to delay posting this by a couple of days to be fair to clients. It would not be right to put it out in the public for everyone to see right at the time paying subscribers are getting into it. As a result posts like this about actual trades are going to be a few days after the fact. I will also put up some trades that lose to be fair and not paint an unbalanced picture of my trading. I have always done this in the past as readers know.

This market has been in a substantial uptrend along with the entire oil complex. Why in the world would you want to short something like this?



First, this market has weaker fundamentals than the other markets in the complex. Second, the commercials not pictured, are heavily short. Third, we have had some divergences in some underlying indicators telling us the time may be now. Also, we had a very low volatility reading, indicating a breakout one way or the other.



We have already taken profits on half our position with $1839/contract and are trailing down a stop to see if we can catch a larger move on the balance. Often you get picked off on the second half for a scratch on that portion. That is ok, because occasionally we will get a windfall on it, and we are risking nothing. We have already rung the register for some $$, so anything more is gravy. It is still possible that this is only a retracement in the uptrend, so it is prudent to keep the trailing stop at break even on the rest just in case we get going again on the upside.

Up Up and Away?

If you look at the sharp upward shift in long side positions by the commercials, and my Magic Potion indicator solidly in the green, things look very bullish. At this point the seasonal seems to have been met by the sharp decline at the end of July.

I am in a flat position due to the horrible mistake I made of exiting due to someone else's model that I respect. As a result, I now need to look for a way back in, or wait for the short signal. The problem is, we are nowhere near a short signal now. Also notice the very bearish positions by both the Small Specs and Large Specs, this is very bullish. At this point I will wait for the typical seasonal low point in October, and just buy strength if we have not had any meaningful decline into that time period.

It is important when you make a big mistake like I just did, to not get emotional and chase a market. If I miss out on an opprotunity, so be it, but chasing what could very easily be a runaway move here upcoming, is not something I am going to do. If you are long, definitely stay long, it could not be much more bullish than it is right here.

Do Not Fight The Fed

Quite frankly I could not have been more wrong when I exited my stocks on Monday. This is where discretionary decisions can come back to haunt you. When trading with systems, which I do, there are still times when some judgements have to be made. This year I have been off by just 10 days in one spot, and here probably about a week, and the result has been a horribly managed trade.

With the bond market breaking down sharply, and the commercials starting to go to the short side, my model will probably give the sell signal next week. However, it would not be surprising to see new highs by then. I do have to confess that in my research I looked at a new timing model developed by someone else, that indicated an exit early this week. This did influence my thinking because he is one of my mentors. I will not make a mistake like this again, it is clear that my system is far superior to his.

When we make new highs, we will once again have one of those broadening patterns I have posted previously. If this occurs while a heavy commercial short position is on, it will be an excellent shorting opportunity. I apologize for steering people wrong on this recent movement, it is one of the biggest blunders I have ever made.

WHAT TO DO?

I have been debating this for the last month or so, after we had the severe decline in stock prices. My plan as I had posted earlier, was to sell on a rally off that low point. It is always easy to say that, but defining the exact point is never an easy task. The COT report is released after the close today, so I do not know what that will show. I had planned to wait for the commercials to get heavily short before exiting, however on this screen, there are a few reasons why I am front running that plan.

First, I have a proprietary indicator which I just call the Long and Short indicator ( L&S). As you can see, it does a pretty good job of calling short term highs and lows, and it is in the sell zone here. Also, the commercials started moving off their heavy long positions two weeks ago. The other thing that I have displayed here which concerns me is the Small Specs increasing Long position. It is back up to a level similar to where it was in July. This is an indicator that I want to fade.

The last, and most important reason why I have exited today is that the value stocks I had purchased, which led the market rise significantly, have lagged it considerably, on the bounce off the lows. I view this as a sign of underlying weakness of the overall market. Last, the heavy seasonal down bias is here. It is possible that the big decline we have already seen is all that there will be, and the seasonal would still be accurate if that were to be the case. However, the seasonal calls for fall buys, so that is where I am focused.

I still have a profitable trade, so it is time to take the profits and wait for a better entry point.

What in the world is this?

I have diagrammed out a broadening formation which is taught by a famous trader by the name of Kevin Haggerty. The rules as to how these points are derived is proprietary to him, but not necessary for this discussion. The basic concept is that once these form at key points, often large market moves happen.

There was also one at the high, just for the record, which did predict this downward move. This one happens to be occuring in the zone of the 200 day moving average, which is a widely watched level by institutions. I for one have not found it significant in my studies, but many other very good traders swear by it. Please also notice that the commercials have increased their long positions over the prior week. When you combine these two things, this is a pretty good buy signal. I realize I will get booed out of town for saying anything other than the world is ending, but this is how I see it.

Whether or not we have another huge downdraft or not nobody can know, but the fundamentals are in place for a bounce from here. If you combine this with what was in my last post with the Vix, there is a reasonable basis for an upward move. If it happens, I will be watching my model closely to see if the commercials jump off the ship. If they do, I will jump with them.

NOW WHAT?



It is impossible not to concede that the trend has now turned down. Oddly, the commercials are still heavily long, if we go into a full crash, it would be the first time in history that it has happened when the commercials were positioned like they are. Below, I have a custom indicator based on the VIX index. As you can see, whenever it has hit 100, a major low has been made.



Although this chart only goes back to 2006, all the prior major lows have had this reading. It is at 100 now. As a result, the likelihood of at the very least a good bounce is very high right here. I am waiting for that bounce to then see how things look. If they still look the same with the other things, I will stay long, if they do not, I will sell all my stocks on the bounce. The VIX measures fear, which is why it has historically been a good predictor of lows. The fear is clearly everywhere right now, and rightfully so. It is possible that we have an unprecedented economic event that will spill over into everything.



I do not get involved in investing based on guesses about such things. The above types of things are how I make my decisions. This tells me not to short the market here or sell out here, so I will not. Could we just continue to waterfall, absolutely. Do I think we will, no and the above is why.

No Change

In spite of all of the emotion surrounding the volatile gyrations in stock prices, fundamentally nothing has changed. As you can see, the commercials continue to be heavily on the long side of this market, which is preventing any sell signal in my world from developing.

Keep in mind that this is news driven trading, and we could easily see a 500 pt up day if there were one good news item that came out. Historically, there has not been one single market crash, with the commercials this heavily long. That does not mean that it cannot happen, but it does mean that the odds are against it. As much as I do not like watching my stocks get hit any more than the next person does, I will not get tied up in an emotional exit. On a short term basis, this is a buying opportunity for a bounce out of this decline. I do think there are big picture issues that may take stocks down more. However, I would expect to see a move to the short side by the commercials before it happens.

I have short term buy signals for Friday depending on the opening, which as I type this appears to be setting up to be a weak one. Bonds did not decline much today, which shows a lack of belief on the part of institutions in todays selloff. A flight to quality would normally occur on a day like this in bonds if insiders were really scared. It is curious that it did not to me.

I do not profess to have all the answers, all I am doing is spelling this out as I see it and as I am trading it.

NOW WHAT?

Here we are in the midst of a pretty sharp decline in stock prices. Alot of gloom and doom is out there. I have to admit that the price action does in fact look like a top.. However..... my timing model is not telling me that yet. The commercials are still heavily long, which is significant. If the real insiders are not selling this decline, why should I?



It does need to be stated that I do have a long term upward bias for stocks, and there is a reason for this. No matter how I research timing models over mid term time horizons, all the short signals are very inconsistent. The reason for that is obvious, the long term huge stock uptrend that exists.



As a result, I look more to dodge big declines and buy dips, than I do to short big rallies. That is a suckers game, and I have learned that lesson the hard way over the years. What I have displayed here is what my guess is as to what will happen in the near term. If my system is to generate an exit, it would most likely be with a rally up from here that probably fails to make new highs. If the commercials were to move over to the short side during such an attempt, the system will most likely give the exit signal. Most of the exits ( sell signals ) with my system, have occurred that way in the past, so that is why that is what I expect now. I was on the record as many know that a sharp decline should occur this year beginning in about the beginning of August, I was off by one week unfortunately. I do wish I was out of my trade at this point just off the cuff, but I always follow my systems, unless I find something that is so important that it cannot be ignored. I have not found anything like that at this point.



Just for the record, that buy trade in the last post was stopped out for a loss. I did it with small size due to the volatility expansion. I always trade small when that type of thing happens, so it was a 1% loss, who cares about that.

Is it time to panic?

We are in freefall at the moment, so what to do next? As indicated on the chart, I just went long the S&P futures, am I nuts? Maybe, it is never easy to buy into declines like this, and also not always the correct thing to do. Why am I doing it?

First, my long term model is still in the long side only mode, so I am looking to buy short term weakness within that. If you look at the red line on the chart, specifically in the first sub-section, we are at a very low level. This is a proprietary indicator that measures advancing issues on the NYSE in a unique way. It has rarely been this low in recent years. Second, I mostly follow my systems with small amounts of discretion thrown in along the way. I have no way of knowing when an individual trade will win or lose, and when I thought I have known this in the past, I have usually been wrong. As a result, I rarely pass a trade due to my opinion about the outcome. It is true, that if this is in fact a trend change, this trade will lose.

From a short term basis, there is no reason to buy into days like this because it is clearly a news driven down trend day and these types of days can really get away quickly. The system that generated this trade is about a 10 day hold on average, and often the first few days go against the position. As hard as it is to watch this adverse move, it is typical of these types of trades.

I am constantly trying to find ways of filtering out bad trades like this one "might" be, and have never been able to find a conceptually correct way of doing so. As a result, I just take them as they come up and hope for the best over time. Ten of the last 11 in this system leading up to this trade have profited, so there is a good track record with it.

Satellite Internet Sucks

I simply have had such trouble getting consistent Internet connections, that it has made it very difficult to post regularly here. I will do my best to do a better job of it going forward. It has been all I could manage to place my trades much less do much else when the Internet cuts in and out randomly at the most inopportune times.

To the left is the weekly S&P Chart, and as you can see the world has not ended since my last commentary. I had stated that if that last small pullback was all we got, a good sized up move could be coming. We have seen that, and there really are no exit sirens blaring right now.

We are nearing the time of year when we can usually expect a decline to occur, so I am watching closely right here. However, as long as the commercials stay this heavily long, we should be ok. Today we got a big down intraday move, but they rallied it back most of the way by days end. We opened about 50 down in the Dow, and that is where we closed. Most of the reasons cited by the bears here for a down move are actually bullish indications, and they just do not understand them well enough to see it. High short interest is bullish, not bearish to name one of them.

I will keep close tabs on things, and may in fact bail out when the seasonal tendency kicks in just because of the large gains I have in the stocks I hold, over 20% as a whole just since April. However, you always want to let your profits run, so never take a full position off just for a dollar amount reason. Taking partial profits, if it is part of the plan is prudent. It is not prudent if you think "well I have made alot so I should get out" ... etc..

What next for the S&P?

Here is the weekly chart, and you can see that the commercials have jumped back heavily to the long side of the market. This is bullish when we are already in such a strong uptrend, just the smallest dip and they bought back in heavily.

The bond market decline is reflected in my Magic Potion indicator at the bottom, but it has abated somewhat in the last week. There are certainly alot of news items that are making intraday swings interesting lately, but overall as you can see, we really have not had much of a retracement.

It would be nice if for a change, positive news got some media coverage. Why is it always the negative stories that get the most attention? Should anyone really be shocked that a few mortgage related funds have some trouble? You would have to be sleeping in a cave not to be aware of the issues in Real Estate right now! This is why that story only hurt the market for about 2 hours, but it still killed the party.

I expect us to move sideways with an upward bias for the next month or two at which point I will be looking for any signals that the party is over. If all the pullback we get is what we have had so far, another good sized up leg could be coming. As always, I will follow my rules as far as when to exit my longs, these are just opinions based on what I am observing.

Nothing Really New

There is not anything of note that has changed with the stock market. You can see my Magic Potion indicator is in the red, which is not good, but it is only one of the components of my system. The rest are still firing away in Green Mode.

The commercials have dropped down to 69, so they have backed off some. If they were to drop significantly, and everything else stayed the same, my system could trigger a sell signal. If I had to guess, I would say that they will gradually taper off on thier longs over the next 4 to 6 weeks. This would coincide with the July/August typical seasonal high, and indicate an exit then.

Only time will tell if that will take place. Until that happens, it is stay long and ride the trend. Do not be a hero trying to fight this trend. Unfortunately many of our great heros died earning their reputation, you will also if you fight trends. You may get lucky once in a while, but over time, you will get run over.

A Picture Paints A Thousand Words

Off to the left is the 30 Yr Bond Implosion. I have displayed standard deviation bands just to give a visual of how extreme this move has been, relative to recent action.

We are below the 3.0 band right at the moment, and as I type this, have a very weak overnight session going once again. Rarely does this market get extended to this degree in either direction. There is a gap down from 3 days ago that is unfilled so far.

There is alot of logic and math that will tell you that a reversion to the mean is imminent when these types of extensions occur. While this is true, they generally occur when a very strong trend is underway, and hence, you are fighting the trend playing for that reversion. My Short term bond trading system did generate a buy today, but has struggled recently during this down move. Most of my patterning is based on "normal" market action, and alot of the general rules go out the window when you get a move like this. You cannot pattern your trading activities for the once every 5 year occurence, or you will struggle most of the time. All that can be done is install strong money management techniques, so that you do not get wiped out when you get a move like this.

I do expect some type of reversion to occur, but it will setup a short entry if it does. This trend is very strong, and will not be easily reversed.

SEE I TOLD YOU SO
This is inevitably what the chicken littles are going to say after today. I did not imply from the last post that I was predicting this, only that this was a potential sign of trouble. Had I been trading from a short term perspective I would have been out before today, but I am not with stocks.

A sharp correction like this is scary and brings out the doom and gloomers. Maybe they will be right this time, we do not know at the moment. The precipitous drop in the bond market today once again shows its merit in directing stock prices. Notice how we have already hit the 2 standard deviations down level on this retracement, generally a good place to buy in an uptrend.

I am waiting for the COT report tommorrow to see how the real insiders have handled this. If they have scurried for the sidelines which I doubt, my model may generate a sell signal. Most of the stocks that I own have not fallen much during this drop, which is a positive, one has risen.

For now I say to stay the course on the long side, and if that has changed I will post something here.

S&P 500

I apologize for having been so negligent in keeping up here. I have been juggling alot of different things, and have had tremendous internet problems at my home. Satellite internet sucks for the record!

As you can see, the Jaws of Death have shown up for the stock market. This is a pattern that has led to many severe declines in the past, so why am I still bullish and heavily long stocks?

Notice at the bottom, the heavy long position the commercials have established. What I think will happen is that the rally will continue for awhile, the commercials will gradually shift away from the long side, and if this happens, yours truly will exit his longs.

The trick with this formation is that is sometimes can persist for a few months to 6 months before anything happens. As a result, for the time being, it is just watch this closely for signs that it is leading to trouble. Sorry for the poor spacing, Blogger is not in the mood apparently tonight to allow me to put spaces between the paragraphs.

Here is the close out of the short trade from the other day, exited on yesterdays opening for a nice profit. This shows that there is value in shorting at times against strong trends in short term trading.

Not all trades work out like this, but if you pick your spots carefully, you can succeed. As you can see from the chart there have been very few short trades my system has generated in the last 30 days, which is good. When markets run like this they are difficult to trade, because most of the time they trade a bit more two sided.

For the average investor, I suggest staying on the long side here, and buying pullbacks. Fighting a trend like this is a losers game over time. In my early days I used to fight trends like this all of the time, and learned from the school of hard knocks not to do it. I did do it here and profited, but I have 20 years of experience trading, which gives me a small advantage in picking my spots carefully.

If you choose to do it honor your stops and keep your egos at the door. When a market is running like this there is no telling how far it will go. It could stop tomorrow, or go for quite a while.

S&P 500

Here is the trade I currently have on for the S&P 500. As you can see it is a short position. I am bigger picture bullish, but that does not mean that short term sell signals cannot be taken. The recent COT report did show heavy long positions on this recent rally, which is very bullish larger picture for the market.

I do view any pullbacks as buying opportunities and I think those that are waiting for the big selloff are going to have to wait until the end of the summer. Predicting is a difficult undertaking for anyone, but that is how I see it at the moment.

This trade will be exited shortly as it is a short term trade and appears to be headed for a profit.

S&P 500

I posted a couple of weeks ago there was possible trouble due to weak bonds. As we can see, there has been some short term strength that has entered that market. This was the lone remaining shortcoming of the rally off the lows, that has now been resolved. I am aggressively long stocks from a couple of weeks back, when the short term trend down trend of bonds broke. I was waiting for a pullback, but decided based on the strong seasonal pattern, to pull the trigger and just add to my positions on any pullbacks.

I was concerned that the breakout that was brewing due to the small ranges I mentioned, would happen upward, and I did not want to miss it. We also have the commercials on the long side as well. We are hugging the 2.0 standard deviation band on the high side, which tends to happen during strong trend moves. This does tell us that we are short term overbought, but I would view dips as a buying opportunity for now.

We do have to keep a close eye on the bond market, which is showing some weakness as I type this. If we were to get a big drop there, it will undermine this rally at some point.

CRUDE OIL

For those of you that get my newsletter, the Crude Oil trade is summarized to the left. I had said to short it on 4/2/07 and exit when the percent R closed under 25. The entry was 65.10 and the exit was 62.01, a profit of $3.09/barrel. This yielded $3,090 per contract so I hope some of you did this trade. Things rarely line up as perfectly as that one did, so the trades have to be taken when they do.

STOCKS

Here is how we look on 4/11/07. Once again the resiliency of this election rally has asserted itself. My long term indicators have never gone away from the long side, so they indicate to still be long. We do have some possible trouble brewing with the Bond Market.

The Blue Line marks 30 yr Bonds, and as you can see, this market has had a sharp move down in the last 30 days. This happened while stocks rose nicely during this same period. These types of divergences often spell trouble for stocks. We are in the early stages of this divergence, but it is probably not a time for an aggressive long position without a pullback in price first.

Also note how the average daily range is getting quite small, indicating very little volatility. Generally, these conditions lead to breakouts in price, one way or the other. The commercials are still heavily long this market, so that is a positive. I am looking to enter this market on the long side aggressively, but not without some type of a pullback first.

S&P 500 The Latest

Here is the latest picture of the S&P 500. This weekly chart is nice to look at because it keeps things in perspective. You can see that prices have not really dipped much in spite of what some of the people calling for a crash have said.

The commercials have bought this little dip, which is bullish. However, you can see that my Magic Potion indicator has turned negative. This just stand alone is not enough to short the market on a larger scale, but it is reason to expect a sideways to down move here for a period of time.
Overall though, I do not expect to see a large break in the market until the end of the summer, but I am hoping for a dip in the next few weeks to load up on the long side.

I will need to see that bottom indicator turn green to confirm the upmove, which it has not done yet. My overall timing system does still say to be long this market, so dips are buys assuming that indicator goes green on them.

S&P 500 The Latest

Let's take a look at where we sit now with the S&P 500. If you remove the emotion out of the moment, you can see this decline has not been that significant. We have broken the uptrend, but we do not have a crash on our hands. You can see I had a short term buy yesterday that profited, being exited this morning.

I have drawn a red line down indicating the short term downtrend that we have established. Underneath this, under the blue line which is bonds, I have a red line indicating the nice uptrend we have there. At the very bottom, I have drawn a line that indicates we have had some commercial buying during this drop, this is what we want to see. Strong bonds and commercial buying, are both supportive of stock pricing.

The commercial buying is not at the level "yet" where it is strong enough to act upon. However, if this index gets over 80, that will change things a bit. As long as the bond market stays strong, and the commercials continue to increase their long side exposure, I am looking for a buy setup for a several month hold coming up soon. My large picture timing indicator has not flashed a sell yet, so buying dips is the call until that happens.

It would be nice to get one more sharp dip that has heavy commercial buying to set this up perfectly, but things rarely setup up in the optimal fashion. We may move sideways to lower for the next few weeks instead. Either way, I am looking for a buy spot.

Banking Stocks

Someone asked me to take a look at the Countrywide situation. I believe the thinking was that with the subprime mortgage overnight implosion, there might be a spillover effect.

First, for those of you who are reading my blog for the first time and or, are not current clients, I need to briefly explain how I trade so that you can view my comments in the right context.

My orientation to trading which has evolved over the last 24 years, is that I only take loaded or very high percentage trades. This is how I achieve an accuracy of 80% wins to losses. As a result, I establish criteria, and only go in when those criteria are met. This is not to say that there are not other ways to trade profitably, there are. However, to trade and get the results that I require, I need to have this level of discipline.

For stock trading, what I want to see is improving earnings for buys, declining for shorts. I also want low debt, or itleast a declining trend in debt for buys, the reverse for sells. I also want the seasonal tendency to be at the very least nuetral, not against the way I am looking. Then I want a pullback against the trend for entry. I do not care about what I call the "story." The story is the subjective situation surrounding the company that I may have an opinion on. Opinions are to suject to emotional influence, so I stay clear of them when trading.

Countrywide, if we use my criteria, would be a counter trend entry to the seasonal if it were shorted here, so that is not good. Debt is flat, but technically slightly rising, a negative. We are awaiting the recent earnings statement to see where that currently stands, that mark that as an unknown. Also, we are in a current retracement in a flat market, which is a better buy than sell in general.

In summary, this is not set up the way I require for a short entry. This does not mean that this stock will not go down, it is just not a short entry that I would take. If you are playing the story, you need to step in front while it is at a high level, here we are just in the middle of a trading range, so this entry has "poor location."

S&P Update

Here is how we look as of the close of Monday. We have continued downward even though we have had a couple of intraday snap back rallies that good day traders could have capitalized on. Most day traders lose money, so do not be tempted by that endeavor.

Notice the carrots on the chart which indicated potential signals. All of these signals (the last 3) were filtered by my secondary trading filters. We have been trading the bonds here the past week, but nothing has triggerred in the S&P.

I have been through too many of these to try and be a hero, I will take the signals when they come regardless of the market environment. If I do get any here, I will take them with half the normal size due to the increased volatility. I do hope for this decline to setup a rally in 30 - 45 days more or less.

I have highlighted the gap on the chart, because that is an ominous pattern. For this market to have gapped down, and not tested it, or even close in the ensuing days, does not speak well for the immediate future of this market. However, we are extremely oversold, so the odds to not favor shorting at these levels. Wait for a bounce to enter new short positions. We are likely to have volatile action in both directions, so honor your stops.

I do expect some further downside action, but I do not believe we are going to get a runaway bear market out of this due to the strength in bonds.

Where do we go from here?

I had mentioned that I would have buy signals for Wednesday, but none of them were triggerred, so I am flat(no positions). Today we come in with a gap down open following an inside bar with an up close.

Historically this has been a good buy pattern and poor sell pattern in general. However, none of my systems generated any buy signals, and in fact one generated a sell signal that was filtered due to the bullishness of the pattern. I want all the stars aligned, so nada for me today.

I do urge caution for those of you not to react too emotionally during these types of periods. Do not chase the market, and please trade smaller positions than your normal size. It is tempting to want to make a killing during a period like this, but more people blow up than make killings during market crashes. The worst thing that can happen is to bet the farm on one short position, have it pay off, and have a bad habit reinforced. Market conditions like this come around once a year for a week or two, so you can not pattern all of your methods on the rare occurences. Do not pyramid and press your bets. There are likely to be sharp moves up and down over the next week, and you can really get whipsawed.

The trend has changed here, but we are really overextended down right now, so the odds of a sharp bounce are high. You do not want to be short the farm when a 20 point bounce in the S&P happens.