WHAT "SHOULD" HAPPEN

My father is in town for an extended stay for the holidays, and we got to talking about Sports like we always do. He began mentioning some of the NBA trades, and what the experts were saying about them. This took me down a bad road, because one of my pet peeves is experts opinions including my own. If you took a bunch of monkeys and asked them questions I would bet the accuracy of the answers would be as good statistically as a panel of experts. It seems to be everywhere you turn there is someone else telling you what you should be doing. I wish people would mind their own business, tend to their own gardens etc.. My favorite "expert" opinion is these cute kids who come on the sports talk shows with the super high energy, and the "play of the season" for the football game that night. They all are knocking it dead and having tremendous years etc.. 

Here is what people don't realize about most of these betting handicappers. If you call their hot lines they split the calls you get between the teams. Half of the callers get the one, half get the other. This way they are guaranteed to be right with half of the people, who will then come back for the next game. Obviously this is why they have to market because eventually the half from the first go around gets halved again and so forth until the original group gets whittled down to a group to small to make money from. As a result they have to constantly get more people coming in the front door for this to work. This is one of the ultimate scams, but it is just an example of expert opinions not being worth anything.

One of my favorite sports guys is Boomer on ESPN, Chris Berman. I love his nick names and his commentaries on highlights. He makes me laugh every single time he comes on. However, his prognosticating, which he has a full segment on, is not even 50% accurate. Who in the world needs some expert opinion that is right less than a coin flip?

With all of that as a back drop, I went to the software to get an "expert" opinion of what to expect for the rest of the year. What is concerning me here is the lack of strength considering the very bullish time period and price cycle we should be in. If you look at the projection of the times during December when we have had this type of look, you can see we have on average just drifted sideways to down for the next couple of weeks. I have posted all the charts of the matches the program brought back so you can look at them. To me there are two that are not really matches, where it shows the price rallying strongly in the blue area. This software is not perfect, but it does do a good job of bringing back similar things to examine. If we eliminate the two that show price rising, the forecast gets more bearish.

In summary, it does appear that historically, when we have not been rallying come mid December, that has not boded well for the year end rally for the balance of the year. At this point the only long exposure I have is one retirement account that I went to 100% SP 500 when we were falling out of bed a couple of weeks ago. I plan on holding that through about mid January, then to the chagrin of the administrator, I will move it back to cash. That is up a few percentage points only coming into today. I don't expect that to bring in much more than possibly a few percent more. I do not have any short term longs in the indexes or the SPY's at this point.

You can peruse these charts and see if you see something that I don't, but it does appear that when we dip the first couple of weeks of December instead of stay strong, it has historically meant we aren't going too far here.

I talked the other day about a short term GOLD rally due to how oversold we were, and we are getting that, up about $20 today so far. This is lagging the stock market right now, so I don't think it will go far, but an oversold bounce was a high probability.

I just don't see much in my world in the way of trading opportunities here for today. On a short term basis we may get a selling opp in the indexes in a day or two. I still am expecting the seasonal to keep the market from falling out of bed, which it pretty much has this week. Keep your powder dry. Hopefully the lack of words today is made up for by the pictures, aren't they worth a thousand words each according to the experts?

Have a great weekend

LET'S RAISE SOME EYEBROWS

After yesterday's comments this may raise a few eyebrows. This changes nothing about my big picture view of this market, but there may be a short term opportunity at hand. I mentioned that what I was hoping for was a sharp rally into January to load up for a short to hold for potentially the big one here. I have no idea if we just get into liquidation mode here or not. One thing that the newbies who have not studied commodities don't realize is, at times they just move like an avalanche in one direction. The long term charts look like EKG's with just one mean reversion move after another. It can be dangerous if you are used to just buying small pullbacks in trends in stocks, to just randomly apply that to the commodities markets. The typical moves are over reactions in both directions. 

One tool that I used to use that I do not anymore, and I am not sure why, is a 2 period ADX. You can see on the chart that for timing short term extensions in price, the 90 level in this index does a pretty good job of that. We are at 93 here in Gold. This may be a spot to look for a short term buy. It is not a trade I am going to do, but I just wanted to point this out to those of you who look at every instance in life as bullish for Gold. I used to listen at times to a radio show hosted by Gold Line or something like that I may have the name wrong. The guy had 75,000 buy signals for Gold. If his Uncle Herb 3 putted the 14th green it was a buy. Of course they make fat commissions on the sales so it logically follows they are bullish. There is a time to be bullish or bearish everything. Timing of course is everything. The time to be bullish anything is generally not after it has increased 400% or more already. However, it is during these periods where it all of the sudden feels "safe" for most to buy things. Of course they buy the highs.

This is certainly not a spot to short this market after a monster decline like we have had. If you wish to play this market right at this spot, not for me, I think it is more of a buy than a sell on a very short term basis. If you are a long term bull and think I am dead wrong, you should be buying with both hands here. For long term trades based on "fundamentals" these are the types of declines you should live for to buy into. Of course I have fundamentals in quotes, because the fundamentals do not support this, funnymentals do. An opinion about something that might happen that never has it not a fundamental.

I want to show some proof of buying weakness and selling strength, and why you should consider it.

This may seem hard to believe, but the above system is a very simple non optimized method of buying stocks on weakness when the close is above the 200 day moving average for symbol CWEI. This involves buying one unit of 100 shares, then a second unit any time the price closes lower than the first entry. It then exits MOC on just a basic oscillator being in the overbought zone. There are many ways to determine what weakness is and I am not giving up how I did that here, but it just tells you that when you get an extreme move, you need to play in the opposite direction most of the time.

You have seen me fade ETFs, the SPY specifically recently, and it was due to this basic premise and system. The two trades I did both worked out very well as you saw, and seeing this table above now, you can see why I like doing those types of trades from time to time. This is not for everyone, they carry no stops, so you can go for a ride occasionally. I can also tell you that not every stock has results this good, but many have them solidly in the 80's percentage wise, and with the average win being more than the average loss. Those are numbers not to be ignored.

The whole point of going into this is to show you show buying into weakness or selling into strength, can at times be the right thing to do. It needs to be done in general in concert with the trend not against it. Gold right now is against the trend, so that is what makes playing for an oversold bounce dicey. Had this condition been in place with GLD for example solidly above the 200 day moving average, I would likely be buying it here. The ETF not the futures.

I don't see much in the way of opportunities in other markets here, I wish I did this is boring right now.

Good Trading

NOW OR NEVER

Here I have the chart of the Naz and my nemesis indicator, the COT Synthetic monstrosity I created. You can see that it has been pretty much "dead on balls accurate" ( love that line out of My Cousin Vinny ) in this market with it's recent signals and the near term one was a sell. I just wish this indicator was always this good but it is not.When I combine this with the fact that we are in a weekly down trend, and we have the POIV heading sharply down, it tells me we could have some real trouble here. We are also at a time in terms of cycles and seasonals, that we should be rallying. I am a big believer in the concept of divergence in the following way. When something happens differently than what should happen, that something is speaking very loudly. As a result, if we do not rise at this time during the year, with all the reasons as to why we should, that could be an ominous sign.

I have been wrong about the currencies being buys down here and the DX being a sell, since they have cascaded downward. It does seem like the whole house is coming down right now. It might be. I have to admit that I just don't have many signals for trades here in either direction. I was looking at the Crude sell, but I admit that I passed on the trade due to the seasonal up bias being so strong. A mistake it appears. I am not going to make too big of a deal about Gold here, this is exactly what I have been telling people was going to happen. This is how markets look when the game ends, and the exits get crowded. It is what it is. Follow your plan and don't get emotional. All of the trends now no matter how you look at them, have broken. I have the last hope trend line drawn in here, and it has been broken today. I really have to admit I thought this was going to happen at the beginning of next year not now, but the equity weakness has gotten to this market.

THE GAME IS OVER NOW WE ARE JUST WAITING FOR THE FAT LADY TO SING

Please no emails telling me about fiat currencies, the dollar, money printing etcc. I will just delete them. You have been sold a bill of goods, what else can I say. Maybe we will get a bounce for people to get out a little better, we are extremely oversold, but I would not bet on that. I take no solace in seeing people get wiped out like they are in Gold right here. Saying I told you so does not make me feel any better. For those who still refuse to accept what should be so obvious, think about it this way. If that chart were the price of tea in china and you were not so emotionally invested in where it might go next, would you still think it would rise to $5000? What I am hoping for is a sharp rally up into January to position myself for the next $1000 down move that is coming here. If we get into a liquidation type of situation which is what it is starting to look like here, this bounce may not come. We will just have to wait and see.

Overall, I am trading lousy this month. I am just having a hard time finding trades that meet my parameters. I would love to tell you I have nailed all of this, but I have not. I have managed to stay clear of losing a lot, but that is hardly anything to brag about. It is a tough environment so be patient. If it is not clear to you, don't take the trades. There is just a strange under current to all of this, I just can't put my finger on what it is yet.

Good Trading

MELTDOWN MONDAY

As I watch this across the board melt down today, I started surfing for the media's take on it which is always good for comedy. In the best of comedic performances we get CNBC to tell us investors in mass sold because of inflation concerns or the price of oil. I wonder if they could produce one single money manager who has ever done that even one time? Why would those concerns cause them to sell today this very second? Why not tomorrow, next week? Further, even if individual investors actually did do that, they don't represent enough volume to move the market. The institutions move price, they don't trade this way EVER!

I did see something that continues to perplex me. The unions in Italy are striking over the austerity measures! Apparently there are some cutbacks in their pensions and they of course would prefer the government just take the money from the privileged, the rich instead. Let's look at this for a minute. What exactly makes people privileged?  A privileged person simply has things that others do not. Wouldn't a lifetime pension qualify for that? Lifeguards here in California get guaranteed 90k per year pensions when they retire at age 50. That to me is about as privileged as someone can get. What this really is boiling down to is a fight over a way of life. If I were president I would do just one single thing, and it would solve virtually every problem that we are grappling with. I would eliminate all pension programs for all government employees hired the day after I took office. I would not take away the ones that are already in place, but I would state that if you start working tomorrow for the government you will be offered a 401k program to build your retirement with and nothing more. In time this would solve the problem even if it took a few years.

At this point we would just have an even playing field between the public and private sectors, and that would be the best way to shrink government. Many would still choose government for security reasons, but not because it pays more which it currently does. I am just astonished that I have never heard one single person suggest this. As we watch Italy and previously Greece, we get a preview of what we are starting to see here. People are the same everywhere. If you spoil people with preferential treatment anywhere, weaning them off it is very difficult to do. They become so blinded by their desire to continue getting their special treatment, they are oblivious to how it might be effecting others. I see this in the behavior of the rescue dogs we are constantly bringing in. If we spoil one too much which is easy to do since we know in most cases they have had terrible lives and I want them to have great ones, we see how they then come to expect it. We had one actually get really mean spirited after we spoiled him then tried to reign him back in.

It is my opinion with all politics aside, that human nature is going to result in the resolution to all of this stuff around the world being very ugly. I just don't see how millions of people who have had special privileges for so long, will ever we willing to give them up without force. As traders, this is going to present a great opportunity to make money. We know these people don't care if they bring the whole thing down. They are so focused on getting over, that they fail to consider any alternative scenarios. When this all comes down, the money to be made on the short side is going to be really incredible. However, do not get so one sided that you think just because of all of this everything has to always go down. There are always opportunities on both sides and that will be the case with this also.

The price of Gold is heading down back into the really important support levels. As I said the other day, these levels need to hold. I know especially for those newer to trading, who have been participating in this and making a killing, it seems inconceivable that it might end some day. History tells us emphatically that it will and spectacularly when it does. When this market breaks whether it is soon or a year or two from now, just imagine for a minute that you were a buyer at $1700 because you thought the dollar was dead and Gold had to go to $5000. Further you put half your net worth in it. At $1500 which is about where the critical price levels are you are down 12% basis the spot plus whatever markup you paid. That would be anywhere from 15% to 30%. Conservatively you are down let's say 30% total, which is 15% of your total net worth. This is a good amount, but you are probably just nervous but not really worried yet. Then a couple of $100 down days come along. Now you are down another 10% and the media suddenly switches to panic selling stories about Gold. You are now getting scared but still hanging on, you know the world as we know it is ending, cats and dogs will be sleeping together, it will rebound.

Now another couple hundred dollar drop happens, now you have a 50 spot on your hands. You have lost 50% on the move and 25% of your net worth. The tough economic times have come, yet the dollar is soaring, gold and stocks are tanking. How can this be, doesn't Gold always hold up in times of crisis, that is what you have been told? Of course you never bothered to do your own research, you just accepted this as gospel. Had you done your research you would have found that this premise is completely false. There is no consistent relationship between Gold prices and crisis periods. At times it has risen, at other times it has declined. Maybe at this point you buy more thinking this will turn around. We drop another couple hundred dollars, and now you panic and dump the whole thing with a 70% loss and 35% of your total net worth up in flames. 

I know bulls are laughing at this, I am sure they were back in the early eighties also. I have seen this type of thing happen in one market after another many times over the years. A market rally begins,  the media jumps on board with some BS reason as to why it is happening. The marketing companies that benefit from the sale of the product that is rising start hitting the advertising hard. They even feature experts giving you all types of Nobel prize types of reasons as to why it is different this time, and will continue indefinitely. They rake in heavy commissions selling the product, and many people flock to the industry to chase the fast money. Sound familiar, could have been the Internet in 1999 or Real Estate in 2003-2005 just as easily.

Lets just say for the sake of argument I am wrong about the above scenario. I was not in 1999 having gone flat in Mid December and dodging the whole drop other than shorting it at times on the way down. I was out in real estate in 2005 making over 1 Million dollars profit selling my McMansion. However in both of those instances, I had reasonable exposure. I did not ever have anywhere near 50% of my net worth in either of those places. You can avoid the scenario I just discussed by having a prudent bet on Gold. You should never have 50% of your money in any one investment, that leaves way too much exposure. There is certainly a lot less pressure with a 10% loss on your hands than there is with a 50% loss. For those who think Gold will never decline again, just in the unthinkable event that you might be wrong, have an exit strategy for at the very least some of what you have.

It is one thing to bet against history, things can change. It is another thing to do it with too large of an exposure to your whole portfolio. Never bet on a long shot with all your money. How many people go to Vegas and bet what they can't afford to lose? DO NOT BE GREEDY it will catch up to you at some point that I can guarantee. Today we have broken decisively a near term trend line for Gold that rises up from the critical September low point. Now the short term trend is down, the medium term trend has already been down before today ( the weekly ). If that September low happens to go, the long term trend will then be down. The actual trendline off that low comes in right now at about 1610 or so. If we get under that it is time to worry.You do not want to be long if that happens. You could argue buying against it on a test with a close stop is a good risk to reward trade, and you might be right. We are not down there yet so it is too soon to tell for me it that is a trade to do or not. In summary, the bigger picture is on the verge of changing here, this is a critical price area for the world's favorite trade.

I know someone asked once if I ever lost money on a blunder and I said yes, it was just a coincidence that the last few I was able to get out of with small change on the plus side. Here is one where I gave the house a little change, but a small amount.  I mentioned the Corn market over the weekend as a place to look for a long. I was already long when I mentioned it and I felt the trade would be confirmed if we took out Friday's high today which we did not.

I am not sure if I consider this a blunder or not, but as I looked at my momentum oscillators late in the session today I just felt they were not really rip roaring bullish. When I am trading against a trend this strong and I get an initial entry that seems promising, I like the trades to go right away. In this case we dipped way down today, and came within 1 tick of my stop, then bounced back up some. As I projected another bar going up my short term indicators were still not looking that great. The other grains do not look overly bullish even though there are some divergences in POIV, Beans in particular. As a result, I determined I was forcing this trade, so I decided to take a small loss and get out. I think across all my accounts the total loss was about $1200, what I basically consider a scratch. I really like the way this market has tracked the seasonal so closely, so I may well get back in here in the next couple of days. For now I am out. I have not traded very much the last week or so and I think that pushed me into this trade. I am not sure if this was a blunder or not, but I am sure that as I look at it now by my rules regardless of where it goes tomorrow, I should not be long yet. I tried to front run the entry a bit and it did not work out so well. Such is the life of a trader.

As I look at the indexes, I still am really bothered by the huge POIV divergence against price.

I have drawn a dotted line across the recent highs, and look how much lower POIV is here in the Russell than it was when price was basically at the same level a month ago. When I think about this and the fact that we are in a weekly downtrend still, this tells me to look for a short term sell signal. If we close up tomorrow and don't just lift off, this could very well be a sell on Wednesday. Ironically my indicators are also saying tomorrow could be a buy it today's high gets taken out, so it is a dilemma for me as to which way to play this. The DX also has pretty strong negative divergence in POIV as do Bonds.

Net net, I am not sure about how to play the indexes tomorrow at press time here but the POIV makes me nervous on the long side just for the record.

Good Trading

WHAT TO BELIEVE

I wish I had the time to go through and create filters for all the doom and gloom emails I get via forecasts from "experts." Grantham, Faber, Briese, it seems never ending especially now. Like they say in the movies, Sex sells. In trading it is fear that sells the tickets at the box office. I have to admit I only know the track record of one of these three guys above, and even he although in general has been pretty good over time, he has been terribly off the last few years. The other two, although their names are in the news all the time, I have no idea if they actually make money trading or not. Regardless of whether any of them do or do not, you have to make your own decisions about things. Going into a diatribe about what the historical returns have been when the S & P has a book ratio of blah blah blah, is just an abyss of guesswork and nonsense. It is true there are legitimate stats that can tell you when certain things have happened, it has led to other things happening. However, getting caught up in static numbers is a very big mistake.

Life is relative and so is trading. Grantham says the presidential cycle runs October to October? Huh? According to whom, him? Why would the 3rd year of the cycle end within a year unless there was some over optimization of the stats to make a point. Aah, this is why you have to be careful. You can bend statistics a million different ways to get to an end. After all look at what the government is doing with the inflation and employment reports, to make them seem better than they really are. My studies on the cycles are done for calendar years, and for the life of me I cannot see any reason why they should be conducted in any other fashion.

I know some of you spend a lot of time perusing the Internet searching for stories to support your opinions. When I do that which is rare, I seek out the opposite views of what mine are to get a sense of how credible they might be. I have told readers over and over that is what you should do. Here is what it boils down to. Have these people above consistently had market beating returns? Have they been right at the turns over time, or have they had one home run and a bunch of strike outs? I will let everyone answer that for themselves. I don't think you should take anyone's world for what will happen next. You should do your own research. Maybe you stick with one person. I personally only consider what Larry Williams says because he is my mentor. Many of the tools I use are his or variations of them that I have developed. By listening to him I assure that I stay in tune with properly using my tools. That is it.

It is my view as I have stated, that we are going to continue to rally albeit at a slow pace, through the end of the year, possibly into Mid January. At this very moment the only long exposure I have is an ancient IRA that went to the long side a couple of weeks ago when we were accelerating downward. I will be out of that at one of two places. First, mid January if we hold up. Second, if we do not, when the lows at the red arrows on the chart get taken out. If those levels go, and we get that much weakness during what should be a very bullish cycle period, I will head for the hills quickly. My best guess would be we might get as much as another 5 percent up from here but I would be surprised if it is any more than that.

The above Gold chart has a surprisingly similar look to that of the Dow over recent weeks, with two also well defined support points. As readers know I am of the view that this market will basically follow stocks going forward. If you think stocks are going to tank you better have your exit strategy set for Gold if you are long. I would suggest seeking out Steve Briese's recent Gold study and it's bubble nature. It is completely numerically based, not opinion based. If you are a bull don't bother reading it because nothing will convince you to be worried. I won't make any more attempts to convince people of what I think is coming here. This is the same stance I took on real estate at the end of 2005. I just sold all mine, and took the money and watched the rest of the people who thought I was nuts get wiped out. It will be no different here, except the drop is going to be larger and much faster. You have good support points in the market marked above, so as long as they hold it is still business as usual here. When they go, don't be a pig, take the money and be thankful you caught most of one of the greatest runs in history. "Don't be that guy" who had hundreds of thousands of dollars in profit that lost it by being greedy.

If you are big picture bullish, just wait until we get the $200 down days coming in succession which will happen, then just buy into them and average into the trade. I would not do that, but I am also not a long term bull or bear. I am just telling you what history says will happen. I could care less one way or the other. I am bearish now just because of the reversion mathematics. Once we fall back to $400 or $500 I will probably be a bull at that time for the same reason.

Here are two markets that I think are worth watching this week, Corn and Sugar. We could call this the Fructose Corn Syrup trade. Obviously that is a bad combination in food, but maybe it will be a good one for trading this week. There do appear to be pretty clear short term trend lines in place here at times with a seasonal up bias. Upward breakouts are probably worth taking in these two markets.

I think we will just have a quiet upward drift in equities for the last two weeks, potentially interrupted at any moment by these goofy stories about Europe. I would suggest ignoring them, they are impossible to trade and it is fruitless to attempt to do so.

One observation from watching a debate over the weekend of the GOP candidates. It is amazing when people fear having the smartest guy in the room as the President. Haven't we had enough dumb asses in recent years from the current one going back several terms. Why not try a smart one just for kicks, Gingrich? In trading I always change when current things are not working. Why not do it in politics? I do think we are at a critical mass point or close to one, when we see the corruption that is going on. Corzine is likely the poster child for what they are prepared to do. He is the ultimate insider, who appears to have broken several laws. At some point, somebody like this is going to have to pay a price. He has ruined many people's lives and I suspect he will not have a penny left after he goes through all the law suits that are likely coming at him.

I read an interesting theory about what happened to the 1.2B this weekend. It was alleged that it was transferred to UK subsidiaries who do not have restrictions on the use of customer funds. It was then supposedly pledged as collateral for these bad debt bets they made that blew up. The collateral was then taken by the creditors as security against the loans. I have no idea if that is true or not but if it is, lookout below for this guy. If that is true, the UK has some serious holes in the laws and I would expect more of this to happen in the future. I am sure some smart ass will cut and paste out of this and change the way I have stated this, I cannot do anything about that. I have no idea at all if the person stating this if knows the law, and if this is accurate. I just thought it was worth throwing out there. Maybe I have readers here that know whether or not that is even an accurate assessment of the laws governing the use of segregated funds, and the differences between US and UK regulations?

I hope that story is not true.

Good Trading

IF YOU DO THE RIGHT THING YOU GET PAYED IN THE END

Once again the poor quality of the Tradestation chart is unfortunate here, but you can see the summary of the last two SPY trades I made there. I first bought into the decline adding larger portions as the decline got steeper, the blue arrows show the 4 days I bought on. I then exited that trade where the light blue lines all come together. Next I shorted in 3 different spots into the rally as we approached the 200 day where the red markers are. You can see from the light blue lines that I exited that trade today at the close. This is how Tradestation marks the entries, I probably could change it but it is a hassle to do so. Today with the large decline, I wound up with a decent profit there. I did contemplate holding overnight here, but my rules called for a certain exit from weakness in my indicators, so I took the profit as per the plan. This is an example of fading the herd, I did it twice in a row here for very good results. There is no point in just fading moves just to fade them, there has to be a reason and a plan in doing so. Do not mistake these last two trades for just blinding fading a sharp move, that can be very dangerous. Do your own research and see if you can find times when reversions are most likely to happen.

There was a question about where the stops were on the short position I had. The answer was there was not one. I do not carry stops when legging into these types of trades, they significantly hurt the overall results. These trades are never completely comfortable to do with the seemingly unlimited exposure to risk. However, you take the good with the bad. When legging into extreme conditions, your stop loss so to speak, is the trend you are in. I knew we were in a down trend in the indexes, and this was a rally in a downtrend. As a result I felt the risk was limited. There does come a time when you have to say uncle in trades like this, and you need to determine what percentage that is going to be before you get into the heat of battle. Once you are in the trade, it is to easy to get emotional. I did have an uncle level in both of these trades where if we had closed beyond a certain percentage, I would have taken the loss and moved on. We did not get even close to it on this recent trade.

The other day I pointed out what bothered me the most about the current rally, was the huge divergence in POIV for the futures, and OBV for the SPY. I mentioned that often large moves in the opposite direction happen during these situations. I do not know if that will be the case here or not. There is so much political will behind making sure we do not crash here, that I don't think we will. That is a completely subjective view without a doubt, but it is what I think. The Presidential cycle is also very bullish, so I will likely be looking to buy into this decline if it goes further. For now I am flat with two decent trades behind me. The next chart shows the Russell and that big divergence I am talking about.

I have marked this big divergence on the chart. Notice how price got to the same level as the highs yet the POIV indicator is significantly lower. This gave us a heads up that we were likely to see what happened today fairly soon. Now we just have to watch and see if price stays stable here or rolls over. The market action is very strange right now. It is eerily quite for hours then moves in spurts. The volume is dropping off significantly, which is somewhat typical for this time of the year.

I do not see much going for Friday other than I think the grains are looking like buys down here.

Good Trading and have a nice weekend

FOR THE DOUBTING THOMASES

Before I get to today's post I need to do a little housekeeping first. In my response as to who I consider to be the top traders question, I left out one prominent name who has had a bad year according to recent reporting, John Henry. It is my understanding that his approach is somewhat like that of Richard Dennis, so it is understandable why in a year like this, the returns have been sub par. I am not going to harp on this much, "judge not lest ye be judged." I only made the point the other day that this was a tough year as evidenced by good traders having sub par years, to attempt to make those who might be frustrated to cut themselves a bit of slack.

It also demonstrates one other point. You just absolutely must be flexible in how you trade. If you find yourself in an environment where what you are doing is not matching up with the price action, you need to change what you are doing. When you run a large fund like John Henry does, this is not so simple. You cannot be nearly as nimble as smaller traders like me. This hampers returns greatly in volatile environments like this. All of this leads into today's topic, correlations.

I mentioned yesterday the basic logic of what was bothering me about all the long trades I saw setting up, and that was that the stock market on a short term basis was extremely overbought. Paraphrasing what I said, it was along the lines of thinking that since the short term bias had to be down for stock indexes, and that would be a problem for long trades in other markets. I had very good legitimate long signals in many places, trades I should have been in quite frankly. This morning as I watched Gold and Silver, the Aussie going up, and the ES at that point up another 5 points, I began to wonder if the reversion would happen, and also how much money I might have left on the table by not being in those trades.

Then all of the sudden, just two decent sized down bars on the tick charts in the ES and boom, every market in town went down most much more than the ES did. Even the Cotton market declined on the report, go figure! You can see I have the Silver market and the Euro as well as Cotton on the chart above, below the ES. Every one of those trades had I been in them would have been stopped out for a loss now. So what can we learn from this? This is a perfect example of what I mentioned above, when things change we have to change. I went back and looked at the last several signals in the Gold market just to see whether or not the ES would have confirmed those trades had I used it as a filter.

You can see the last 3 Gold setups for me, 2 sells marked with red arrows, and one buy with a green one  in the middle. Ironically, in each of these situations, the correct filter would have been the ES. In the first instance, a sell, we had a similar situation to what we have now, a very over bought stock market that was under it's 200 day moving average. Viola, once the reversion started, Gold went down sharply. In the second instance, I have a very clear buy signal with my proprietary indicators ( not shown ), in the ES at the very same time the Gold buy showed up. In the third instance, I also had a clear sell in the ES with my proprietary tools, and boom, down we went. Now currently we have the very overbought short term condition in the stock market, really right at the 200 day moving average. At this same time I had a short term buy signal, not on the chart actually, but it indicated a buy at 1737 on 12/7. So by the logic at hand, this recent buy should not be done with the current state of the stock market. So far that trade would be upside down by a good bit.

This is why I did not do the trade in Gold or Silver, or the Aussie or the Euro, or anything else for that matter. I have no idea at all whether or not on an ongoing basis this logic will continue to work as a filter. However, what I have learned over the years is that when something is nagging at me like this correlation stuff has been lately, I listen to these inner thoughts. This is a very unusual time in history, and although the opportunities are tremendous, it is also very tricky. I think you have to think on your feet like what I have discussed here today. For all I know the PPT shows up again like it did yesterday and reverses things once again back up. However, these trades had I taken them would have already stopped me out except Gold. That stop would have been 1705, so that level has not been hit yet.

I am content that this logic has been the proper logic and I am glad that I have preserved the capital that would have been gone. I am still stuck in this crappy SPY trade, which is upside down by a tad at press time. I will trade that out to it's end for better or worse. I am looking just for a short term oversold condition to develop and I will exit when it does. Reversion trades are always tricky to time and this is just typical of how these trades are unfortunately. Heck look at Gold, how would you like to have been trying to time the reversion in that sucker? That has been overextended for 2 years statistically. Reversion trading is not for the faint of heart. You have to trade small size since you have to give the trades a ton of room, so the percentage returns you get doing it are not as high as narrowly defined short term trades, which are the ones I typically do.

I am not sure how most readers feel, but for me I always get a great feeling of relief when I have steered clear of a bunch of bad trades like I did here. Maybe that is a negative quality, who knows? This all could change in a day or two if we get some type of reversion in the stock market, then the buys will have the green light again.

Good trading

OUT ON A LIMB

For today's narrative I am going to take a shot at something a little different. I watched a well known newsletter writer basically ruin himself by doing this last year. I still get emails from them occasionally with sharply discounted prices to try and get subs back. You do take a risk calling a special alert for something if it does not play out. I am going a step below that, and also qualifying it with entry techniques below. I guess the good news is that this is free so I can't lose any subs if I am dead wrong.

My feeling is that any newsletter that is cheap is not worth getting in general. If something is worth something, it should cost something. Do not discount the price after a blunder or series of them. You need to come out and admit you were wrong, explain why, then move on. This one particular letter has never done that. Perhaps ego is involved, who knows. It is hard to have an ego in this business because of how often you get your ... handed to you. As a prior writer of one and possibly a future publisher, you always have to balance what you charge between having it be cheap enough that people will pay for it, but not so cheap that you attract the wrong crowd. The wrong crowd is the get rich one, and unfortunately that crowd is much larger than the "we are serious about this and want to learn over a period of time how to make money" crowd. In either case, you need to make the quality of it as high as you can and let the chips fall where they may.

Readers know that I am still short the SPY's in a reversion to the mean type of trade. I do not expect that trade if it works, to be a big winner. All I am looking for is a small reversion and at this point a close under 124.97 in the SPY if it were to happen today, would be good enough to exit that trade MOC. If that does not happen today, the number will be different tomorrow. The reason I go that specifically into that is that I think we have a somewhat unique situation at hand here. We have several markets that if they were to close today right as they look in the chart above,  are really good buy signals for Thursday. Specifically, the Euro ( in the chart above ), of course the DX which is the inverse and is a short, the Aussie Dollar, Heating Oil, and Silver. The grains are also possibilities, but the patterns are not as good there. There are others as well you can take your pick, those are just my favorites.

So, the way I am going out on a limb is that if we get a down close today in the ES/SPY that satisfies the above price target, I am calling for a good sized rally to start the next day in most places if the highs of today get taken out. If we happen to close down, and continue down, the trades are off as they would not meet my entry requirements. We will need at least some very short term show of strength to pull me into them.

I found myself in a dilemma last night for today in many markets. I was logging all the potential trades for today which were mostly longs. Once I wrote them all down, the problem suddenly appeared. Every market is keying off the ES for direction. The ES is incredibly overbought having gone almost straight up since 11/25. I know there are good edges on a very short term basis, for fading moves like this. In the SPY there is over a 90% probability of some type of at least small reversion taking place here. If I know then that the probabilities favor a small decline, and a rally is what is needed for these correlated trades to work, it simply does not fit, at least for today. Maybe we will just keep going up and I will miss these moves, that is entirely possible.

One thing you have to learn to accept, and I constantly have to re state this to myself, is that you are never going to catch all the moves that happen. NEVER. You have to establish some rules and live with the fact that you will catch the moves the line up with the entries you use.What is particularly challenging in this environment is that if you miss one you miss eight, because everything goes at the same time and mostly in the same direction. This is why you are seeing so many top traders doing poorly this year. Some of the very best are losing money this year. I can only speculate as to why this is happening, but I think this has something to do with it. You either miss moves, or you are too heavily weighted in one direction, when the trades do not work. When that happens they all lose at the same time. This is why I have constantly stated to be careful about your risk parameters this year.

Here we now have another situation where several trades may be lining up in the same direction. I will be using the same logic as I have before. When deciding which to play I will consider them to be all the same, and will make sure the contracts I take in each one are less than normal so collectively they add up to the risk for one trade. I will likely go slightly beyond that level, but not by much. By trading multiple, I do give myself a chance for some small difference between markets to allow one to work here and there if the others don't. However, there really is no diversifying in the traditional sense any more. If you just look at for example the emerging market ETFs, and compare those to growth stock measures, then look at foreign country ETF's, then to the US stock indexes, you will see they all look exactly the same. How exactly are you diversifying putting pockets of money into each of those if the chart patterns are all identical? You are not!

In any event, if we by days end wind up with the reversal bars on the chart that are currently in place, taking out those highs tomorrow, reversing back up again, would be very bullish in many of these markets for the short term. If we happen to close down today, but not far enough to reach my exit point, then there is another decision to make. That would tell me in all likelihood we might retrace a little bit more. However, I am not going to get too far ahead of myself with this. 

One step at a time, I am trying to build the brand of me here basically, so let's hope it is available in the future at Saks Fifth Ave and not Walmart!

OVERBOUGHT IN A DOWN TREND

Today at the close I added some more shares to my short position in the SPY's. One thing that is developing is some significant divergence in the accumulation indicators in both the ETF's and the futures indexes. I have On Balance Volume in Red on the chart above and it looks very similar to what the POIV looks like in the ES. You can see price is very close to the recent highs, yet OBV is quite a bit lower. This could of course catch up, but I am just talking about what is at hand now. I showed the reasons why I still say we are in a downtrend over the weekend. In this chart you can also see we are also below the 200 day moving average, albeit it by a smidge here. Net net we are significantly overbought in a downtrend, so that is why I am shorting this move.

As with any other trade, there is no way of knowing if it will work or not. The probabilities of fading overbought conditions under the 200 day are favorable, so that is why I am in this trade. It really is not any more complicated than that. Once we get a reversion, if we get one, I will exit the trade. If we continue up, I will not add any more due to how perilously close we are to the 200 day. There is not necessarily magic to the 200 day other than many large institutions follow it very closely, so it becomes a self fulfilling prophecy to some degree. Over bought conditions north of the 200 day do not have the same edge as they do underneath it.

I do think some markets are setting up potential buy signals, here is one I have not mentioned recently. The GOLD market is close to a pretty good launching point. However, I think this move is going to be the last hurrah before a significant down turn here. At this point we are in a tight triangle type of pattern. The seasonal points upward, so if we break in that direction I will likely go with that. The one thing we cannot ignore of course is the inter market correlations. Everything trades of the ES right now, so if it does happen to roll down, this will come along with it. I also still consider the weekly trend in Gold to be down now, so that is one reason why I think if we get a rally here it is not going far. I do think the correlation between Gold and the stock market is a bit looser than many of the others, but it is still there. I do not see a trade for tomorrow yet, but as we all know the overnight session can change a lot of things very quickly. We currently have some index weakness which is influencing this market down as well at press time. If that index weakness reverses, this may also.

Silver still appears to be the weaker of the two, longs should be done in Gold and shorts in Silver. The Euro/DX trade looks setup to me now, with the DX being down and the Euro up. Of course it is likely that will not trigger unless stocks keep moving up since there is a direct inverse relationship. This is just the PPTs dream. They can control virtually all the markets by just launching buy programs in the ES. 

I was reading the details about a new bill Gensler from the CFTC is pushing, that would outlaw the use of segregated funds for use in trading. Apparently according to a quote attributed to Gensler, Corzine was the main guy who blocked the bill from being voted on this past summer. If that is true, nobody can tell me why Corzine should not be in pinstripes. If he was blocking the bill, while at the same time engaging in activity that was essentially looting clients accounts that he knew would be outlawed, there has to be some grounds here somewhere. It is shocking to me that they are allowed to do this in the first place. As we know most people lose money trading. Those who do well either run their own funds, or just trade their own money. They don't work at firms like MF Global. What that leaves us with us people trading our good faith money in our accounts, who are losing traders, and it is legal for them to do it. I have some guy trading my money who is not good enough to trade on his own? I would like some Octagon time with some of these guys, lets do a pay per view! I am sure the authorities who check up on me from time to time will not appreciate these comments and I could give a ....

The world should be outraged over this.

The last tip of the day is turn off the TV it will only hurt your trading.

TEPID RALLY

Here is the weekly chart of the S & P 500. For those of you that attended Larry's Art of Trading seminar, you will know what the indicator at the bottom is. In the interest of protecting his interests, I have covered the label of this graph. It is a trend measuring tool, that as you can see has shown we had been in a steady uptrend for awhile, and now have rolled over into a downward trend. Also, we have followed the seasonal very closely here in recent months. When I put all of this together, it tells me to still look higher through the end of the year, but also that it is not likely that we will get a big rally. As I mentioned last week, I have been building a short position in the SPY over the last 2 trading days, and did add to it about 15 minutes before the close Friday. I had actually hoped for a stronger close than we wound up with. The good news was since it was weak, the add on closed in the black already. That of course means nothing. One more bullish story of another loan to someone who can't ever pay it and we could have a big rally. I wonder if a loan was made to a qualified buyer if that would tank the market?

There is going to come a time, when loaning money to people who can't repay will be a bad idea as it used to be. The story of Elmer Fudd otherwise known as Barney Frank not seeking re-election last week, and what his legacy would be was ironic. He is certainly the single biggest proponent of loaning money to people with no money or credit. It was ironic that we once again got another big rally on such a story going on over in Europe. Other than retiring to chase that pesky wabbit, he should be misremembered for what he was so instrumental in doing. He also should probably be in jail, but so should most of the rest of them and it is not going to happen as we know.

The stories coming out of Europe are going to continue to play havoc with the markets going forward. My overall view is now to try and catch a short for a few days down sometime in the next few days, which will setup a buy to carry into the end of the year. I don't expect a huge rally, I think it will be a slow creeper after we get a retracement here this week. Maybe a story about another bad loan being made will shoot this higher, but without that, we are really overbought here and in a down trend. That should lead to some type of a dip. After the dip it is a buy for the year end up and into January, then things could get interesting.

The next chart is more support for a dip. I have mentioned in here previously that the best way to time stock market swings is the VIX. There are a lot of ways to go about doing this and I have no idea if the way I do it is the best. However, look at the next summary of a system I have for buying and selling stock indexes, based on the VIX.

If you look at this just from an overall standpoint it is pretty good. The draw downs are a bit high, and there are a few other things that make this not just good enough to blindly trade without anything else. However, what it does tell me is that there is a bias we can get that is about 80% for a direction, and that is awfully good. Keep in mind that this system does not have a stop, it has an exit based on levels of RSI so that is why the swings are so big. I think the best way to use it is too look for ways to trade in the direction it indicates, not just go in at the market as it does. It generated a sell signal late last week, which is why I started legging into my short, and also exited the long I had been in. When this sell signal showed up, and I also looked at the trend measurement which still shows down, it told me fading an overbought condition was the move to make.

The next chart shows why there is a sell signal here. We are extended on the down side past the bands that generally contain the price. Just like anything else, there are a few places on the chart where you can see the signals were inaccurate, hence being wrong 20% of the time. I could care less about that, 8 out of 10 is good enough for me.

The next chart is a market I have been talking about the last few days, Natural Gas. It does appear to have a setup now with a pretty small stop due to the smaller ranges we have worked into here. There is a nice trend line coming in here that would break if we took out Friday's high. I show the stop which is about a grand on the chart.

Please go back to last week for the other setups, they are still all the same and there is no point in just regurgitating all of them.

Good Luck this coming week

BUCKING THE TREND

I see many markets in transition right at the moment potentially changing from down trends to up and it logically follows then that the Dollar would be doing the opposite. In the world of one trade that we live in, everything goes one way and the dollar and bonds go the other way. One thing that really jumps out at me about this chart is the huge POIV divergence that is here. Usually when we see this a large move going in the opposite direction will follow. This is also happening when we are close to a seasonal down tendency. Me likey dis one. Once again my Synthetic COT indicator is off in the clouds telling us nothing. I should call it Spalding, since it reminds me of the Caddyshack character that is clueless.

Ideally a test of some sort of the high will follow, then a short entry can be taken. We do have NFP tomorrow, but I don't expect that to mean much. The government interventions both real and rumors of them, are driving almost all the market moves right now, so the NFP is almost a non story other than good fodder for the political hacks to kick around. They will want to use it to bury Barry. I say out with Barry and get Clinton back and let's see if he can break Wilt Chamberlains record with the secretarial pool! We know the NFP report along with so many others, are so doctored, that they do not offer anywhere near a true picture of what is really going on. There is no way to trade off this kind of crap and there never has been. Just place whatever orders you would place whether the report is coming out or not. The worst case is you get a few ticks of slippage, big deal.

I really have no idea about the big picture gloom and doom stuff as to what the dollar has to do, the money printing etc.. That is just not tradeable information. Many of the currencies also look like buys including the Euro, so it logically follows the DX should be a sell.

I traded some emails today with one of my readers that is very concerned about the big picture and the global crisis that could be coming. I want to make something clear that perhaps I did not do the last time I brought this up. The main reason I don't seek out "expert" opinions on things, and rely on my own assessments, is not because I think my opinion is better or more accurate. It is because I am accountable to me, others are not. If I lose 50k because of taking some action based on a view on something, that view had better be mine unless I can bill the owner of that opinion the 50k and get paid. There is nothing worse than losing money listening to someone else instead of yourself. I have made that mistake in the past many moons ago, and won't ever do it again. I urge all of you to be careful about hunting for opinions that just reinforce what you already think If you decide to seek them out, read the opposing views. I can assure you if that if you are scared, you can pretty easily find supporting opinions of others who feel the same way.

The MF Global situation at this point is continuing to be very weird. I guess clients are getting 60 to 65% on the dollar, from the account balances they had. This is quite frankly unacceptable, and it also appears Corzine is getting a complete pass on this. So at this point we now have Congress trading on inside information that is illegal for any of us to do, and now we have a former Senator and Governor now who oversaw this MF disaster not being held accountable in any way. I have always said that life is in inside game and you are either inside or you are not. I think these two cases pretty much prove that to be true. There just is simply nothing any of us can do, when the Madoffs or Corzine's of the world decide to blatantly break the law. Laws are there as deterrents, but some people just ignore them.

This does not mean that the whole system is going to crash. I have no doubt there are many more liars out there and another big firm or two could be doing the same thing and be defrauding the public. Just try and split up your money, so you are not ruined if one place goes down.

Here is another market that might be setting up something, Wheat.

A possible seasonal low point is coming and some of my private stuff shows this could be setting up a buy. The problem here is that since the whole world is setting up a pullback buy, and this is one of the weakest markets, do we do it? Probably not, but we have to see how things look if and when the setups develop. If we have buys in the stock indexes, currencies, energies and others, chances are the Grains being weaker, will not be the ones I choose to play.

I did start scaling into a short position in the SPY's today just based on how overbought the market is in a weekly downtrend. If it is going to pullback it should start in the next couple of days. My position is small at this point and will be added to if we close strong tomorrow.

Good Trading