HOLY GRAIL, IS THERE ONE?

One comment made yesterday got me to thinking that I have never really reviewed the different approaches to trading that one can take. Today I will do a brief overview of different ways of trading/investing and their virtues and drawbacks. I will take one of the below approaches each day and discuss them.

Here is an equity curve of an SP 500 Mechanical trading system I have used in the past. You can see the huge gains, then the leveling off in recent years. What this represents is typical. A mechanical system which identified short term imbalances and sought to take advantage of them. It worked very well for awhile, then all of the sudden it's equity curve is going sideways. This is typical of so many different approaches that are mechanical, and the main reason why I do not trade with them anymore.

Here are the different ways you can trade/invest:

Systematic Trading

Discretionary Trading

Arbitrage

Buy and Hold

Macro-economic Top Down

SYSTEMATIC TRADING

With this approach you craft a fixed set of rules for entries and exits and follow them without question or hesitation. This is a very effective way of taking emotion out of trading. The very best in this category can make 20 - 30% per year pretty regularly. There are years where the systems work exceptionally well and you do much better than that. I used to trade that way and did experience a few very good years well beyond this level of return. The challenge with this is twofold.

First you have to develop a good set of rules with edges in the markets. This is not easy. Over optimizing past data is a chronic problem and often leads to subpar out of sample performance.You have to have something to base your systems on, so researching what has occurred in the past is the best way to try and develop rules for buying and selling. I have spent many years backtesting various ideas for exploiting what I see as edges in the markets. I have often found significant results to some of my ideas. At one point after studying just daily seasonal tendencies for up and down closes in both Bonds and SP 500, I developed a system to trade that bias. Any bias over 85% I entered the market at the opening the next day and exited on the first profitable opening. I ran off 55 consecutive winning trades with that. To this day that is by far the best such run I have ever had.

This was a case where the actual trading far outperformed the back testing. Outcomes like this rarely happen, but occasionally you get lucky. However, I started to run into trouble with this approach, took a few losses, then realized this was a dumb way to trade and shelved it. That wound up being the greatest call I have ever made, because that system has not made a yearly profit since that time. I would have lost alot of what I made had I continued on with it. Ironically a judgement call outfperformed the mechanical here in the end. However, in defense of systematic trading, alot of that money made from that is still in my bank accounts so it was not a total loss.

Second, the single biggest drawback to this approach, ultimately almost every system I have ever developed at some point stopped working. They all became losing systems some after years of profits. There are a few reasons for this. First and foremost, there are a ton of smart people on wall street. Some of these firms hire one brain child after another out of MIT to develop systematic approaches to exploit market ineffeciencies. As a result, as individual traders we have very strong competition here on the idea front. We may discover something, but at some point these powerhouses also discover it. Once that happens, it gets "arbed" out. This means the edge is eliminated and no longer can be traded profitably.

You can certainly chase your tail on these types of things and as long as you can stay ahead of the game and accept that a good system will last a year or two at most, then this is still a good approach to use. You will have the pressure of having to constantly stay ahead of the curve here, developing new ideas over and over. It is unlikely you can develop an approach, then make a 10 year plan to use it. It will just not be effective for that long.

Being a martial arts guy and ex wrestler, I am one of the most disciplined people any reader of this blog would ever meet. This approach suited my personality very well due to this. I could follow the rules without question. Many or even most people, cannot do this. You have to understand that if you literally miss one trade, or do one incorrectly, or pass on one, etc.., you can ruin your whole year with this approach. That one trade you miss could be the single biggest trade of the year. When I had my trading service, we had a 5 month stretch without one single loss trading Bonds. This was an incredible run, 22 straight wins. It was completely mechanical, just log in to my site, get the orders for the trades, and click the mouse. I actually had a client at the time who cancelled his subscription because he had lost money! How the hell could anyone have lost money during a stretch without one single losing trade?

He was such a pin head that I never went far enough to determine how that could have happened, but obviously he did not follow the rules. Very few people can do this correctly. This person was typical of why this approach does not suit everyone. You have to match your approach to your personality or you will not succeed.

I will discuss Discretionar Trading tommorrow.

Good trading to all of you

IF YOU LIKE WHAT YOU READ SPREAD THE WORD

First of all I want to thank those regular readers of the blog. My whole intent in doing this to begin with is to build a small little community to discuss trading ideas. I guess I for the most part put out the ideas, then we kick them around. What I would like to see is more participation. This is not a money maker for me and was never intended to be. However, it does take alot of time creating the posts, so I would like to have more participants if possible. All I ask is that if you like what you read, spread the word.

I can track generally where in the world people come from that check in. As a result I do know that we have people from all over the world that read this, many on a daily basis. I am not going to spend money advertising it because that makes no sense since there is no way of covering the cost of doing that. Also, I am not selling anything, so there is just no logic in that. I just would like to get a bigger audience. If anyone has any ideas please shoot them to me, or post them in here.

I am working on one thing that if it turns out well, it will probably accomplish this task, but it will not happen until the end of the year.

Let's look at my new favorite report to bash, the COT report, and see what it is telling us if anything about the stock market.

Looking at this weekly chart, you can see that in general the commericals ( red line ) have had longs at reasonably high levels during this rise, supporting the price movement. They have been selling in the last couple of months. This is to be expected, the natural function of what they doing is hedging. Typically they get opposite the trend much faster than they did here, so in hindsight this should have been a clue to how far this might go.

When we look now, although they have been selling, their net position is really in more of a neutral ground area, so I don't think it means a thing. Small specs ( green line ) have been buying recently, but not at large levels, again this means nothing. The last category, the large specs ( black line ) have been doing some selling. This is a bit surprising because they are trend followers and accelerators. Generally at new high levels like this they would be much more heavily long.

There are 2 ways to look at this. First, it means they have alot of buying power left to drive this further. Generally there are limits to the position sizes so often when they get to historical highs trends tend to reverse. This is because they have run out of buying power, and the market can then just fall on it's own weight. Since we are a long way off from their highest long position, it means if they wanted to drive price they have a lot of buying power left to do it.The second way we could look at this is that since they are trend followers and accelerators, this selling means they perceive the trend to be ending, and this is a red flag.

The $64,000 question of course is which is correct? This has really been the whole problem with COT analysis and why I have been bashing it lately. The patterns in the positions just are completely inconsistent. What means a buy in one instance is a sell in another. This should not be the case, this is fundamental data. I like the techniques I used to be able to be applied the same way to all markets. This can no longer be done with this information. There are still a couple of situations that when present with this data have value, but that is a topic for another day. In this case what I think this means is just that some large players have taken some profits due to the magnitude of this move. This would not normally be how they move their money around so it is complete conjecture on my part. If the DOW is going to 15,000 they would not want to miss that much of the run. If that were the case, we would look for them to be aggressive buyers on breakouts and that would confirm that view as being correct.

Net net, I cannot really draw any meaningful conclusions from the COT report for this market. I suspect that we will just keep moving along here with very small pullbacks, creeping higher. Life is good, don't fight this.

SWEET SCIENCE PART DEAUX

A couple of weeks ago, I do not recall the exact day, I mentioned the Sugar market as one that was setup for a rally. I have placed orders above the market several times, and finally on Friday you can see where the green arrow is, I got filled. You can see the familiar look, the momentum oscillators were moving up well ahead of price, and eventually price "got it." I have written often about how oscillators often diverge against strong trends for a long time before triggering a reversal. At times like what is currently happening with the stock market, a reversal never comes. There is no perfect answer to how to best use this type of situation other than to use your best judgement.

In this case the huge Pro Go divergence ( green line ) helped push me into this one. Yes that also diverges at times without producing reversals. If you want a perfect 100% guarantee, become a union worker somewhere. There is no such thing in trading. This is an odds game. In my trading career in the past I have been way too tied up with looking for the holy grail like so many do. I spent years developing and trading mechanical systems. At times I had spectacular results. However, often what happens is markets find the inefficiencies and eventually eliminate them. As a result trading systems have limited life spans. They were getting shorter and shorter, and I just lost my confidence in them.

The transition back into discretionary trading was painful I have to admit. I had a couple of just awful months, but I knew it would be worth it in the end and it has been. Now when I have several things I use pointing in the same direction I take the trades and live with the results. I do not get the 85% accuracy rate I used to trading mechanically, I wind up at about 60 - 65%. That is more than enough to make solid profits. I use what works for me, I could care less what anyone else is doing.

When I mention a setup in here it does not necessarily mean the move will happen the day I mention it. It means to begin looking for a way to get into the market. In this case it took a couple of weeks before the actual entry showed up after the setup was in place. I will not always put the same thing in every day making sure you get it. I will just give a heads up of what I am looking to do, the rest is up to you. This is not by design, I get busy just like everyone else and forget to do certain things. After all this is a free blog where alot of trading ideas that turn out very profitably are thrown out to you by me on a regular basis.

What more could you ask for?

Larry Williams put out a video yesterday alerting people to this trade, and I suspect that some people may have viewed that and just gone to the market and bought here this morning, which gave an immediate push. You could have gotten in close to where the correct entry was at the opening so I think some people saw that and went in. Let's see if it sticks.

THE LITTLE ENGINE THAT COULD

As the moonshot continues here I think it is very clear there is nothing even remotely slowing this down right now. The reasons behind moves like this or their internal components, become irrelevant when we get a momentum move like this. We have gone up about 15% just since the February low. I have repeatedly stated that 1235 was a lay up, that is only another 40 points which could happen in a day or two if we get a blow off situation.

One of the best trend measurements is the blue line at the bottom, a Larry Williams creation. When it gets into a horizontal flat lining type of look as we have now and had last year also as you can see, you just have to buy all the dips. It is indicative of a very strong trend. I do admit to also being in the camp that this is a bubble, and by most valuation measures it clearly is. However, we have certainly seen in recent years how far bubbles can inflate before they burst. Who knows how far this could carry?

One of the old adages on wall street is never short a dull market, and that definitely applies here. This is a dull market except for the last 45 minutes of most days. There is almost no intraday volume at all, then "magically" the last hour we rally to new highs for the day. This has happened such a high percentage of the time that of course it is not natural market flow. It does not really matter. The bottom line in trading is how much money you make or lose, not whether you are right or wrong or what your reasons for a particular view are.

One of my favorite things I have ever read was in a blog hosted by my friend Rich Toscano down here in San Diego during the housing and stock market bubbles. Some guy said that the people thinking stocks were overvalued were actually right and the markets were wrong. After I stopped laughing, which took an hour, I realized this is the problem most people have. They refuse to understand that the market is always right and if you are in disagreement with it you are the one who is wrong.

THE MARKET IS ALWAYS RIGHT

Wins and losses are tallied daily in the markets, if your views are contra to what is going on with actual prices you will be cleaned out. Now there are obviously times when divergences develop and a contra view can ultimately be proven correct if you hold on long enough. Just looking at this chart above. With all that is going on today it is certainly not a crazy view to believe that this all will come crumbling down. Now as Barry is apparently surrendering now to Russia, it appears to be another move that will wreck this country for decades. Make no mistake about it, the damage he is doing is going to take decades to correct. At age 50 I will not have time for the fixes to happen, and will likely be moving out of this country to a democracy since we are really moving away from being one. Ironically there are other countries in Europe that seem to be moving towards democracies as we move away from being one. Italy in particular, a place I love, may be my landing spot eventually. Another mil in the bank and poof I will exit this trainwreck he is staging. If I am wrong and the next administration can undo alot of this I can always move back.

With all that in mind though, the extension of that logic is that the stock market should decline if all that is true. There is no precedent for any of this, but the scenarios I can find where societies forms of government were transformed, do not show stock market declines. As I have written about before, there are so many other problems in the world right now economically, that even though we are being weakened by design, we are still the strongest except for maybe China. The market in it's price structure is not telling us that any of these big picture problems are daily issues here yet. We are getting a lift off across the board in alot of asset classes right now, and there does not appear to be a reason to step in front of that yet regardless of your macro views.

Alot of what is happening to me reminds me of my old days in the school yard. You have a kid who runs his mouth constantly, and everyone tolerates it to a point. However, he pushes it too far, then all of the sudden some discontent starts to boil ( this is happening now ). Eventually somebody stands up and calls him out, he mouths off in response. The next predictable step is he gets his ass kicked and is physically forced to stop being such a jerk off. That is where this country is heading, and probably although a metaphor, how all of this will get stopped. The uprising will have to become so strong that we get on the verge of another revolution or civil war. He is hurting alot of people, and just taxing people like me to pay for all of it is going to at some point get a pushback beyond what he can squelch. Barring that the F you I won campaign will continue onward. The arrogance of this guy and his flunkies is incredible, unprecedented in this country. It is going to take a long time for this to happen, so there is no need to assume that tommorrow all these bad things will crush the stock market. They will not. If it gets close they will buy futures with all they got to keep it up here.

I think we have to look to the May - July time zone now for a potential top in the market. Seasonally that is when most highs are made on average. There also has been a tendency historically for years ending in 9 or 0 to feature major tops in the market. I will be looking for signs of a shorting opportunity either in the 1235 zone or beginning in May, not likely before that other than a short term trade if one of my patterns shows up. I exited all my stock shorts yesterday, and even though more were losses than wins, they overall actually had a small profit. A miracle quite frankly considering how wrong I was about the short term decline I thought was here. I did state in here I was light on the short side and that was obviously a good judgement.

It does feel to me that overall the economy is getting a little bit better, and I am not one to fight the wave that is underway right now. I do like the fact that the intermarket relationships that had been so closely linked have finally decoupled and markets are moving on their own fundamentals again. This alone aside from anything else tells me things are getting better. It was panic that started that linkage to begin with. The US Dollar is looking good, and is getting close to this pullback buy I have been waiting for.

If this trade winds up being successful it will help boost stock prices further. Ideally we would go down one more week on this, but I am looking for buys right now in this market. We got clobberred here yesterday so maybe that gives us a little more downside movement. Let's look at the world's favorite market.

Recently I had commented that I was not sure which way this market was going, but I thought it could have a nice move. That move has been upward, the 3 billion market bulls in the world have been right. We now have an interesting juncture. The top panel has one of my favorite sell signals, the middle panel does not confirm, but the longer term bottom one does. Entries from these signals require lows getting taken out, so that would take a big move. Also, the daily chart is going straight up, so no short entry in sight there. This weekly chart just tells me to look for a potential short entry up in here.

The nice thing that has happened in this market for the bulls has been that the incredibly overbought situation that was in play at the high, has been worked off without too much technical damage being done. I made a large amount of money shorting this at that peak and at various times on the way down. Then had a nice long in the area of where that low was. This has been by far the market I have made the most money in over the last year, so I just root for continued movement. I do not care which way. If you are long there is no reason to exit here. However, if a weekly low gets taken out with my sell signal in place, it would be time to exit any longs. This sell signal often triggers large moves unlike some of my very short term ones were moves of just a few days to a week happen.Until that happens though,the path appears to be up here.

Good trading to everyone

PUNCH DRUNK

Well the old adage of all the bad trades look stupid afterwards certainly applies here. Keep in mind that I just trade patterns, not opinions. As a result, all trades are really the same. The patterns are different from trade to trade. However, I don't trade with alot of discretion so I usually don't feel dumb after a bad trade like this one was. This week has been mixed, I have made a couple of bad trades and a few good ones, so a net gain, but not a great week overall.

Let's talk a little about a bigger picture view of this market, and all the indexes. I harp ad nauseum about the PPT. We know they exist, and we also can see they are making no effort to disguise what they are doing anymore. In reality this is really irrelevant. We cannot do a thing about it, and we do know they are baised in one direction so anything they do will move the markets higher. It really is a known edge. It tells us that during any pullbacks that we get no matter how small they might be, buying is the correct play.

It is hard to buy into a 2% decline after an 80% upward move, I have to admit. The strongest trends are the ones that have very small pullbacks and they just don't give us great chances to enter. For those who might be long term holders, I do not envy you here. This is a very difficult call to make if you have sat this one out all the way up to here, and are now contemplating what to do. If it were me in that position, I would sit on my hands here. Chasing something like this inevitably results in you buying the exact high. There are significant downside possibilities here that could trigger at any moment just based on all of the political things that are going on. If the horse happens to get out of the barn away from the PPT, this could meltdown incredibly fast. However, there is always the possibility in any trade of it moving against your desired direction, so you really have to tune that out.

You have to have a plan for how you approach trading and investing. This helps when we get into a dilemma like this. For me I don't care because I make my money going in and out for 3 to 10 day periods for the most part. I know my plan and it's limitations. For those who have a longer term horizon you have to separate news from your decisions. You need to buy on extreme weakness. If for some reason you exited when we went down under 7k in the DOW you need to have a plan of when to get back in. I would say in general the plan needs to be identifying a point when a retracement of a trend becomes a trend change. Obviously that happened quite some time ago now, so this is not a place to make your re-entry. DO NOT make it based on your view of whether Barry and his minions are commies or not. They appear to be but that has nothing to do with the stock market. I think most people have seen that proven out now.

I will be the first to admit that my longer term view has been incorrect. When we intially began the rally in March of 2009 I thought it was a retracment trade. As it carried along I still thought it was. I realized really about 3 months too late that it was more than that. However, I still thought the 1235 area would provide a ceiling for this. That might still be the case, nobody knows. Since there is such a heavy confluence in that area with so many different approaches that are used, I do expect us to have a moment of truth there. If we blow through those areas that next stop is new all time highs in the markets. My gut is that is what is going to happen. That gut is not based on anything technical that I use. I just feel now that we have defied the odds as well as many other forces for so long, that there is no way to stop this. It is yet another bubble that is being inflated. We all know that nobody does bubbles better than the former United States.

There does remain the possibility that with all the world wide crises going on, that money could flee from other places and start chasing our stock market. We have been lacking volume which proves this has not yet happened. If it does that could provide significant fuel. This is impossible to quantify.

So, if the .618 retracement area does not produce a reversal in this market, one is not coming. I cannot offer any advice to long term holders other than to watch that area and see if we stop there. If we don't you will have no choice but to get back in. It will be a terrible re-entry point if you exited at the lows. I never told anyone to exit there, but I will admit I did tell people I thought we were ultimately going under 6k before the final low was made. That is not going to happen now. I was wrong about that. I did also tell someone that when he got out at a different place than I had suggested, that he needed to be prepared for the period where he was going to feel like he had made a mistake. That time is now. I was unduly influenced by COT data in making that low call. I did tell another person who asked me about getting out that if he did decided to do that, he had to make sure he had a plan to get back in if he was wrong. He never got out I think mostly because he did not know how he was going to get back in.

For me it is very easy to just get back in once I see I was wrong in exiting something, as per my post above. This is just born out of experience. I cannot afford to get too hung up in what has already happened. If a setup for an entry is legitimate I keep chasing it until it is not. If it proves to be wrong I reverse.

Since I showed the losing trade above, here is the winning trade I made which made alot more profit than I lost in the dumb NAZ short.

I am not going to be doing much more shorting until I see something else that might indicate we are reversing. There is nothing jumping out at me here, other than the re-entry today if we were to move back down which is highly unlikely. This NAZ trade was just a losing trade and the setup is gone now barring a late drop today.

TRAVESHMOCKERY

Well I talk about this constantly and go through periods where even though I know it happens, I let it go and others where it irks me. One of my favorite commercials is the one where the guy is yelling it is a Travesty a Sham and a Mockery, stutters then says "It's a Traveshmockery!"

What the US government is doing in the index futures is clearly that. It has never been this blatant, and I am shocked that more is not being made of this. Yesterday was another clear example of the market rolling over and starting to pick up some downside momentum. Then "magically again in the last 45 minutes a big reversal back up. Folks no matter how you cut it, this is just not right and mark my words this artificial inflating of this whole uptrend is going to be a big problem at some point. It is not a big deal to allow the market to correct for a few days, then move higher again. By forcing it up virtually every day they are not doing us any long term favors here believe me.

It is my opinion that there is no way any fund or large individual trader would have put on a buy program when this last minute save occurred again yesterday. Literally every day that I can remember when we have been down over 50 points in the Dow coming into the last hour, we have had a significant rally into the close. The markets are very random, this is far beyond what would be a normal distribution of price movement. It is artificial.

There are certain parameters that are generally used and they were not at levels that would generate this type of thing at that point yesterday. I do have to admit I am biased because I am short the Naz futures and some individual stocks. However, this is a topic I talk about repeatedly in here. I guess my blog is not widely enough read to have been brought to Barry's henchmens attention. I have no doubt if it were, they would be threatening me like they seem to do with everyone else behind the scenes that does not agree with them.

The odd thing about this which I cannot explain is how they are managing to keep large funds from large scale sell programs at the times in a balanced market you would normally see them. I supposed behind the scenes incentives or some other such "deal" or "conversation" might be taking place. It might be being suggested that it would not be a good idea to launch any major sell programs? I have no idea and no proof whatsoever about anything along those lines that might be going on. I do know that this is the most unbalanced stock market situation I have ever seen in my career from this standpoint. Even the big bull market of the late 90's was not like this.

With all that aside I will stay with my short with no expectation at all of a win. These guys are just not going to let this market even have a minor correction the way it looks right now. Below is one of the individual stocks you can see I shorted yesterday, FEDEX. Will any of them work? Who knows? I did decide not to short the Q's and QID with my futures short yesterday just because I want to be light on this position. The way the PPT is controlling things I just don't see any reason to get overly excited on the short side right now. I only shorted 700 shares here, but once you do 4 or 5 trades like that you use up 400k of margin really quick.

May the force be with you, which in this case is the PPT on the long side!

BEATING A DEAD HORSE

Are we heading for a decline? Possibly

Should we be selling with both hands? Maybe

Is this a market to chomp at the bit to fade? No

I know alot of people including trading colleagues of mine are really getting anxious about shorting this market. I question why. You can see from the above a setup that should look familiar now, a strong trend with momentum oscillators diverging against it. This is the achilles heel of these things and if anyone ever solves that problem I hope they are smart enough to keep it to themselves. It is very difficult to know when these divergences will actually tell us in a timely fashion, when a decline will start.

This is a sell setup for me in all honesty so I do have orders in to sell below yesterdays low and will also take the Q's and QID in my stock accounts if we get down there. I doubt we will. I am also already short a few individual stocks. I know in my earlier trading days I always wanted to fade moves like this and tried incredibly hard to find the best ways of doing it consistently. There are none. There is no doubt that at some point and it could be today or a year from now, that we will have some downside movement here. It could be substantial. However, you really have to be aware of momentum. Our oscillators can measure it for us and here they tell us it is fading.

We can also look at new highs vs new lows, which also tell us that momentum is fading here. However, price is the final arbiter, and it is unequivicolly telling us the trend is still up. We do seem to be potentially forming one of these rounded looking formations here which have often led to major tops, but it has not formed yet. I also think you have to factor in the greatest market manipulation of all time here into the mix.

Can you imagine what people would be thinking about all of Barry's tactics if the Dow were at 6,000? He would not have been able to pursue the F... you I won strategy to transform this country into Sweden. Yes the votes in Congress would still be there, but the public uprising would be way too strong and probably even violent for him to have pulled off what he is doing now. This is not an insignificant consideration. It is impossible to quantify, but also impossible to ignore. I think the practical application of it is just simply buy the dips and take profits aggressively on shorts, until we get such a strong trend break that it is obvious they cannot stop it.

Will it happen, who knows. I doubt it will happen any time soon. There are far too many socialist/communist things left to get done before they let this trade freely, if they ever do. Therefore I do suggest keeping short leashes on short positions. At some point we may miss a big move but the whole problem with every technique I know of from standard deviations, the regression to astrology, etc.. all have one big problem. All the entries at times run way too far against you before the markets ultimately reverse in your direction. It does not pay to have 5 losing trades in a row trying to fade something like this just to ultimately catch the exact top. All the testing I have done have drawdowns that are way too large to be practically traded. Some very good equity traders have been cleaned out trying to short this market way too early last year.

I wish it were different, and I also wish I would have understood the depth of the manipulation that was going on here earlier in the game. Even as someone who has been well aware of the PPT for quite some time, I had no idea they could pull off something like this. Fortunately for me I trade technically and even if I am dead wrong about that it is not a factor in my trades. This is really more just a general discussion of why fading big trends, regardless of what is behind them, is a tough business proposition. Whether it be market manipulation by some outside force, or just the sheer streng of a trend itself, the price patterns always look the same. They have persistence in price movement in one direction with very small retracements.

I do not recommend betting the farm against this market at this point

ANOTHER DAY AT THE OFFICE

Above is the exit of my Short Sale in 10 Year Notes, yesterday near the close. The topic of the day relates to just executing trades by the rules and moving on. I got stopped out in my Russell trade for a loss, then got this nice win which eclipsed the losing amount, so net net a profit. I prefer to stay in trades longer than this but when I get 3 good quick days in my favor consecutively after entry often I will take profits. As to what is "3 good quick days", well I have to keep some things to myself. Here I wold have had my trailing stop had I stayed in above the prior days high and been picked off today, so this exit has already been validated. Even if it were not and we had continued downward, I followed my rules so time to move on.

There is actually a potential buy signal on the weekly chart in the Ten Year right about here, which is one of the main reasons I kept a pretty short leash on this one. You always have to keep in mind what is going on in higher time frames. In addition to this, there are sell signals in equities which is bullish for bonds, so I just did not want to get too carried away with this one. It was a good trade and I know if I can execute like this time and time again, life will be good. My own version of LG.

In terms of being critical of this, there is one thing I did not like about these 2 trades. I always like my wins to be more than double my losses, which provides me alot of wiggle room for periods of subpar win/loss ratios. That did not occur here. This win was about 1.25 times the loss in the Russell, so the 2 to 1 was not achieved here. You cannot force a trade to be something it is not, and I have in the past given back way too much giving things too much room. It still was better than 1 to 1 so better than a kick in the ass.

NOW WHAT?

We are damned if we do and damned if we don't now. Trends that just go straight up like this are so hard to trade. We do have short term sell signals, which in moves like this are not worth the paper I print them out on. Yet we also are so incredibly extended on a short term basis, that new longs are not good plays here. This is where you just have to have discipline and not be an ambulance chaser. When there are not good trading opportunities it is too easy to force something marginal and give a bunch of money away. DO NOT DO THAT.

I do not like watching this just sail along everyday either, but would feel even worse buying in and getting clipped quickly on the reversal that we know is coming. Anywhere between where we are now and 1229 could represent a major long term position short entry, so I am not going to expose new longs at these levels. Just sit back and admire the Picasso that has been painted by the PPT, it is one for the ages.

You can see on the following chart, the short term sell setup in place with the NAZ. The momentum oscillators are in downtrends, while price is climbing. We have a nice short term trend line that can be drawn in for a short entry. This is a trade I will play if it triggers today.

If it does not I will just sit on my hands and not force anything and I suggest you do the same.

Have a good trading day

THE WIND AT OUR BACK

I was finally put out of my misery on my Russell short position this morning. The stock market is kind of like a downwind par 5 right now. There actually is a holiday bias trade that says to buy stocks today, so this early up movement is no surprise. So why was I short coming in if I thought we would go up?

You will have to enlarge this image on your end to be able to read it. It is just a snapshot of all the stocks I have orders in to Sell Short today. None of the orders are close to being filled, and I do not expect them to be.

So, I mentioned a holiday upward bias, I have also been talking bullishly recently. Further I mentioned the trend is very strong and that I am expecting 1235 as a virtual lay up. Why in the world would I have been short the Russell 2000 coming into today, and why would I have all these orders for short sales resting?

I DON'T AND NEITHER SHOULD YOU, TRADE ON MY OPINION!

I have rules by which I trade and I do not vary from them ever! Often with years of experience you can get a feel for what is likely to happen, but here is the problem. That "feel" can be influenced by many things some legitimate, some not legitimate. As we watch market movement and look at what is going on we can often develop an overall sense of what is likely to happen next. However, what if someone in your family is ill? What if a good friend had something bad happen to them? What if an unexpected expense showed up in your life? Do you think any of these types of things might have the ability to influence something so fragile as an opinion? You betcha!

I have not been able to ever find a way to quantify what my "opinion" is and when in the past it has been right or wrong and for what reasons. If you introduce too many variables into this business it will eat you alive. The place where you want to introduce feel is for the most part nowhere. Yes there are times that I do use some discretion in where I exit trades, you need to do some thinking. However, that judgement needs to be a minor component of what you do. Recently, I had a short sale position in the Russell ( last month ) and it had a big day in my favor on the day of entry. I had a target established below the market. I was set to just sit and let it get hit or get stopped out. Then something happened, we got a big gap down on the opening.

I mentioned in this blog right when that happened that often these gaps when they are against the direction of the main trend can often be continuation entries for long side trades. As a result, I judged that since I had a counter trend trade going on, and this unexpected development had taken place, that I should take my profits. Low and behold that gap was the low of that day and we have moved higher ever since. This was not really a "opinion" move. It was based on research I have done over the years about gap openings. This was really more a matter of thinking through what happened not emotionally flying off the handle and clicking the mouse.

I have certain patterns in the market that I trade. These patterns are present in the stocks above for short entries, so I have the orders in, period. Yes they are against the trend. One of the limitations of some of my patterns is that they do at times show up against strong trends. I am aware of this, so I do not get too concerned about it when it occurs. I know that over a large sample size, these patterns work and do make profits. With this knowledge in mind, it then just becomes a matter of executing them when they show up and living with some losses that I will take when we get into a moonshot market like this.

You will note that they are all sells below the market, which does help from getting run over. The market has to trade down in my direction before they get filled. This helps in runaway markets which often do not take out prior days lows.

Just for the record I do still have my 10 year short position on which is consistent with the market bias I have. When I put the Russell short on and the 10 year short on, it was likely one of the two was going to be a loser since they generally trade in opposite directions. However, you never know, and I did not put theme on together for that reason. My pattern was in place for both, so off I went.

WEEKEND REVIEW

Here we have the VIX still giving Buy signals, and as you can see we are very close to breaking a well connected trendline. Both of the trend oscillators are indicating an UPTREND. This is a good trade setup for next week. In general this would mean a decline in stocks, but it is not a one to one correlation. As you can see since we made the low here a couple weeks ago, and bounced some, stocks (the green line at the top) have not declined at all. This is volatility, which generally correlates to stock movement. The one other way to look at this is just to watch the trend in it. With the trend solidly down in volatility, that generally does mean higher stock prices.

If you think about this trend being towards lower volatility in options pricing, which is what this measures, it does logically follow that it is a reflection of diminishing worry in the marketplace. This typically accompanies periods of rising stock prices. Everyone feels good and nobody is worried about anything bad happening. Historically, when this lack of worry gets to an extreme, major tops happen. Conversely, when it gets to a very high level of panic, bottoms happen. There are alot of ways of using this, and I suggest readers do their own studies. It is the best single tool I know of to use in timing stock market swings.

Guess what, it too is not always right. There is no holy grail in this business regardless of all the great marketing hype certain people use to publicize things they are trying to sell.

Here is the ETF for the VIX and you can see it is actually quite a bit weaker. This to me does not indicate a buy yet. The last trading day made it's lowest low of the year, and reversed to close positive. These reversal bars although occasionally marking low points, are more often false low points. Conclusion, wait another day or two and see what happens here. There is no entry for Tuesday that I can see. You have to believe the PPT will be buying futures in the electronic session Monday to make sure everyone "sees" how good everything is getting as reflected by the NFP report. As a result, it follows that this will make lower lows before bottoming.

GOLD - I just don't see a damn thing to do at all here. Copper has raced ahead to new highs, with Silver a little behind but stronger than this. In general Silver is a more speculative market than Gold, so it is usually would be bearish for it to move up like it is with this market not moving much. However, I am not sure it means that much here. This is just a range bound market at the moment, and I don't see anything in my world setting up this coming week.

Here we have Crude Oil which has been rangebound for quite some time now. It is threatening to break out of it's trading range here. As you can see each prior time it has reached this level we had heavy commercial selling and small spec buying, which capped those rallies. It is happening again here, so it appears there is a 2 way trade here. You can short against this level with a reverse to a long on a breakout. I do not trade like that, but there are alot of ways to approach this business. There are people who are very successful who trade breakouts. I am kind of rooting for a break out which will give me more ammo to bash the COT report as being worthless. If we were to break out successfully, it would be another example of the COT data having a screw loose. I still use it in limited ways like this, but it is way down in the pecking order now.

One other thing of note  here is the rising open interest ( blue line ). In a trading range this would typically be bearish, bullish if it were declining.

The Dollar is setup for a buy now, and I am hoping for a day or two pullback to setup an entry. You can see the shorter term trend indicator has broken it's uptrend, but the longer term one has maintained it's trend. Also, the weekly chart is clearly in an Uptrend. Technically the POIV (purple line) diverged at the high as well as the Pro Go ( green line ), which is a negative here. However, the Pro Go is now leading ahead of price so will likely make new highs on a breakout so I think we are good to go here. It is very bullish for stocks that they are now trading directionally the same as the dollar. I have mentioned this in the past here. Historically these two markets have traded together, not opposite as they have in recent times. A strong dollar has typically meant a good stock market.

Good luck trading this week.

HO HUM

NFP report does not move market much, or did it?

Above is my position in the Ten Year I took yesterday as you can see the annoying red arrow on the chart that Trade Station displays. You can also see my stop resting above, the STM which stands for stop market in their jargon. Although the equity indexes did not move much, that Russell short I have on is still on, bonds did move a decent amount.

There is alot of talk out there about future inflation etc. I mentioned the other day that you should certainly be looking to short bonds if you believe in that scenario. Of course the hint there was that I was also looking to do so, although I did not specifically state that. I am not going to give up every single trade in advance that I do in a free blog. At some point in the future if I decide to ressurect my trading service, that will be the only way for anyone to get all the trades I do in advance. I do still give a fair number of them up in advance exactly as I am playing them, which is more than most places will do. I also am a real trader, and put real money behind the trades unlike many paper champions who do not actually do the trades they recommend.

Getting back to Bonds, I did not go short because of an inflation view or lack thereof. To me the market is in a short term downtrend and had bounced, with the structure of the trend still being in place. As a result I basically just shorted a pullback. As to whether or not the bonds move down alot or not at all, I have no idea. The pattern was there so I took the trade.

It does logically follow to me as I listened to the suits on CNBC this morning reviewing the NFP numbers, that for the time being things are better. We can debate how this can possibly last being that it is all based on government stimulus, but why bother. The trend is up in equities and who is to say where it might stop. If it continues, it is likely bonds will decline into their typical seasonal low period of May - July. Since that is when equities will probably reach the 1229 - 1235 area, we may very well have some confluence of things at that time for a reversal in both bonds and stocks. May is the operative word. There have been a few other junctures one being a couple of weeks back, where we also had some confluence of things for a reversal and it did not happen. All it did is result in a sideways ledge type of correction, that barely retraced at all.

One of the best lessons I have ever learned and continue unfortunately to have to re-learn, is that making investment or trading decisions on a strong believe in something that MAY happen, is a terrible mistake. There is a great deal of random activity that we all try to classify into some order, so that we can profit from it. That order is nothing more than our own self imposition on random events, and it has no effect on the ultimate outcome. The best way to trade is to study patterns in things that HAVE occurred previously, not that MIGHT occur. If A has caused or resulted in B X % of the time, that is how to trade. Do not get caught into the "well if A, then theoritically B" especially if that sequence has never occurred before. Fiat currency etc is an example of this. You are betting on something that has never happened before having to occur for the premise of your investment to be proven correct. It might happen for the first time ever and you will be right, but it is not a wise way to bet. I like probabilities on my side, not randomness hoping for the one outlier event to have to occur, for me to make money.

I keep harping on this because I keep seeing people making this mistake and it is one I have also made earlier in my trading life. You cannot take a macroecnomic view of things and try and impose that on shorter term investments. If you think for whatever reasons, that the economy may not be as strong as all the "experts" are saying it is you are probably right. It certainly appears to be talking point spin. However, look at the stock market rally we have had. These larger picture macro views do not directly correlate to shorter term market movement. In the case of stocks, these two things can diverge for extended periods of time and we are seeing one right now. Alot of money has been made on the long side of this market, and there is still no reason to get too jacked up on the short side of this monster, just because you might think that the rally is bogus due to government intervention.

I do think a day or reckoning is ahead at some point and once it does start and gets some legs, it might be a bit scary how fast the decline happens. However, until we get a trend change, that is just noise.

On The Chin

Here is a trade I put on yesterday in line with recent comments, that I am taking it on the Chin and likely to get stopped out on.

It is easy to just show all the good trades one makes but that hardly has credibility to me. I have losing trades also, and this is one of them. You can see where my stop is sitting just above where the price is as I type this. As you can see I only have 3 contracts on this one, a small position. I do have the trade in multiple accounts in the same size, so a very small percentage risk per account. Anyone who reads here knows I always preach risking 2% or less, this is far less.

One of the things we are seeing in this bull market is any news good or bad lifts the market. This is a sign of a very strong trend. There are so many ways to define trends, but you really don't need anything fancy in this case. Just look at how small this recent correction is, really just a sideways move. In the other indexes it is even less pronounced than this one. This is why I shorted this in lieu of the others, it has been relatively weaker.

With my stop just resting above, it may be stopped out already by the time many people even read this. I really don't care. This trade had my parameters for a valid setup so I took it, albeit it with small size which was a discretionary call. Yes you do have to think about what you are doing. It is going to take something very unusual to knock this trend off it's feet, so there is no sense in getting too excited about getting short at this point, hence small size here.

We are getting an across the board liftoff in commodities also and a corresponding dip in the dollar. Now that the dollar is lining up with stocks in general, it is interesting that today it is diverging back against it again. This lift off does give credence to the big inflation so many people are calling for. They could very well be right, I have no idea. I am generally uncomfortable being too enthusiastic about a view that 90% of the people alive share. There are just too few examples of any predictions that 90% of the people share that turn out to be correct for my taste. However, there is no sense of being a contrarian just for the sake of pissing people off. There has to be a technical reason to have a viewpoint on something. My technical studies do still show the Dollar in an uptrend.

As a result, I am still of the view that the Dollar pullback now is temporary and that we are right into a buy zone for it. If it happens to blow right through these levels going further to the downside, I will change my view. For now I think we have a buy the pullback situation in the dollar. This should mean that in general, these commodity moves should be running into some resistance very soon.

Below is another trade in the 10 Year Notes that is setup in my view

Certainly if you buy into the inflation argument, you should be looking to get short the bond market here. The only thing about this setup I do not like is how strong the purple line is, the POIV indicator. It is saying this market is strong underneath since at the recent low it's reading is far above where it was the last time price was down at the same level.

The Alarm Just Went Off

The markets appear to have woken from their slumber

After a few days of basically flat lining, we have some good movement today finally in many places. I do warn people to watch for the one day wonder moves that often surround holidays especially in the currencies. If you are in something and get one big day in your direction on a holiday electronic session or the day after, take the money. I have been burned on this scenario way too many times in the last year. We tend to get false moves on light volume which have been reversed the following day with a very high probability lately. I have had several big one day moves become scratch trades around holidays, don't let it happen to you.

Let's check out how the Dollar looks, I have been wanting to buy a pullback here. First and most importantly, we have a flat lining buy setup shown in the first panel where I have a label of strong uptrend. In these situations when the %R dips into the buy zone, we need to be buyers. It has reached that zone today so far. If we close here, this is a buy signal for tommorrow. Remember, it has to close there, trading intraday in a %R zone means nothing.

Next on the third graph, we can also see the longer term of the two trend oscillators also showing a pullback in an uptrend situation. Of course you could tell that just by looking at the chart, you do not need a fancy oscillator to tell you that. You often see these same oscillators on charts from me. There is no magic to them, the magic is in just appying one approach consistently. I use these over and over and most of my trades look pretty similar. This is not a coincidence. I have things that have an edge in trading, so I just apply them over and over and wait ( although at times impatiently ) for the same setups to show up. I would suggest you do the same. Find an approach you are comfortable with. Learn it's limitations, embrace them, accept them.

Not matter what your approach is some of the trades will lose, deal with it. As long as what you are doing is based on sound fundamental concepts, and has demonstrated that over a large sample size an advantage in the marketplace, then just go with it. Use it over and over. Do not get discouraged by the losses. It is known going in there will be some. Last month I started off gangbusters, then hit a stretch of a few losses that took back about 35% of my gain. I did not get discouraged. I waited for the next group of setups to show up. When they did I placed the orders and had a homerun month. I did not get discouraged by a few losses mid month. I know my approach has an edge, so I just waited for the next setups to develop and applied my techniques when they did.

Too many people, myself included in my early days, constantly chase the holy grail in trading. I have news for you, there is not one. You will do yourself way more harm shifting from one approach to another looking for that perfect technique, than you would from even taking a marginal approach and perfecting it. To be clear some searching needs to be done to arrive at your ultimate technique. You need to match your personality to your approach or you will fail. However, once you have done that, stay with it through thick and thin.

I promise you that you will have both, the thick and the thin!

Have You Missed the Train?

As we watch one of the greatest rallies of all time continue to sail along, what do you do if you have missed it? This is actually an easy answer. NOTHING!

Now that the buy and holders are out talking about how you have to be in it for the long term, yada yada yada, keep your wits about you. People from this school of thought cite what happens to your long term returns if you miss the 10 biggest days, therefore you always have to be fully invested. What they neglect to mention is the far more profound effect missing the 10 biggest down days would have on your returns. Without repeating what I have stated in newsletters in the past word for word, suffice it to say that if you could have managed to dodge the 10 biggest declines it has a far more beneficial effect than the negative effect of missing the 10 biggest up days.

It is impossible to catch all 10 of the biggest up days and dodge all 10 of the down days and vice versa. I state all this for one reason, there is alot of BS out there that serves only to ehance money managers incomes and not necessarily your personal returns. They benefit from having your money fully invested at all times, no wonder they think it is such a great idea. As we look at the above Weekly SP 500 chart obviously had you known in advance that this type of move was going to happen, going all in at the low would have been a great move.

I was bullish if you go back and read posts from the last couple of weeks of February from last year, so I did have the low pegged. However, I too have missed a great deal of this upward move. In fact as hard as it seems to believe, I have actually made money shorting this move. I have had 3 good batches of individual stock shorts that I have highlighted in here at the time I did them, where I made a good bit of daniero during these little retracement moves. I have not made much on the long side I am ashamed to admit but it does not bother me in the least bit. Why?

You have to define how it is that you trade or invest your money, there are many different approaches that can be used. You also have to identify your time frame, this is critically important. You cannot be a jack of all trades in this business. The reason that cannot be done is that when you cross timeframes, what looks really bearish in one time frame can be very bullish in another. If you constantly jump back and forth you will undoubtedly be wrongway feldman and miss move after move. I do not care who you are, nobody is going to catch every move, NOBODY!

Assuming you accept the previous premise, it should be no problem if you have missed this move. You should be looking for what you will do next, or at another market that might be setup to make a nice move. After all the move is long since gone and now you are buying right into major long term resistance between here and 1235. We could also sail right through there with no problem and go right into new all time highs. Am I predicting that, NO. The point is that who knows when and where this move will end. These running markets can just creep along for very long periods of time.

I have highlighted 2 buy spots on the chart and have to admit I only played one of them, the first one. I did not do the second one due to the divergence in the accumulation/distribution oscillators at the top of the chart. You can see how they were diverging on the decline into the second red arrow. As a result I did not do that. Do I wish I had? NO. I follow rules and I have found when that type of situation exists the probability of the trade working are greatly diminished. I pass on them with no regrets. Also, you can see at the bottom of the screen that the trend indicator has been diverging for a very long time, very misleading. This does not happen often with this indicator.

Net net, this has been a very strange rally in so many ways. I have asserted here that I believe it is being manipulated by our good friends at the PPT. Whether that is happening or not, the fact is that internally this has not had what typical bull markets have, so do not feel too bad if you have missed it. Rest assured that the people that have ridden this are likely to ride it back down without getting out. If your long time horizon is to just hold stocks forever, you never should have exited and never should again. I do not subscribe to that approach, I am a short term trader.

My short term approaches have not given me the buy patterns I would have hoped for during a move this big upward, but so be it. Other markets have given me my signals and I have profited every month but 2 of the last 12. Be comfortable with your own approach and do not look back. Learn from the mistakes you make, but don't dwell on them. I tend to dwell on them for about a day, then move on. I want to learn from them, but not let them drag me down. If you have missed this, get over it and determine what you will do next.