OUT OF THE GATE EARLY

I have been talking about several things lately that are now coming to fruition.

First, I mentioned due to heavy commercial buying the EURO was going to rally, it has.

Second, I said last week I was looking to short the Dollar on a bounce but it might just freefall. It is freefalling today.

Third, I mentioned the Bond Market was due to decline and showed the huge commercial selling that was going on. This market is down big today.

Fourth, I showed a chart over the weekend projecting the next 5 days as up in stocks, and that is what I was looking for. We have roared out of the gate today upward.

Here we have the SP 500 and you can see we have a nice upward move developing. The 5 day forecast showed up coming into this week so this is no suprise. Nothing much left to say here except play the long side for now. Below is the Dollar Index which is crashing today. You can see the 3 point divergence at the high which often triggers large moves like what we are seeing. Now we have extended down a long ways in the indicator ahead of price, so this could be an exhaustion move.

Next we have Bonds. This move is just beginning it appears. There is something interesing developing here, a potential 2 consecutive inside bars pattern. These are good breakout patterns typically in either direction. Notice also here the 3 lower peaks in the oscillator, although the last one also has a lower price peak, so not the typical triple divergence by the textbook.

I expect these moves to continue for the rest of the week give or take a wiggle here or there.

LOOKING FORWARD

Today lets go over a few markets I am expecting to move next week

Above is a tool Genesis has that projects future price action based on matching price patterns at hand to prior occurences. This is far from a perfect forecast, and at times they are dead wrong. However, I have found that about 66% of the time these are accurate predictors of where prices will go. This shows that in the next 5 weeks the forecast is generally higher for stock prices. My short term indicators have also given buy signals this past week, so both are in line with one another. Something in my craw is telling me to question this, but I do not have anything objective yet that says otherwise. For the near term meaning next week I am expecting prices to move flat to upward.

If you look closer at the forecast above, it really shows a couple of weeks of flat to slightly down, then 3 bars up. Looking at the above chart we see that a cycle low is due in 2 weeks. We also see the Will Go Long term projecting an upmove starting in 3 weeks or so. If we put all this together, it says a tradeable low should either be here or show up in the next couple of weeks. The one contra signal is the Will Go short term above in black. However, as you can see the sell signals there have not been very good the last year or so with most of them being wrong. As a result, just ignore that.

In summary, I am looking for long side trades at the moment here. Once a bouce occurs that will shift, because the trend has changed to down in my view, and I want to sell rallies more aggressively than buy dips in down trends. Next up, BONDS.

Look at the heavy commercial selling going on here. It is the sharpest in quite some time, and it has now taken us down to the level of commercial shorts where a decent peak occured before. This is the typical flight to quality spot, so if stocks are going to stabilize, it would logically follow that this market would decline. I am looking for sell signals on daily charts due to this above situation. The ideal seasonal low here is Julyish, so maybe we will have a decline for a few weeks setting up a buy for a bigger up move. Since we are in an uptrend here pullbacks are buys.

The next market to show is a daily chart of Silver, where I am looking to get long this coming week.

Look at the recent bullish divergences at the low, now we have a higher short term low that has formed here, so a break out upward here should be bought in my opinion. I will put my money behind my mouth next week on this and we will see what happens.

Last but never least in water cooler conversations in corporate offices, the US DOLLAR.

Again, it would logically follow that we would have sells here, if I am looking to buy Silver. There are divergences galore here in everything I look at, so I am looking for a sell entry here. I probably need another up close, but will just have to wait and see what happens. It certainly would be correct to already be short here, so I may miss this if it just rolls over, hope not. The divergence in the trend oscillator is actually a triple divergence, so this move could be a big one.

That's it for today.

SOMETIMES YOU JUST HAVE TO TIP YOUR CAP

As I sat and watched the PPT's brilliant save before Thursdays opening, I could not help but just feel like sometimes you just have to give the opponent his proper due. They are incredibly good so I tip my cap to them. This market needed a save badly, they knew it, and they did it. I think most people are realizing now the spin on the recovery is just that, and the double dip scenario is happening. Of all the people who know the real numbers, the PPT is at the top of the list. It is why they do what they do. I guess arguing against it makes me a party pooper. I just don't like manipulation of prices, in either direction. I think we should have free markets, but we never will.

Speaking of manipulation, that communist Warren Buffet had some nice comments in front of Congress in his testimony. This is not an exact quote, but paraphrasing, he said he did not think individual investors should be allowed the trade SP 500 futures with small stops in a speculative fashion. I wish I had been there so I could have rushed the stage in a bull rush. He is the poster child for what is wrong with what is going on right now. We should be free to do whatever we want no matter how stupid the next person thinks it may or may not be. Who died and left him in charge? I can bet you this, there are plenty of people that probably thought alot of great ideas were bad when they were first pursued, that is how innovation happens. If everyone thought the same thing, nothing would ever change. Wanting to outlaw someone from doing whatever they want with their money is so outrageous it is incredible that more of an uproar was not created by those comments.

What these king liberals want to do is control your ability to become independent of them. It is easy for him to stop innovation, he already has his money. How exactly is someone who has 5 large to their name going to become successful if they are not allowed to pursue their dreams. If you are a liberal reader of this blog, wake up. Your trading will be severely effected by these jackoffs if you don't get them out of office ASAP. Repubs may not be the god send, but at least they believe in free markets as well as having affairs. None of these people are clean, but take the least of the evils. Dems do not want trading, and if you investigate you will see there are legislative things out there moving toward getting rid of trading. If you want to be a trader you better damn well get these people out of office.

Now that I have gotten that out there, time to get back to the markets. I have not done much trading this week. When I have a bad week like the prior one, I like to chill a bit. One of my main goals is to not let a bad run really hurt me. Bad streaks tend to extend from my experience, as do good ones. It is not really explainable other than through my account statements. I think it likely has to do with trading scared. When you are scared, you are too cautious. You need to be disciplined when trading, but not overly cautious. Most of the time, the setups I find to be just perfect, lose. I tend to nitpick entries alot after a bad streak which is a mistake. There are no guarantees in life. Once I hit a bad streak thoughts I don't like creep into my head. I wait until I feel more balanced before engaging again. This usually takes a week or so, sometimes less.

I have made a modification to one of the things I look for to make trades during this week, which will free me up to not be so darn picky. Unfortunately, a few trades I would have been in are gone and are on their way and I have missed them. One specifically is being long the SP 500. I should have gone long during the PPT move, when it traded through Wednesday's high, but one of my prior rules forbid that entry. I do not chase moves, I either get in at my price or a pass. We could have a big up move here. I am not going to get into the details of the change I made other than to state this. I used to require all time frames to match up, and now I do not.

One trade I am looking for here is a DOLLAR short position during the next week. I will post that trade when it develops. I expect most markets to rally during the next week other than the DOLLAR. I am not sure about the Metals they may be the exception.

STRANGE BREW

Here is the trade I mentioned the other day I had orders in for, the Swiss Franc. You can see this market is moving up nicely. I have to admit that I do not have a good overall read on the markets at the moment. There are not many things setup the way I require to trade. The Euro which in general trades in the same direction as this, appears to be setting up a short, so I have doubts as to how far this trade can go. I would have a stop under each days low for anyone who might be in this trade just in case we roll back over again.

Next, the SP 500. As you can see we have a mixed bag here. The one short term momentum oscillator shows a flat sideways trend, and the longer one shows up. I really like these to be in sync and they are not. When I see things like this I just don't force trades.

I do not have a good read on this as a result of this, but since the weekly trend by the way I measure it has turned down, I am looking for sell signals on bounces.

Gold is a market I have not covered much just because my setups have to been there for any trades yet. You can see on the chart below, there are some minor divergences developing but the trend is very strong up here. There is no reason to get too excited about shorting this until something more than this develops. I love to trade the metals due to the volatility in them, but there just have not been any really good setups in my world. As I stated before, I don't force trades. I know I can make a months worth of profits in a few days, so I wait ( not patiently ), for the right trades to present themselves.

Good luck trading today, sorry there is not more to talk about.

Blogger was a nice Goaltender today

I was blocked out today during my normal posting time by Blogger being down, so as a result I did not post anything this morning. This will serve as Monday and Tuesday's post. Above is a weekly chart of the SP 500 with alot of things on it that regular readers have seen before. First on the top chart you see price with cycles overlayed. These cycles also match up with the bottom pane which shows a low coming, but not for a bit. The second pane shows Larry Williams Will Go which predicts stock prices through the use of Bond and Stock yields. It is far from perfect, nothing is. However, it gives us a good idea of when fundamentally flows should go from one place to another. Today's value is not displayed, but the black line shows a nice curl down in it to about where the Red Line is. This tells us that via yields, stocks should decline here.

The middle panel which is my Commercials Hybrid is not showing any selling yet. Even though I have bashed the COT report recently, you can still see that in general, this Hybrid has been a reasonable predictor of price moves, especially with the trend. It is telling us this dip is a buy, but the other things are not lined up and we have also broken the weekly uptrend in one of the three indexes now, so I am not paying close attention to this at the moment.

My shorter term indicators had been indicating to try and buy this for a bounce until today. We have now gone down enough where things have turned down too much for a buy signal it appears. I think we are on very dicey ground right here. If we do not hold here, be prepared to tune out the Abby Joseph Cohens of the world, who today proclaimed everything is fine and not to worry. "The US is much stronger than the other countries." I guess the world is not flat in her world. She may be right, but my work tells me to be very careful right here. I would not short this here either, unless you are a day trader. We are now seeing end of the day selloffs, the trademark of a downtrend. This is in sharp contrast to the PPT end of day buy programs we have seen for so long.

Here is one market that appears to be setup to rally, and there are not many, Soybean Meal. We have a good weekly uptrend, not shown, and now the daily is appearing to be turning up. If we close down on Tuesday I will be looking to get long here Wednesday.

I do also think we are due for a dollar decline and Swiss and Euro rally. If for no other reason, than an oversold bounce. I have orders in for the Swiss tommorrow, so let's see what happens. It does not appear they will rally if stocks continue to decline but you never know.

THE MORNING AFTER

I have never been one to hide when things don't go right and I will not start now.

First I need to start with what I did right yesterday, a very short list comprised of one item. I was long the NAZ going into yesterdays NFP report. It was by far the strongest of the indexes and still is. When the bad report was released everything crashed pre us opening. However, once we opened here, the NAZ started to rally. At that point things were looking good, price was still above my entry point, a miracle. However, soon thereafter the rally started to stall. Originally my stop had been where indicated below the 3 day low. It was my judgement that from watching the across the board weakness, that the market was going to roll over, so I exited this at the market right at the same price I entered.

Always follow your rules, but know when not to follow them. This is an adage I always go by and rarely do I not follow them. However, I don't care how good of a captain I am, I am not going down with the ship no matter what the manual says. This was a good decision as we did go down to where my stop was originally sitting, so that order would have been hit had I just left it in there. As I have stated often in here, trading is a thinking persons business. You need to have discipline, but you also need to be nimble enough that you do not lose sight of the fact that you have to make decisions based on your experience. I have saved myself time and time again over the years by making judgement calls just like this.

Now lets look at where I made a bad decision.

I was short the Bond Market and things were looking very good until the report. I had my stop above the pivot high, a mistake. I should have had it just above the prior days high. We had 2 consecutive days closing below the prior days low in an uptrend. If we were going to break we should have just rolled over. I knew the report would be volatile, so I wanted the stop further away just so that I would not get whipsawed on a normal report. This was not a normal report. I was too greedy here and it cost me dearly. Learn from this as a reader of this blog. Do not be greedy it will eventually bite you.

There are a few other examples I could post, this was the worst trading week for me of the year, losing about 5%. It happens. The key is to try and contain the bad periods around this type of drawdown. If you can do that everything will be fine. Where does yesterdays selloff leave us in stocks?

For chart pattern folks, we do have a head and shoulders bottom possibly forming here right around the 200 Day Moving Average. If we get above Fridays high we are off and running by that logic. One thing that bothers me about a low being here, is the way the momenum oscillator has far out paced the price on the recent bounce. You can see the actual price got nowhere near where the prior peak was, yet the oscillator exceeded it by a wide margin. That is a short term bearish development. What could develop now though is a higher short term low on the right side of the chart.

We are at a critical juncture here in my view. If we do not hold here we could fall a long ways. This is the line in the sand. There are alot of cross currents going on now,  do not trade based on your view of the economy. There is not a direct correlation between stocks and the economy. Alot of markets look like the stock market right now, so chances are stocks will determine where alot of commodity markets go in the near term. I am still looking the get long the EURO and short the DX but those setups are on the verge of being gone. A little more dollar strength and those trades are off the table for now.

TRUE TEST

After the futures got wiped out by the Non Farm Report this morning, I guess we will see if this little rally off the lows is for real. If it is this selloff should attract some buying at some point today. If not maybe it will just roll back over again. I really have no idea, but I do have a plan of action. My stop is placed where indicated on the screen, and the plan is now to do nothing. It will be hit or it will not, pretty simple. If it is not and we hold here, there might be more upside to go here. If you step back and think about it, there should be no reason for a rally after a report like that, which was pretty negative. However, as we have seen time and time again, markets have a mind of their own, so you cannot always predict what they will do in reaction to reports.

Sometimes they swing big one way then reverse. Other times they just are a one way street. There is no way to know which will occur. All you can do is have a plan and follow it. The guesswork is just not for me any more. In my early days I constantly tried to do that, and was never able to build any consistency at all, so I do not even bother now.

The other part of my plan today was two fold. First, if we started rallying after a decline, I developed a list of stocks to buy. Second, I am going to look to short the DX if it breaks yesterdays low. The EURO long which is the inverse of that just has too big of a stop for my taste. This is a long shot, but again you just never know what will happen. If that were to happen in the DX after going up and making a new high for the year, it could signal a near term top. I cannot predict what will happen, but I can predict what I will do when certain things do happen.

Here is the DX chart displaying what could be a trap breakout if it were to reverse. It may just keep going in which case I will not short it. I do not enter at the market. I always enter on stops below current prices for shorts and above them for longs. This way I have short term momentum going in my direction upon entry. I would love to be good enough to just enter at the market, but I have yet to figure out a good way of doing that which provides consistent results.

The EURO just looks the opposite of this, having made a new low for the year today. This is also a trade for Monday if it does not trigger today. I love the quick reversals of breakouts. They do not always happen, but large moves occur when they do.

Time to sit back, watch, and execute the plan for better or worse.

DON'T KNOW WHAT YOU GOT TILL IT'S GONE

After trying to make do without my Snag it Screen Capture program for a week while traveling I realized I never knew how good I had it. All the free Online options or nested ways with my own trading programs just suck basically. It becomes way too much work to do what can be done so easily with this program. Below is a better look at the chart I tried to put up the other day showing where I was going long the NAZ.

You can see where my order I mentioned the other day was resting and where I am long from. The one concern with this trade is that the short term oscillators are racing way ahead of the price, which could mean this move is puttering out. It seems to project continuing to rise tommorrow when I try doing that with an up or down price bar, so maybe we have a bit more to go. I mentioned that the NAZ was the one that I felt was the strongest since it did not take out the Crash Day low when the others did, so that is why I went here to play.

I did also try to play the EURO long/Dollar short play last night and exited that trade for a small loss this morning when I saw I had made a mistake. Something about this trade is bugging me even though in my indicators it looks good. I cannot put my finger on it, but if we close down today and take out todays high tommorrow, I will go long again in the EURO. Tommorrow is the non-farm payrolls report, so we could see some movement in all these markets again come tommorrow. It seems as though Barry and his crew have rigged things to show a continuing improvement in the employment situation, so I do not expect an outlier number.

I mentioned that Crude Oil and the Energy complex was setting up for a BUY, here is a chart of how Crude currently looks.

We do appear to be basing here for a rally. Unleaded Gas is the strongest of the three here, so that is where I have been watching. This is the market most people follow, so I posted it. We get the electronic bars on holidays now, which mess up alot of the indicators for a few days. You can see the tiny bar the 4th bar back. These are annoying but still count as a trading session so they cannot be eliminated.

That is all for today

Last Day in Exile

Above is the NAZ 100 contract which I believe is setup to rally. This lousy Screen Capture program just will not display the text I want which would show a buy arrow above the high of 2 days ago. A friend made me aware of a way of capturing things through Genesis, but it requires so many different steps that I am just going to do it this way for this last day. Once I am home I can get back to using Snag It and be good to go.

The NAZ has held up much better than all the other indexes during this decline, so this is where I want to be buying if I get a long position going. At the same time, BONDS are setup as a short as well. The DX is still a short setup and the Grains and Energies are longs. Unfortunately, these are all very highly correlated once again, so you have to be careful about where you choose to trade and with what size. If we get a large stock market move in either direction, it will determine the outcome of most of those trades. Some will move with stocks, and the Bonds and DX the opposite.

Choose Wisely

CRASH AND BURN

Another overnight stock index crash resulted in a stop out in my Dollar short I was in. One thing that I just accept nowadays is that whenever I go on vacation or buy something expensive after a good trading run, my next trade will be a loss. This has been going on for years, so I just accept it. It must be some type of backwards punishment from somewhere. ( Hopefully not from above! )

This market along with many others are still setup for moves in the next couple of days. Of course if we just keep crashing in the stock market, many of these moves will not take place. However, I just hunt for my setups, and place the orders. I cannot control if they get filled or not, I can only control myself being ready to take action if they do. We have alot of correlated trades once again. It appears to me the Bond Market is setup for a decline, Stocks and currencies for a rally, the Dollar a decline. These are all basically the same trade unfortunately now, so size adjustments will have to be made in the event they all were to trigger.

We had for a period of time, a decoupling of all of these inter market relationships with stocks, and it now seems to be linking back up again. If you notice now all of these things seem to be moving together again, with the exception of the metals. Gold and Silver seem to be doing their own thing. Copper is also in on the game, looking very similar to a chart of the SP 500. What I am looking for here now is a down close today in most of these except the Dollar and Bonds( requires up close ). Then I will be looking to play breakouts of them in the opposite directions tommorrow.

One more short post tommorrow, then I will be back home and it will be business as usual.

THERE ARE FREE LUNCHES

I did find a free screen capture program to use for today, but alas it kinda sucks, but is better than nothing. I cannot draw any arrows or put any text on the charts. Basically what we see here is the Dollar Index above with a few momentum oscillators on it. Then at the bottom, a longer term trend measuring line. The first two which are LarryWilliams creations indicate that we are in a downtrend in terms of momentum, yet the third panel indicates a strong flat lining uptrend. It could also be argued that in the top two panels the momentum line has gone down much further than price, which is an exhaustion and therefore is a buy signal. That is a judgement call.

I have colleagues who are looking at this as bullish and they may be right. If we all agreed prices would never move. I am short this market now with stops above. I will get stopped out for a loss or hit a profit target for a win. I lean to the short side of the debate here due to the accumulation/distribution indicators, the Green and Purple lines. You can see they are heading down ahead of price. This is just another trade. I want them all to work but really don't care one way or the other about any individual trade. Trading is too stressful to get too hung up on individual outcomes. All your hair would fall out if you did that. The EURO of course is the mirror opposite of this being setup bullishly.

You can see here in the EURO the dramatic increase in COT longs ( RED ), and more importantly, the huge short position in Small Speculators ( GREEN ). I always look for opposite moves when the Small Specs start leaning this heavily in one direction. Also, this is a trade the "World" is short. I am for the world, but when it comes to trading, I want to be against it for the most part. I tend to like to play the EURO due to it moving more, but the DX you can dial in the risk better due to the smaller movement per tick. If I know I want to risk X dollars, it is easier to get it close with the DX. I always wind up too far under my 2% risk factor due to rounding down numbers of contracts, when trading the EURO.

Next we have a similar situation going on in the BOND market. You can see below the heavy Small Speculator long position that was evident right at the recent high. This is a market I have mentioned recently as something I was looking to short. I am hoping we get an early bounce next week there for a shorting opportunity.

If the stock market happens to collapse again obviously this market will rally. For this trade to work we will likely need to have sideways moves in stocks for a few days, then a rally in them. Will that happen? You got me!

Have a nice weekend

ON VACATION BUT NOT ON DRUGS

As a trader there really is no such thing as a vacation. I am constantly watching the markets and trading them regardless of where I am or what I am doing. I never want to miss a large move because I was not paying attention. I do miss moves for other reasons, but will never allow myself the excuse of being mentally checked out.

Of the things I called out yesterday, every one happened except the Gold and Silver, and my orders were not filled there anyway. Now it appears to me that the Metals shorts are marginal, and the Copper market is actually setup for a rally.

The one trade I am really laying in wait for is a short in the Bond Market here if we get a bounce of 2 or 3 days. My momentum indicators that I use have turned decidedly down now in this market, so I just need an entry pattern now.

It does also appear we are putting in a low here for stocks, so I am looking to get long there. I am long the inverse dollar ETF ( UDN ) which had huge volume yesterday. I am not sure I am thrilled with that, all the amateurs piled into that trade yesterday. The volume was up 15 fold in that ETF from the prior day. I guess I have to hope John Q Public has that one right. I took it because of the short I took in the Dollar Index in attempt to mirror that trade in my equity accounts.

From a bigger picture perspective, it does look like quite a few things are going to rally here, Grains, Energies, Currenices, Stocks.  I am not sure about the Metals. Copper looks like a near term buy to me then a longer term sell on a rally on the Weekly Chart. Gold and Silver I do not have a clear view on, but the Weekly trends are up, so I guess that is the path of least resistance now that the short term sell patterns have not fully developed.

I was trying to buy Sugar today, but that market is down alot, so I think after today this Buy pattern is going to probably be nullified. It may not be I will just have to wait and see how it looks after today. The Sugar long I mentioned in here last week did work out for a profit, but less of one than I had hoped. I cannot show charts from where I am now, so I will catch up with the charts when the trip is over.

As for today, often days like yesterday are followed by narrow range sideways days too consolidate the prior days action. I am hoping we go across for a few days to setup a long entry in the indexes. Also, we are heading into a holiday, so the volume will probably fall off making the PPT the deciders on what happens today. This will likely mean that if we happen to be down going into the last hour, look for a late day save by them. These guys are good as we have seen over and over during the last year. If you are a day trader, look for longs during the last hour if we happen to be down going into it.

Good Trading to all

I JUST READ IT FOR THE ARTICLES NOT THE PICTURES

That is what everyone always says about  Playboy, will it be true for this blog?

I am traveling and do not have my good screen capture software on this computer, so no pretty pictures until I get back home. Below is what I am looking for in the near term:

-Dollar Decline, I shorted this overnight

-Rallies in most other currencies, this would logically follow a Dollar Decline

-Gold and Silver shorts, these orders are not filled yet but are in the market below where we are  currently trading

-Stock Rally, I do not have buy signals yet but it just looks to me like we are going to bounce here. All the rallies are being sold so far, but if we get one that breaks through that selling pressure it could be a big short squeeze up day

-Crude Oil rally, it appears to have started already. This market got extremely oversold during the recent decline

-Grains Rally, a few heavy Small Spec short positions have developed in a couple of these. In general when we see that we want to trade in the opposite direction.

STOCKS

For those who buy into my expectation here, the Naz has been the strongest of the three indexes, having not taken out the crash low like the Russell and SP 500 did. As a result, focus your longs in that area. I do have buy signals in individual stocks, but not yet in the indexes themselves, so I am hesitant to fully commit on this. However, the setups I look for do not develop at every single turn. As a result, this could easily go from here due to us being in the weekly support zones. What I need to have happen is a bounce and a pullback for me to get heavily long. Will we get it? I have no idea, but I always have a plan for what I am looking for and what I will do if it develops. Until that time, I focus elsewhere in my trading. For the time being all the pivots are down, so I will not commit fully to the long side until that changes.

DOLLAR

This trade is setup very well in my world, with most of my trend indicators indicating down even though price is still strong. These types of divergences are what I look for most often, and they are in place here. As a result the mouse gets clicked. It is really that simple in my world. When the setup is there, I calculate how many contracts based on the risk per contract and enter the orders. I do not call my friends to ask them what they think, nor do I read anyone else's opinion. It is my money at stake, so it is my rules that matter to me.

I do talk with others traders often, amd we exchange views and trade setups etc.. Some of these traders are better at this than I am. However, I have never in my whole career taken a single trade just because it was recommended by someone else. I have missed some very good trades by not doing so. I do not care. I review all the trades I make by printing out the charts and keeping them in a binder. Typically after the end of each month I go back and look at what I have done, why I did it, and look for things that need improvement. I never want to be in a position where I review a trade and my notes show that I did it only because someone else told me to. There are not many breakable objects in my house that would survive that review.

I do look at markets that fellow traders point out to see if where they are looking is supported by what I do. I have at times found things I missed by this process, and gone on to take the trades because it turned out my rules were met. You never want to be too much of a know it all in anything because it will block your ability to grow and improve at your trade. There is a balance that needs to be met, between being your own person, doing what you know is right, and also being open to new ideas. There is rarely a week that goes by where I do not look at a different way of doing trades. This week might be the exception to that as I head off to the golf course.

Good trading to everyone

NO NEED FOR A MORNING JOE

Overnight action continues to pummel the markets, if you need a morning cup of Coffee to wake up now something is wrong. The above chart with the Dow Futures shows that we have now traded below the "flash" crash lows. I said at the time that was the sign of coming attractions, only the media was hyping that as the actual low. We may have had liquidity issues due to trading platforms, but the reasons for this decline are real and there was no reason why that would have been the absolute low. However, I am a short term trader, so I move to where the opportunities are and for the moment I think they are for a long side entries in some places. I mentioned I would be looking for a fakeout once this low was taken out, so I am now looking for buy entries.

However, the main indicators I use to measure things are not giving them here even though we are in a price zone I want to look long. As a result I am just not doing much trading right now. I do remember recently a reader of my blog who I respect a great deal sending me an email about a buy signal that was generated for stocks very close to the top, by a well known market guru. It was based on a certain number of issues trading above certain levels, and it was at a very high percentage. Of course being the contrarian that I am, my remark was it sounds more like a sell signal and I was right. This gentleman ( the investment manager who issued the buy signal not the friend who told me about it ) has a good record with this particular signal, but sometimes you really have to think about what you are doing instead of just blindly following mechanical rules.

It certainly made no sense to me to all of the sudden go long after we have had a rally the magnitude of what we have had, and were into obvious resistance areas. I had been mentioning for months in the 1229 - 1235 area in the SP 500 as a problem area. Maybe he gets bailed out by the rally returning to the market, that would not shock me. However, at the very least you could have bought in 10% or more cheaper now. I warned repeatedly in here that this market could fall 2000 points in a flash, due to how it was arficially raised to valuation levels that were not sustainable. You may recall the charts I posted with individual stocks, one being a blue chip Dow stock, where it looked like a Pork Belly chart. I had commented this was not sustainable, so this is what you get when you get these types of price extensions.

Ironically, now we are getting some interesting market cross currents that make me wonder if we are not going to reverse from here. Normally with an overnight wipeout like this you would also see more downside movement in many other markets. I would have thought the Dollar would be up alot more as well. The weekly trend in the indexes is still up, so we are into support levels in this area. We also have some divergences in some of my proprietary things I use to spot reversals. One of these is shown below in the Euro and there are many others. I do think the next move is going to be up from here and hope to get long in the next few days.

These divergences have been present at many major turning points, and I have learned to set my opinion aside and trade them when they show up. I am looking for a long entry in the Euro due to this right now and hope it develops this week.

TOOLS FOR TRADING

I am constantly displaying different things that attempt to measure and quantify market action. We calls these "tools of the trade." Regardless of your occupation, there are certain techniques you use to determine how you will go about your business, trading is no different. One of the newer ideas that is out there is projecting price movements by computer matching of bar patterns. The techniques use algorithms that go back and measure or match the recent activity to other occurences that have high correlations to that action. They then project what will happen going forward, based on what has happened during the prior occurences that have a high probability match.

Above you can see one I have run for the SP500. What this match is telling us is that based on an 80 percent correlation, there are 13 prior matches in the history of this contract to recent action. On average what you see is what has transpired after those prior occurences. This shows a small rally, then a small dip, then a steady rally for a couple of weeks beyond that. I have played around a great deal with this and have found it to be useful, but more as a tie breaker if I am undecided on something. When this tool was first released by Genesis last year, I thought it was just great. I do think it is accurate more than 60% of the time. As a result I used it on a weekly basis to confirm every trade. Alas, I missed a few very big ones where this was wrong and everything else I use said to do them, so I put it in storage.

Recently though, I have taken it out of the moth balls based on a comment friend a fellow trader about it, just to use as a general projector of what might happen. If it is against what I am considering doing I do not care if everything else says to go. However, if I am really torn on something, I am using this to push me into a trade. There are now versions coming out soon that will do this same thing not just on price, but on the indicators themselves. For example if you use stochastics you will be able to have your computer tell you what happened with price the last time the stochastics "looked" like they do right now. I have mixed emotions about this for a few reasons.

First, the more mechanical you get the more subject your approach is to being over optimized. The biggest nemesis to developing trading systems is "data mining." This is basically where you tailor your rules so precisely to prior outcomes that it is virtually impossible for them to work in the future. However, your test results look gangbusters. Second, for the most part indicators tell us what has already happened. They are generally not inherently predictive even though we try to make them so. Third, we are getting into a situation where we are trying to compete with the brain trusts of wall street. Large funds can hire alot of brainpower to develop and use tools like this in way most of us neither have the time or the skill to do. If we get too reliant on this we are at best using something in an inferior way to someone else.

It certainly is an interesting prospect to think about the computer being able to tell us when our favorite indicator is telling us something and to know exactly what that something is. Are the patterns we use as good as we think they are? This will tell us that. However, there is one thing that can get lost in all of this technology, the human element. As full of flaws as we all are, we do have moments of brilliance that can lead to very good successes. Making judgements at critical times is part of life. Trying to get around making those decisions so we can blame the bad outcomes on a "system" or tool is just a cop out. I am willing to live with the ramifications of my decisons, knowing at times the decisions will be lousy. I also know at times the decisions will be great and better than any machine can make.

When I made my transition away from systematic trading to discretionary trading it was painful. The first few months were very up and down, not at all what I was used to in my old mechanical days. However at this point I now make more money that I ever have trading with discretion, and I would not have it any other way. Tools of the trade are mandatory, just don't become slaves of them. Use them in a way that best suits your personality. I can assure you that if you have a conflict between the two, eventually it will really bite you. The worst part is that it will most likley bite you at a time you can least afford it.

Is that above forecast likely to be what happens? I have no idea. It is in conflict with some of the cycles I displayed over the weekend. It does represent what would be the bullish case here that we will find support at these levels and move back up again. Some of my cyclical work indicates a bounce here, then a larger dip than this shows, so we will have to see what transpires. That is what keeps this fun, not knowing.

Consistency Matters

For those of you who question the PPT and whether or not they exist or what they do, it is time to take your head out of the sand. Yesterdays "mysterious" recovery in prices in the last 20 minutes was a news story reported. You get me on a news station and my market recap for yesterday would have been as follows.

"Stocks opened sharply lower this morning on follow through from Thursdays weakness. This was a logical place to trap short sellers below the low of the Panic selloff day from the prior week. Professionals bought in at these levels triggering a rally that went up sharply. This move was in the midst of a downtrend, which led to profit taking driving prices back down. The US Government decided it did not want a weak close on this day, so with 20 minutes to go they launched futures buy programs. These buy programs in term triggerred stock buy programs driving the Dow average up triple digits by the close 20 minutes later. Our calls to the treasury department for a comment were not returned."

I guarantee that would be a ratings hit for whatever network I was on. Ironically it is exactly what happened and not just smart ass commentary. News outlets are more interested in ratings than the truth which is at this point indisputable. Where does the PPT's late save yesterday leave us? Unfortunately, this is the truth the left biased media does not want out, so alas this will never happen. It would be fun though wouldn't it?

The first thing that jumps off this chart is how consistent these 17 week lows have been. Every single one of them has had a good sized rally beginning at the dates the cycle has indicated. It next comes due 7/2/10. By this logic it would follow that we would drift down into that date for a buy spot. I do not use cycles much for actual trades, but they are helpful in trying to develop a general idea of what might unfold moving forward. There does appear to be some confluence for a big rally beginning in mid October, but I will cover that more as we get closer to that date. That also coincides with what would be the next cycle time zone after the one that is displayed.

Moving away from the cycles, the other thing that really stands out here is the huge bearish divergence that has been building during this rally. Since the Pro Go indicator is designed to tell us what the professionals are doing, we can see more evidence that they are not the ones that have been driving this higher. Hmmmmm... anyone have any thoughts on who has been? In any event, divergences like this are typical in strong trends, but at some point they matter and price retraces often sharply like what we have seen. It is impossible to get the exact highs in these situations because in this case the divergence has been in place for months, and has just now kick started a retracement. This is one of the reasons I have been hesitant to be aggressively bullish throughout the "Government Rally." The PPT buying does not bother me that much other than I just don't like market manipulation in anything. I think if we were flies on the wall in a high level government meeting, we would be shocked at the manipulation that goes on everywhere in all aspects of our life. There is nothing we can do about it, so it is what it is.

The Green line on the chart is one of my price containment bands, and the rule is basically as long as we do not have gaps between the price bars and the bands, the trend is intact. As a result, the weekly uptrend is still in place for now. Overall this tells me a couple of things. First, taking buy signals here is ok because the weekly trend is still up. Second, cycles are saying we should decline, so once these bounces take place they are shorting opportunities for bigger moves down. We are also in the neighborhood of the 200 Day Moving Average for many stocks, this should be a support area. Hence we have a two way trade area here.

Friday's last reversal bar means nothing, so move back down this coming week would be no surprise. However, from a short term perspective, I am looking for longs in individual stocks down here now.

Gold got whacked big time this week so let's take a look at that chart.

I have a 12 week cycle on this chart and you can see how well that has done in picking buy spots. It projects another one in 2 weeks. The big problem I see here is that we have a big picture 3 point divergence in the Pro Go Oscillator that has triggerred a downward move. I generally do not like trading against these types of things, it is a good way to get your account value reduced. The Green Line shows my weekly support band that as you can see has contained price nicely recently. It is about $30 below where we currently are. My plan for this market is to short any rallies that happen here next week if we get them. If we do not and continue to tank, I will look to see if any buy signals show up in the support zone. I have my doubts that they will but we will just have to see.

I would not initiate a new short at this price, primarily because we have had 5 consecutive down closes on the daily chart in an uptrend. Has the back been broken here? It is way too early to tell, it appears to be a normal pullback at this point. However, the red flag is the big time divergence staring at us here. This makes me a bit more cautious on the long side from a weekly perspective than I otherwise would be.

Good trading to everyone this week. I will be traveling for a week starting Wednesday, so I may miss a few days with posts. I will try to put something in each day but no promises.