LADIES AND GENTLEMEN, WE HAVE SEPARATION

The above chart is of the CRB cash index. I have not looked at this for a very long time. I was somewhat surprised to see it not be stronger than this. However, since I am looking for sell signals in almost every commodity market right now, I was not surprised to see a sell signal in place here. We have a significant price divergence going on here with the momentum oscillator, and it is rolling over. I am looking for sell signals Tuesday or Wednesday in several markets. Here is what is very surprising, I am looking for a buy signal in the stock indexes in that same time window. Commodity and stock markets have been joined at the hip on an almost tick for tick basis month after month for quite some time, and although it is a historical anomaly, it is still almost shocking to see the two markets actually separating again.

This has come out of the blue, which makes it more legitimate. What everyone waits for will never happen. I don't think many were looking for this decoupling to happen right now. Ironically, at a time when the bullishness for Oil is just off the charts, that market seems to be ready any day for a major tumble. See the history books if that surprises you. In the Fed's quest to inflate everything, they have been pushing on a string as we know, so it may be that they will only be able to keep control of the stock indexes, and will have to let the dollar rally and commodities decline. It has to be tiring to monitor financial and commodity markets to the degree they are doing it, and put out one fire after another. At some point you have to figure something has to give. It seems they can control the whole world, but they cannot.

The one very bearish fellow I mentioned here in this blog recently, whose emails I have subscribed to just for the sake of evaluating the doomsday scenario, has even relented some on Gold expecting a major shakeout to occur there this year. Of course he still sees that as a buying opportunity. He may be right on that, I really have no idea. I will evaluate whether or not metals are a buy if they tumble. Until then, I am looking for a sell entry, and still don't see one. One could develop this week if we get a bounce. The one problem here is that when a market is inflated this much based on the speculation of small investors, the exits could become crowded in seconds, and believe me, when the small fries head for the doors in those markets, you newbies are going to see something you won't forget for many years. I wish I had the divine wisdom required to pinpoint that $100 down day in Gold we have coming, but I don't. However, I would literally bet my life we will see one if not more of those probably this year sometime.

So, what to do now. First, look for pullbacks in the dollar to buy, and bounces in commodities to get short. In the stock market, I think buying the next dip, even if it is a day or two, is the correct play.

The next chart is a weekly chart of the Wheat market, the weakest of the Grain complex. I am hoping to find a sell signal here soon. You can see the heavy Commercial selling that has taken place recently. Many commodities markets have this, some of them have had it going on for awhile now and are due for trend changes. However, they have not occurred yet, so be patient. The powers that be don't want a dollar rally and commodity decline, so it may take awhile for true market forces to get this done.

I suggest anyone who has any interest in COT stuff to spend time studying the material. There are still ways to use this stuff, but they are not necessarily the same as the traditional ones. We are in uncharted waters for market manipulation, so the timeliness of the turns in the markets are not as closely tied to fundamentals as they historically have been.

I wanted to briefly touch on a subject I find myself contemplating on a daily basis now, and have not come to any conclusion yet. This subject is the doomsday scenario. There are those out there as I have mentioned who are quite credible, calling for a major crisis to develop soon. I generally do not spend alot of time thinking about such things since my time frame for trading is reasonably short. However, if these guys are correct, my trading accounts will be in jeopardy because all the firms will fail, and the SPIC will be basically gone. As a result, I find myself devoting some time thinking about the possibility of such an occurrence, and also how if it were to happen, would I survive it.

What bothers me on the surface about all of this is that everyone of these people say the only possible way to survive this is to put all your eggs in one basket, GOLD. Regardless of my views on GOLD or any other market in particular, I find myself having a hard time believing that putting all your eggs in any one basket is ever a good strategy. IT SIMPLY IS NOT. If you don't believe me track down a former Enron employee.

Here is another thing that on the surface seems implausible about all of this. It requires predicting correctly the fall of the ROMAN EMPIRE part II. I have never believed that good strategies require the ability to correctly pick the "different this time" scenarios. It is true that changes in the world do happen, and when they do they are first time occurrences. It is my feeling that if the US were to fail, the whole world goes down, we don't go down on our own. Certainly the European countries are in far worse shape than we are, and I just can't see myself bowing the Buddha every day hoping he will spare me. On the other hand, it is clear we are on the verge of something very bad here. Just the sheer arrogance of the congress to try and push through that 1 Trillion omnibus bill, shows those jerkoffs have not and won't ever get the message. They have dug us such a hole along with the Fed, that I don't see any way out without considerable damage to many of us.

In summary, this is something I am continuing to evaluate, and once I come up with a definite view on this I will put it in here. One thing I am sure of, when this next crisis does arrive, and I do think there is going to be one of some type, there will be a tremendous opportunity to make money if you are in the right place at the right time.  I do also think that when it does arrive it will be bigger than the last one. I also think it is likely that the money will be made on the short side of something, not the long side. I think it is going to be a massive deflation not inflation wave.

AHH... THAT FEELING

The topic for today is staying out of trouble. I am not sure which is a more extreme feeling between the angst when a big move happens and you miss it, or the pure joy of knowing you saved your ass with a proper judgement call. Such is the life of a trader in that we continually experience both of these extremes. I guess I must like extremes because I go through these same emotional swings in my quest to rescue and save animals. We just lost one yesterday which is incredibly painful, yet I balance that with the joy of the new one we just rescued. Back to trading.

The above chart is the SUGAR market and it shows if you zoom in to where the arrows are, where I went short then quickly exited for a small profit in a trade that I just flat out was dead wrong in. On the surface this does not seem like much of an example for a trading blog from someone who is supposed to know what he is doing, so let me go through the logic of what happened here. As a discretionary trader, I am constantly challenged to read my indicators properly, no small feat in today's climate. I am looking in general for trend changes in commodity markets across the board this month, and when I came across this chart the other day, I thought I had a sell signal, and I took it. I had reasoned that the momentum indicator had changed to a down trend, and price had reacted up a few bars. As a result, I sold below the low of Wednesday on Thursday. The market went down, I actually waited for it to bounce after it traded through the low to get a better entry price. It then closed below my short entry, so far so good? Not so fast.

When I looked at this more closely, I noticed that in spite of the corrective down move off the highs in this market, that the POIV accumulation/distribution indicator from Larry Williams, had remained almost right at the levels of the price highs. This was a major red flag and it was something I missed on my initial analysis. Once I had that under my belt I began looking to see if there was anything else that might support a long versus a short. If you look at the indicator you can see where I indicated with this how it had gone down much farther than the price had. This is always a potential exhaustion situation. When I considered this with the monster up trend that is still there, it seemed to be that the higher probability play here was actually to go long if it started rising again. I next paired that with the knowledge that based on POIV there was accumulation going on here.

At this point I was dead convinced that this was a buy setup not a sell setup, so I just exited my short at the opening going flat. It so happened the opening was about 20 ticks below where I shorted this, so it wound up technically a small gain. That portion does not matter at all. The point was I got out of a very bad trade without taking a loss. The absolutely love the feeling of seeing a good decision like this play out. I am not going long here yet because the ranges are so big here that there is certainly the possibility this will become a congestion period. I will wait for things to settle down here then look again.

What I did here is a slippery slope. You do not want to make a habit of entering trades then exiting them on a whim. This was far from a whim. This was sound trading logic and evaluation. The whole point of having stops is to protect bad decisions. However, if you happen to realize that your entry was just completely wrong due to an error on your part like what I have just described, you should get out immediately. You can always get back in. Technically this trade would not have been stopped out yet, since the stop was above the high of Wednesday, but it is a trade I did not want to be in for the reasons I just detailed, so I am out. I also used this same logic in the Russell ETF trade I put on the other day. It became clear to me there especially watching the other two indexes make new highs even though this one was lagging, that I did not want to be short there. I exited that one as well, in that case for a small loss.

In summary, if you find you have made an error you should exit immediately. You need to be careful second guessing trades. You have to be able to understand when you are second guessing and when you have found an error in your assessment of the trade. This is what is called being a trader. We have to balance all sorts of things and make good decisions. We then have to move on to the next one.

WAITING IN THE WINGS

We are in an interesting spot right now in many markets. The Copper chart above is one such spot. We have had an incredible run upward in price here as we have in virtually every market. I have talked about the danger of trading against the trend, and this is no different. Oscillators often diverge against trends and give one false signal after another. I try to use the rule of thumb that there has to be "prominent" divergence against the trend, to trade based on that divergence and against the underlying trend. That of course is subjective.

For me it has to be the first thought I have when I pull up a chart, "Wow look at that divergence." This one above qualifies. So the next step is how to go about taking a trade. It is my personal opinion that selling weakness in a spot like this is a mistake. It will work the one time the exact top is formed because the market will just free fall. All the other times, it will result in an immediate trap as the market lures in all the bears, then retests the high. It is my belief that you want to enter these trades on the retest moves, once they show they might have failed. This is still not a perfect way to do this, but at least it gets you better trade location. There was a possible short entry today below Tuesday's low but that is a very aggressive entry against the trend. Had the overall structure of the market been more neutral or towards the downside, that is an entry I probably would have taken.

Since this trend is so strong I am going to wait for something a bit better. The other thing to consider here is that in this complex, Gold is by far the weakest market. As a result if you are bearish on metals which is sacrilege at this point, look for sells in the weakest member of the group, GOLD.

It is obvious how much weaker this market is than Copper so short here if you are looking for sells. I might split my bet since the Copper setup is so strong I will have to wait and see.

Tomorrow we have the DNFP ( Doctored Non Farm Payrolls ) report being released. The one thing we do know for sure is that is will misrepresent what the truth is. How to handicap how or in what way is just impossible. I am sure we would all throw up if we knew the full breadth of the dishonesty coming out of the government nowadays. I would just prefer to be ignorant and let them lie to us. As Jack Nicholson said in a movie once "You can't handle the truth." That is clearly their view and how they operate with all of us.

It is likely we will get sharp moves initially off the report and that is basically gambling so wait for it to settle down if you are not already in something.

IT'S OK NOT TO TRADE

Here is a market that has been very difficult lately, BONDS. Here is how things looked last night and the debate on my end was whether or not this was a buy or a sell. It could have been argued either way. The momentum oscillator is rising indicating an up trend. Price has also made a higher short term low and if Tuesdays high was taken out today, it would confirm a second higher short term low. We also have the POIV indicator showing underlying strength. Pretty straight forward, a BUY right?

As I looked at this in more detail I also noticed the following. The short term oscillator had actually risen quite a bit relative to price. This is bearish. Also, we are clearly in a downtrend overall in the market even though the short term market structure if making higher lows. As a result, when I pushed away from the desk a bit and just looked overall at what was going on here, I expected to see price come back down some. As a result I passed on the long side trade.

This morning that decision was confirmed when we took out yesterdays high then tanked. This would have been a stop out loss for me had I placed the buy orders. At times it is certainly better not to trade if you are not completely sure of what you are seeing. I know that during the last several days I have not traded much, but have avoided one loss after another that I would have taken through deeper reviews of things like this. Losing trades are part of trading, but so is consistent logic in how you go about making decisions. I find with myself that I make better decisions when I have a consistent way of making them. When I start jumping all over the place chasing my tail, I don't trade well.

Sometimes you have to just step back and look at a market and see without all the fancy tools we have what is really going on. I mentioned the Crude Oil trade in here the other day. That was a market that was clearly setup to me and was going to decline. There was no doubt the minute I looked at the chart. This is the way I like to trade. When I start having to look at something 10 times, it is best to pass. The best trades jump right out at you, and also once you enter them, they just take off in the desired direction. I have seen this time and time again in reviewing trades I make. It it is not completely clear it is OK NOT TO TRADE.

The above example is just one live one from how I look to trade. Everyone has their own individual techniques they use. Some require less discretion than others, so maybe things are easier for some of you. The tools I use now require alot of analysis, so I find it is best for me to have some type of logic as to how I progress through them and make decisions. The top down, "what is the overall spirit of what I am seeing here tell me" approach for me is what works best over time.

We have had sharp corrections for a couple of days in several markets right off 12 month highs. These are very difficult to catch. Readers know I have been looking for this at the beginning of this year but just blindly selling the first break of a low in big up trends like this, is not a good strategy in general. The decision we now have coming in many places is whether to buy the dip or look for a bounce to get short. I provided this example above to show how I attempt to make these decisions. I hope it is helpful. There is no magic to this as most people who have tried this know.

When you are sure go aggressively, when you are not tread lightly.

UPON FURTHER REVIEW

A funny thing happened yesterday, a legitimate sell signal developed in the stock indexes. For all I know this is another false setup, there have been a ton of those the last 6 months. This one I like due to the nature of it being a trap pattern, a false break to new lows that immediately reversed. This chart is the inverse Russell 2000 ETF, RWM. Of course the futures contract is the inverse of this, showing a false breakout up. We do also have the momentum oscillator diverging positively, and the seasonals favoring down. All in all worth a swing and it is a trade I am in.

Here is something else I noticed yesterday that for some reason I had missed, not sure how I missed it.

I was contemplating a long in Silver until I looked more closely and found that there was actually a triple divergence in the oscillator. These often trigger very big moves and if you are watching Silver and Gold today you are seeing one. It bears watching to see what happens here. We know these are monster air pockets in the near term. I have to admit that I am not short here yet, I am hoping for a bounce to enter. It would not surprise me at any moment to see this collapse at least for a short term sharp down move.

I have also noticed sharp spikes upward in the ADX in quite a few markets. This indicates to me short term blow off tops have formed, so I would be cautious of long side trades in most markets in the near term.

Short but sweet today I am pressed for time

EARLY CHARGE

We have come out of the gate gangbusters this morning to start the new year. This is to be expected for several reasons. First, we have a major bull market on our hands, so the trend is up. Second, the inflows in funds represent money that gets put to work the first couple of days of the new quarter and month. This is why in general there is upward bias at the beginning of months overall. Third, the market is being manipulated higher so why should just the semantics of a new year matter?

There are alot of statistics out there some of which I have shared in here recently about January performance and what that means for the year as a whole. The traders almanac is a good source for you statistics junkies to consult to get these. The bottom line is that the odds favor an overall up year if we do well in January. Although I have mentioned that I was looking for some sell signals at the end of this week or the beginning of next week, that does not mean anything for the year as a whole. First, those signals may not trigger. Seondly, if they do they might be wrong. They are also short term signals, they mean nothing for the broader context.

I did have several buy signals for individual stocks today but these big gap opens have negated all of those. I don't like chasing gap opens. I also had a few stocks/etf's I wanted to short, but this big up move has made those unlikely fills at this point. I guess I am a spectator for today. I did get stopped out for a 9 tick loss in the bond trade I put on Friday. Let's face it when you get a monster ES up move overnight, a long bond position is not where you want to be. I still am looking to get long bonds again down here if another buy signal shows up.

Here is a trade I am sitting on waiting for an entry, CRUDE OIL.

There is a world of bullishness in this market, so of course I want to short it. We do have a possible trap false breakout today if it were to reverse tomorrow. Will it? Who knows? However, if it does I will get short here. There also seem to be some of the oil stocks setup in a similar fashion, so I will also play those if this reverses.

Here is a weekly chart showing the COT picture for Crude Oil and I have red arrows pointing out the extreme positions at hand. The small speculators have a huge long position and the commercials an extreme short position. As we have seen recently, this can go on for much longer that it used to be able to before a market turn happens, but inevitably this leads to declines.

I do not see much else now, other than staying out of the way of the up momentum in most places. If you are long stay long. If you are looking for shorts, wait, the time is not here yet.

HAPPY NEW YEAR

Since I have a fair number of readers around the world in different time zones including Australia, I thought it was fitting to salute the New Year even though it has not happened yet here in San Diego. What a beautiful sight the photo is.

I had intended today to do a review of my calls for the year from January, and cannot find them for some reason. I went into my posts from January and did not see them so maybe I did not proclaim any divine wisdom to be measured against. It is my nature to pop off at times so I am surprised I did not do it, but I will self critique the ones I know I have made throughout the year.

Blunder # 1

My initial blunder of the year had to be my underestimation of the ability of the Fed to influence stock price direction. In as much as I rail on this constantly in here, and have been aware of this for years, I have never seen their activity be able to drive prices this far for this long. It is generally easy to see when they are active just looking at intraday charts. You can also go online and find when the POMO is being done. However, in the past they have not been able to reverse big trends. At times they have not even been able to slow them down. The reason the Fed along with a few other players are referred to as the PPT ( Plunge Protection Team ) is that the alliance among them was formed to intervene when plunges were happening to shore things up. In the past we have had such heavy volume during downward moves, even they had a hard time containing them.

What has happened this and last year is that the volume has been light, and they have more "liquidity" than at any time in the past. The result, is that they have a very tight rein on exactly what moves where. I have read one of my original mentors comments throughout the year on the Fed, Kevin Haggerty. He was the one who taught me about the PPT. Even he has underestimated their ability to control things this year, and he has been watching this for quite a long time. This makes me feel a bit better.

The one potentially interesting development coming in the new congress is the possibility that certain new anti-fed folks are going to now be chairing committees that deal with the Fed. I would urge them caution. Once they force them to open up their books, they are not going to like what they see. I doubt they are going to want to take the political hit that will accompany a stock market crash. That is exactly what is going to happen if they force the Fed to stop what they are doing. Be careful what you wish for so goes the saying. it is true that the manipulation they are doing is not right, but they have saved millions of people alot of money in their 401k's and I doubt the average person objects to stocks going up every day. Why would they care if the Fed is artificially creating it, a gain is a gain. In the long run eliminating the Fed like some people want is a can of worms that nobody in their right mind would want to preside over. You would have to reset currency prices, and that is an absolute disaster on steroids.

A time of reckoning is going to come for stocks, and there are some longer term cycles coming due at a couple of times this coming year that could give us the sell spot for the ages. We will just have to wait and see if things develop in sync with those dates when they arrive. Until that time, I think even though we will have a couple of sharp declines, they will be bought by the PPT and the market overall will be ok.

BLUNDER # 2

My assessment of the GOLD and SILVER markets as a bubble. As with any asset class bubbles, timing their deflation is very challenging. I should not have been so vocal about this pending implosion, I was just dead wrong. I still feel my view on this is correct but it is anybody's guess when this game ends, and I don't see it in the immediate future. I do see short term sells coming in the near future, but it is not clear to me that will represent a long term top.  My whole basis for my view on this being a bubble has been based on the drivers of this rally being individual investors and historically that has meant huge debacles. In this market this has not occurred in spite of record levels of Small Speculator longs at times. This still puzzles me but it is what it is and my call for a crash here was wrong.

Ironically I have made a good amount of money in this market this year trading it, so that is really what matters. Opinions are for cocktail parties anyway.

Now to some good things from this year. Readers know I am heavily into saving animals specifically Saint Bernard's. Here is a photo of one we just rescued from a place in Phoenix. This poor guy along with two brothers were in a house in LA where their owner and elderly guy died, and they did not find him for 10 days. The three dogs were in the house without food or water for that long, then defending their owner as is their nature, attacked the animal control people when they came because they did not want them to get close to their owner. They deemed them hostile dogs that should be euthanized. The heirs to the estate contacted the breeder who also had no use for them and designated them for the same fate. The rescue people found out about this and contacted the family offering to take the dogs and find them homes at no charge, and the heirs refused saying put them down.

The heroic woman who runs this rescue sued the estate to block this, and won and got the dogs. She will take care of them for the rest of their lives if they do not find homes. Once my wife saw this photo on the web is was all over, so she drove to Phoenix and brought him home. We had to pay for a couple of surgeries for his eyes, and now he is healthy and will be a great dog for us. This woman is what a hero is, not some dumb NBA player who makes a free throw that wins a game. Also not some dilinquent football player who makes a tackle on a kickoff and dances like he is on dancing with the stars, then goes back to the sidelines and sits for most of the game.

What is the whole point of this? I got a bit off center in my trading for a time this year, so I backed off quite a bit and focused on things in life that matter like this to put it back into the proper perspective. Things like this are what makes life to me worth living. If you find yourself in a place where you are feeling sorry for yourself because you got beat up in the market, take a step back. Help an elderly person in a parking lot, do something to give back to the world. I think it will make you realize you need to be thankful for the good things in life you do have and you will get yourself more grounded. This will lead to better decisions. Of course I have to make some money trading to pay for all of these things, so here is what I am looking at right now.

Here is the Bond market that I feel is setup for a rally. We had one false start the other day that I mentioned where I took a swing a missed. I got out of that trade quickly only losing about a grand, which is a rounding error for me so not a big deal. I did take a second swing at this one earlier this morning on the long side. This prominent POIV divergence should matter at some point, it rarely gets this type of look. We do have a strong seasonal down bias that comes in at the beginning of the year for Bonds, so I have no idea if this will go anywhere but there are other things in play here that should result in a rally here.

This is a weekly chart that shows a couple of things. First, the valuation vs Gold. You can see when we reach the undervalued levels vs gold we get rallies, and we are deeply into that zone now. The red line is something Larry Williams brought to the attention of his students recently. Since it was his notification on this, I am not going to show specifically what it is. The hint I will give is that it is derived from the COT data. You can see also that in the past when we have reached into this zone this market has rallied.

The last chart I am showing is just one of many that look the same right now. You will see a nice rally into new highs, that is right into a seasonal peak period. I just think it is prudent to be aware of this and a very good friend just reminded me of the seasonals which I had not been watching very closely in recent months.

This happens to be Soybean Meal but it could be just about anything, many markets look like this right here. I do not see a sell signal here, but I did pass on a buy today due to the seasonal coming due. Time will tell if that is wise or not. The dollar is getting clobberred today which is helping lift almost everything right now. I am going to be looking for sell signals in many markets in eary January due to this above type of situation.

Last word for the year. I am going back into managing money partnering with a very good friend and exceptional trader. I will provide more on this at the appropriate time. It takes awhile to put these things together. Until that time it is business as usual. Once the CTA is operating it will effect some of the commentary in here due to all the ridiculous rules the NFA has. Once the web site is done there will be links back and forth to this blog, and I will continue to provide regular posts.

Happy New Year to everyone and best wishes for a prosperous 2011. Thanks for reading.

WONDER WHAT LINE HE IS ON?

I remember when the great one was running his campaign and pledged to go through the Federal Budget line by line in an effort to eliminate wasteful spending. The thought occurred to me this morning that I wonder what line he might be on now after 2 years? Is he still in the preface? Perhaps the Table of Contents? I think he just did a Select All, then clicked on increase then hit save.

As you can see from the chart above that I fished out on the web just to show a quick snap shot of things, high deficits are not bad for stock prices. You can see in the last 10 years how clear it has been, when deficits rise so do stock prices. When they decline, along come stocks. This is where people who study economics and try to apply those principles to stock prices get lost. Deficit spending has becomes stimulus for stock prices. When they are injecting money, that money goes to where it will get the best return, and that is often stocks. At times the PPT makes another spot more attractive like real estate for example, or the metals in the last few years. When you can borrow money cheap and invest it and make more, that is basic economics.

If you research the great depression you will find that we actually had a surplus for part of that period of time. Most people would not expect to find that I bet. I am not arguing that deficits are a good thing, they are not. However, this is a trading blog so the point I am making here is that you should not get too bearish on stock prices or the market as a whole just because our deficit is increasing. It really does not have a correlation, or if anything, it is in the opposite direction of what is commonly espoused.

That being said, I am as readers know, bearish for January in quite a few markets. I do not as of yet see a trigger to get short the stock indexes. There is seasonal down bias as I have been discussing in January and the first pocket of that seems to be at the end of the first week to the beginning of the second week. That is a window to look for a sell pattern if one has not developed already. January has not always been a seasonally weak month, that is a more recent development. Seasonals like all cycles tend to move around some, so you have to keep that in mind.

So Goes January, So Goes the Year

Here are the results in the SP 500 since 1988 buying the market on the first day of Feb, if January closed up for the month and exiting at the end of the year. This is the so called January effect and you can see that this has been a good harbinger for the year overall. What is also interesting is how small the draw down max is on the winning trades. Even the largest loss is not that much at 11k considering this is just holding for a whole year with no stops. In summary, I am bearish for January beginning at about the end of week 1.  That is a short term bias and I do not know if that will be correct, or even if it is, if there larger implications. However, if the month does happen to close up, the longer term view has to shift back to the long side.

Do your own research on this it is worth the trouble.

NEVER SELL A DULL MARKET?

This is an old Wall Street saying that gets thrown out quite a bit. You can see 3 distinct dull periods where the price has just continued to creep higher. In this case obviously shorting would have wiped you out. It is the nature of price up trends top behave like this. They tend to just stair step upward. Downward moves tend to be faster and more violent in nature. This is why short term traders like me love shorting because you can make more money faster. This does not mean you should have a bias, that is a major mistake. Short only funds have been killed this year, and long only funds get killed during declines. You need to play both sides of the market, but you also need to understand the differences in the nature of price moves.

Let's say you had a negative bias in stocks due to the feeling or even objective analysis that you do, that told you the stock market is likely to reverse back down. You would then go to the chart to see where to go short. There are certainly plenty of divergences in the momentum here that you could have justified taking a short position. However, what I would recommend, is requiring a substantial trend change in the price before doing so. That has never happened in the above chart, so at the very least you would have stayed out of trouble. There are always bad periods, times when you just can't get anything right. I have had one of those this year. It is imperative that you keep your draw downs low. I have kept mine under 12% during one of the worst periods of my career, and believe me in the overall scheme of things, that is nothing. One of the ways I have done that is trying to stay clear of some of my signals that have occurred during this recent upward run.

There have been sell signals in my short term patterns. I have taken them with smaller size and quick exits due to not everything being lined up perfectly. You could argue, well why wouldn't you just wait for everything to be lined up? The answer is a trade is never perfect, the ones that are seem to be bad trades. We are basically probing for a move when the evidence leans in one direction. If the evidence was always air tight for trades, all traders would be mega rich tycoons and the CSI labs would be out of business also. It is not a perfect world and there is no "perfect" trade.

If you can keep your losses limited during bad trades or bad periods, the good periods will take care of themselves. I will admit that as per my recent posts, I am getting bearish on stocks right here and I am chomping at the bit to participate in what I think is going to be a decline in January. However, I also know that so far there is nothing in the price structure to support my view, hence there is not a trade here. At the same time, I do not see a buy signal. Even if I am expecting a decline, if a valid buy signal shows up here in an uptrend this strong, I will take it without hesitating. My view on a decline could be wrong, and who is to say we don't go all the way to QE 10 with the FED which would probably take us to 20,000 in the DOW. They have shown they can completely lift the market in spite of all contradictory influences, so don't be a fool and fight it. Make sure the price action ties into your overall view, then enter your trades.

The next chart is an example of where I had a bearish view on the market and waited for price structure to come in line with that. It is one of the best trades I made this year. You can see how much different this overall picture is than what we have going on right now.

Price here was obviously in an overall downtrend and you can also see the sharp declines we had during this period. You can certainly make alot of money during these moves if you can catch them. However, I think you can clearly see the differences in these two charts and why I am telling you to make sure price action ties into your directional view. Fighting trends no matter how fancy your techniques are, is a very difficult way to make a buck or even keep the bucks you have!

THAT OLD FAMILIAR FEELING

I heard this morning that the bullish advisory levels have reached well over 60% again.

This is hardly a news bulletin. What also is not a news bulletin is the explanation given by someone from an advisory firm about why that does not matter this time. In other words, "it is different this time" the dreaded 5 WORDS.

You can see from the Nasdaq weekly chart below, that when we have reached these levels in the past generally there have been declines that have followed, or sideways action. The commentator mentioned some odd stat about how the percentage of households that own stocks was lower than at times in the past which is why there was plenty of room to run. Of course this could turn out to be true. However, the sentiment indexes are of professional advisers not individual stock traders. This is quite a bit different in my mind. The small investor does not drive the market, large institutions do. It is when the advisers are overly bullish that these levels mean more as a contra indicator.

Larry Williams has just come out with his annual forecast, and while I will not give all the details since it is a pay per view report, I will say that it shows a lot of bearish setups right now or in January. This ties into what I have been discussing in here, January after the first few days of rally, should setup some nice selling opportunities in quite a few markets. The first few days of the year should feature new equity flows into funds and support the market in general. After that, I think we are going to give way to some selling pressures probably for a month or two.

I mentioned the other day that I felt the metals were setup for a decline and that I was short GOLD. I also mentioned I had no expectation whatsoever in the trade, and it was simply a signal so I took it. After watching it test the 1372 area twice and bounce, I bailed out of it for a scratch. The entry pattern had been an inside bar with down close, which by and large is a crappy bar pattern to sell below. There are always exceptions in that some of these work, so I still took the trade. However, knowing the pattern was marginal, I kept a very short leash on the trade. I have a close friend who was also in the trade, who reversed to long and is making a nice gain on that move. I did not see a buy signal, so I did not do that but wish I had.

There is no magic to the two bounces, this was a complete judgement call. This market is still in such a big uptrend, I just looked for the first sign of trouble and deemed that to be it. Silver is soaring today and it did have a higher short term low so I guess that is where I should have been long but I am not.

I did try a long side trade in the bonds yesterday that I exited today for a small loss. When I saw it quickly reverse back down today I bailed out quickly. I do think in general this market is in a buy zone, but the pattern is not quite right. I forced an entry yesterday and when I do that it usually does not work out too well. I am also looking to short Heating Oil, but again the tape is awfully strong there so not sure where I am going to get into that one quite yet. I expect stocks to remain firm through the balance of this week. Any dips will be quickly bought just like we saw yesterday.

INCONSISTENCIES

As we sail along waving to the crowd celebrating our huge recovery and looking forward to a "boom year in 2011," I find it troubling what I am about to discuss. When I do my weekly analysis, I am finding alot of markets setup very bearishly. The only bullish setup I see is the Yen which is a contra to the US stock market generally speaking, having been a flight to quality spot recently. This should not be the case with this perfect storm the fed has concocted. We should be seeing a major inflation wave ( what they are trying to create ). There is one occurring right at the moment, but it is beginning to look like this will end the way all other artificial moves have happened in history. Prices historically have reverted back to the mean, an almost statistical certainty once you get extended as far as we are now. See housing of 2005 for a prior example. It is of course our challenge as to how to time these reversions.

With all the analysts calling for these huge equity moves next year, some even for new all time highs in stock prices, we should be seeing a plethora of explosive buy setups. I did not find one single one of those in all the markets I looked at. The above chart is COPPER and you can see how closely this has resembled the stock market. This is an industrial metal that does track stock prices closely. Look at the huge Small Speculator longs in this market ( marked by my red arrow ). This is also accompanied by a big increase in commercial selling, taking the short position to the highest level we have seen it since 2005. It is often somewhat normal when a big rally begins for the commercials to get immediately heavily short due to their hedging activities. Once we get longer in the tooth in a rally, it is a little different. From a hedging standpoint you could certainly argue that this also makes sense since they are protecting a huge windfall.

However, you could also argue that keeping a lid on prices is also in their best interest, which is another way of explaining commercials heavily shorting once a run gets going. Here is the closest prior example I can find where commercial activity was similar to what we have here in the above chart, with the small specs also heavily long. It actually happened at the end of last year, hmmmm....

It is certainly interesting to me that this happened at the same time in the year, but that may not be significant. You can see the last time we had this setup, we got two sharp declines. This market will not decline unless the stock market does. We have a showdown setting up. We have the Fed putting money into the stock market on a daily basis through POMO to make sure stock prices keep rising. I have stated repeatedly, that they have been able to drive this due to the volume being light. We have a very big volume source in the opposite camp of them now. This is a showdown coming, fundamental forces vs government intervention forces. Who will win? So far the FED is rolling every competitor that challenges it like an Old Nebraska football team. Just running the ball up the middle on every play for one first down after another. However as we all know, Nebraksa's offensive strategy ultimately ran into trouble when everyone figured out what they were doing, sound familiar?

What I have stated repeatedly, and you can find your own historical examples of this, is that when markets get extended this far, the reactions will be equally large. I also see in my perusal of the markets, that both Gold and Silver are now setup again fundamentally for declines. Since we know these track stock prices very closely nowadays, this is also a bearish development. We are now seeing some pretty prominent divergences in weekly charts, that have not been there at all during these huge rallies until now.

That is a good amount of divergence now in the momentum indicator. You do not just go out and short a market due to something like this, but it is an early warning to be on your toes. The next chart is GOLD and you will see an even bigger divergence here.

This has been the weakest of the three metals, and it is no surprise that it has the largest divergence. This is the one to short if you choose to short the metals.


I also think the Canadian Dollar is setup very bearishly, in a similar fashion to Copper above with the difference being it has not rallied anywhere near as much. The Swiss Franc has a very bearish setup as well.

This is a triple divergence potentially, a very powerful sell signal that seems to be forming. I could go on and on, there are many markets setup for sells. Crude and Unleaded Gas have been commercial selling going on. It appears in summary, that we are about to get an across the board decline. I doubt it starts before year end, but in case it does this week be ready to go.

We should see some sell signals trigger in the next couple of weeks, it is yet to be determined if they are just minor or major in their magnitude or duration.

WINDING DOWN

I mentioned the other day that GOLD was setup for a decline. You can see where I went short in this market today. As per the usual, I have no expectations of any kind in this trade. It was a signal so I took it. As we wind down for the year, the markets do generally tend to get pretty quiet. However, I have seen some large moves happen during the last few days at times, so when signals show up I do not pass on them just because "I think" it will be slow. The odds are it will be but you just never know.

I was reading about how China has been a heavy buyer of GOLD as a reason why the price has to keep rising? Why? What if they have bought all they are going to buy, couldn't that then mean an absence of buyers? What if the PPT decided to combat them by shorting GOLD in record numbers to drive the price against them intentionally? The point of this is just this, it is all random opinion as to how it will effect the price. It is also irrelevant to short term traders. Even if you dial in exactly on this type of analysis, timing such things on a daily basis is impossible.

From this chart above I see both a downtrend ( short term ) in price, and a longer term downtrend in momentum from the oscillator, confirming the price. This together means to me I should be short so I am. The very high correlation between stock and gold prices probably means this won't go far, since it is unlikely we will get a stock market break here, but at times these two markets can separate. The next chart is that of the NAZ, which to me is jumping out as the weakest of the 3 major indexes.

This is developing into quite a bit of divergence here and now almost of the variety that it is worth taking a counter trend shot. It is my hope it keeps building the last week of the year setting up a January entry. However, things rarely setup exactly as I expect even though I always hope they do, so for the brave, taking a shot now is not a terrible idea. We do have the year end markup which I think is going to trump any sell signals, so I would suggest smaller size on this trade if it is done this month. I am not a big fan of shorting below the low when the market is in open water like this, but occasionally you get a top right on the money doing it. Generally it favors waiting for some type of price action that tells you at least the uptrend is flattening. The worst thing that can happen is getting one of these right because it reinforces a bad habit, then you get run over the next several times you try it.

There are those that say that as go the techs so goes the market. Although just anecdotally, I tend to agree with this, I cannot find any research that actually backs this technically. There are some very good traders who swear by this adage, tech leads. If that is true, the NAZ being the weakest of the indexes adds some fuel to the fire for a coming decline. However, even though it is relatively weaker, it is far from weak so I guess that is an asterisk. If we have a pullback, and this declines more, that would be more meaningful that what has happened thus far, which really is nothing.

SENTIMENT, IT'S MY OPINION!!!!!........

There is starting to be some talk about excessive bullish sentiment on the stock market. I have to admit at this point it is hard to find a "analyst" who is not wildly bullish on 2011 on stock prices. There are those who would then argue that is a reason to be very wary of prices. In theory if everyone is leaning one way who is left to chip in to keep that going? Tom Demark, one of the great futures trading analysts wrote in one of his books that prices stop going up when all the buyers have bought, not when all the sellers show up. I suppose this could be a play on words, but it does make sense. At some point when there is no money left to keep pushing a move in either direction, a change will occur. It is how to gauge this that is the challenge.

If you look at the above chart of COPPER you can see two periods where I have marked with horizontal red arrows, where Sentiment was excessive for extended periods of time and no trend change occurred. This is typical and is the reason why there is no magic number on Sentiment that screams buy or sell. I do have one spot marked with a vertical arrow, that represents a better way to use Sentiment. We were moving up in a strong uptrend, had a retracement, and Sentiment got very bearish with the trend still intact, albeit barely. It is excessive sentiment in situations like this that is more meaningful in my view. You can see at the far right side of the chart, that Sentiment has once again been pegged at excessively bullish levels for a few months and prices have marched higher without missing a beat. Had you been shorting this market due to this you would have been wiped out by now.

The next chart of the SP 500 shows the same thing. You can see that the best way to use the Sentiment is when it goes against the current trend on pullbacks. I like the quick switches where it quickly moves to the opposite extreme. I have marked off a couple of these. Quick changes against the trend although some do work, are not as reliable.

My apologies after 2 hours of trying to finish this post with the poor Internet connection due to rain here in San Diego, I am giving up. Satellite Internet does not work when it rains and I cannot get a connection to the Google servers that will allow me to post any charts. I was lucky to be able to get the first one in. I will complete this tomorrow when the forecast is for a break in the storms.

MY OLD FRIEND AND NEMESIS

Here is a weekly chart of GOLD, a market that I have made alot of money trading this year, yet been wrong about the big picture here. I guess I would rather have the money than the ego boost from being right if I had to choose, but it would be nice to have both. I have no desire to see the public get fleeced even though it might seem that way. I am just pointing out in here that rarely in history if ever, has the general public been right indefinitely about huge market moves. They have been here for a few years now which I think probably throws this into a dubious category. I guess the Internet bubble might be another occasion as well as real estate, where this has happened. I do think all of these are the same.

I was listening to CNBC and that Fast Money or whatever that show is called yesterday. The one trader was stating that there is now heavy institutional selling in this market where there has not been before. I would beg to differ on that. If you look at the COT report, this has been going on for quite some time and it is evidence of why you have to be very careful when these big trends get going with the COT report. Often the Commercials will be heavily against the trend for months at a time, so you can not use that as your sole basis for bias. The other thought that has crossed my mind is that the way the government is playing with all of the numbers who is to say they are not also doing so in the COT report?

For the first time in quite awhile we now have some very significant divergence coming into this market in the momentum indicators. You can see the 3 lower peaks now in momentum against 3 higher peaks in price. This is a sell signal. How to enter the trade is up to an individuals own approaches, this is just a bigger picture occurrence that should lead to some downside action. Will it be a huge peak or just a pullback? There is no way to ever know that in advance. I suspect a pullback only. These prices are being rigged by governments so there is a huge amount of buying power to buy dips to keep this bubble inflated.

One of the things I keep hearing that is so frustrating is that during times of trouble GOLD has always been a great place to put your money. Let's take a look at that and see if it is a theory that should work, or one that is actually born out by history. The first chart here shows the last 2 market crashes and what GOLD did during those periods.

How can this be? In the aftermath of the Internet bubble GOLD was flat. You can see then it rose with the price of stocks afterward. Next we have the great crash of 2008, GOLD went down, then again recovered in price when stocks did. So far 2 for 2 of it not doing what the pundits say. Let's go further back in time, maybe I am just not getting this.

The famous crash of 1987, the single largest percentage drop in one day in history, surely GOLD must have been a flight to safety spot then. Oops, apparently not, it declined. Going back to 1982 which was a nasty time in our country with high inflation and soaring interest rates. There are some who debate that was worse than our current situation. How can this be GOLD plummeted during that period. Is this a typo? The data must be wrong. The running tally now, 0 for 4.

Here we have the nasty decline in 74 and 75. Well we finally found an acorn didn't we. Gold actually rose during this period, we broke the shutout. We have now found 1 out of 5 crisis periods where this theory actually bears out. Even in this case you can see GOLD was already in an uptrend following stocks up to the top, it simply just went up a little more during the decline. This is hardly proof of this theory at all.

The point of this whole exercise is not to prove GOLD can't keep rising, it surely can and may. However, if you choose to invest in this, do not do it based on the theories that are out there about it being a safe vehicle in times of trouble. Even though the theory makes sense, throughout history this has not proven itself out in actual price movement. If anything the tendency is for it to go down not rise. This recent run for the most part tracks the stock market as a whole, if you can't see that by looking at charts you are just blind. I believe this is true because really bad economic times generally result in big deflation. During a deflationary time commodities will generally decline. Maybe this time will be different but any reader of this blog knows my thinking on that probability.

As a long term player in this market there is certainly no reason to change your plan at this point. As a short term trader there are alot of reasons to begin looking at the short side here.

IT IS COMING THIS TIME

Here is a chart of the VIX and alot of other stuff on it. I won't apologize for this mess, anyone who is a trader is used to looking at things like this. The Green Line is the SP 500 and I have marked off with arrows where moves in the VIX beyond containment bands have triggered reversals in the SP 500. By and large this is a very good way to time the SP 500. It has bad signals just like anything else, and there have been a couple since the FED took over the stock market a few months ago. Deal with it. If you had an approach that never generated a loss you would not be reading this blog, and also you would not be living on this planet either.

The bands can be anything from standard deviation bands to bollinger bands, you name it. You can draw regression channels, just go hog wild on this. The bottom line is that when the Vix gets stretched as it is now, reversals take place. When it gets extremely stretched ( not quite yet ), big reversals take place. What I am hoping for is the PPT to continue to play their games through year end, keeping this strong. That should result in a bigger stretch away from a central point. Who knows that may not happen. This is so set for a decline, that maybe all their games will accomplish is keeping the market sideways. Either way we have to be looking for sell signals now.

I gave in and listened to one of the gloom and doom videos over the weekend, this one from a dude named Stansberry. I don't know him from Adam, I have no idea if he has ever hit a ball out of the infield in all honesty. I will say his presentation was very well put together and difficult to challenge on a point by point basis. The bottom line is that when excessive levels of debt are reached, companies fail. The corporation called the USA is in this position. It is difficult to accept the conclusions these gloom and doomers make, but hard to challenge the individual points that lead them to these conclusions. I think the collective psyche of Americans will change quickly if the stock market happens to hit a rough patch. The "recovery" is nothing other than a cute BS story painted by the media to support their savior Barry.

This situation is years in the making and it is Greenspan's fault, not the current president or Bush for that matter. Greenspan started this bubble rotation cycle that led us here. He is the one to blame. What anyone should do about any of this is of course an individual decision. If you buy into the Armageddon type of scenario then do something about it. I personally have done a few things like gather up several weeks of extra food that is not perishable, and also made some water arrangements. Other than that it is business as usual. I do believe we have a reckoning period coming sooner than later, and I really have no idea how bad it will really be. It is hard to envision wide spread rioting in the streets, but people are people, and we certainly have our share of entitlement folks in this country. I see no reason why these people won't react the same way their European counterparts are. I heard some gal on FOX the other night ( of course a teacher the biggest cooks we have in this country ) claiming the government owed us all a guaranteed job and health care. She could not have been more steadfast in that belief. I wish I could buy her college and fire her.

One thought I will leave this topic on is this. I do have other business interests, and I see the following theme starting to shine through. Their is a voice that is optimistic, yet on the other had budgets are being slashed. Obviously the later reflects the true view on business prospects. I will just leave it at that.

The media won't call out Greenspan since he is a democrat, so don't hold your breath on that one. When he refused to ever allow any short term pain, and orchestrated rotating over inflated asset class prices, he eliminated the natural reversion to the mean price movements that keep things in balance. As a result we wound up with several things all at extremes and basically nowhere to go. Now they are repeating this with stocks and GOLD. I am sure they would love to think they can rotate out of them into real estate, but that seems to be a unlikely save that can be made. Real Estate is not going to be able to be re-inflated without a better overall economy. They have setup two places for people to go and of course that is why GOLD and stocks have the 90% correlation they have. They are both being artificially inflated by the same people. It is also why they are both going to decline together.

Maybe when this starts GOLD will separate and make the GOLD bugs a ton of money, we will have to wait and see. They have been dead right about the direction, but dead wrong about the reasoning since the dollar has not really declined, it has gone sideways. However, for the moment, these two markets remain joined at the hip. In general, both Gold and the dollar tend to have seasonal moves at the beginning of the year, the Dollar up, Gold down. This also lines up with the short stocks scenario.

I would suggest studying the VIX, there are a million ways to use it and I think you will be able to find many ways that will help you in trading the stock market swings with it. I have thrown out a few in here over the last year, there are many others.

BONDS SHOWING SOME LIFE?

Here is a market I have been talking about and been wrong about also. I have been looking for a buy in this market at it has continued to crater. We still have this big time divergence in the POIV indicator here, which at some point is going to provide a base for this market. It could be now. The bottom indicator is a new project I have been working on that I won't reveal other than just to display it. There is an expanding pattern in it which should indicate a low is here. I never know if the low is just for a short term move or a larger one with this indicator, but it has been a pretty good predictor of short term highs and lows. Today as I type this we are up nicely in this market, so we may be forming a low here. Ideally we will drift here for a week or two, then breakout upwards. That will be where I will be looking to get long, if that happens.

There is not as of this week much in the way of commercial buying coming into this market at all, and we have changed on the weekly from up to down. As a result, I think this low will be just a bounce and the next large move is going to be another leg down. As per what I usually say, there is no way of knowing if this will play out or not. It is just what appears to be developing here. It does tie into the equities January dip I am looking for. Since these markets trade inversely for the most part, if equities are going to dip, this market should rally.

The next chart is one I have shown many times before, but wanted to show it once again. Look at the incredible link between GOLD and Stock prices. I continue to be amazed at this, but I watch it intraday at times and am amazed how every little move in the ES prompts a move in GOLD. This is just so bizarre but it is what it is. You can see this pretty much started in 2008, prior to that this relationship did not exist.

Since it does not appear a big equity crash is anywhere near, it is likely Gold continues to be strong based on this relationship. The Dollar is in an interesting spot right now. On a weekly basis we are still in a downtrend, yet the daily has had a nice little bounce, leaving these two time frames somewhat out of sync with one another.

Now that today has taken out this area indicated on the chart, it make this picture a bit unclear to me, hence no trades to make. The Aussie dollar does appear to be setup for a buy on Monday as do a couple of other currencies, so maybe this is still a sell here, but it is not clear at all at this point.


I have noticed recently my readership here has been increasing, so I wanted to say thanks to those of you that read my blog everyday.

There was a question about what a reversal bar is. That is simply a bar that trades down below the prior days low and closes up for the day or vice versa.

SOMETHING I JUST NOTICED

This is a chart of the SP 500 weekly with the 30 Yr Bond Overlayed on top of it in Purple. One relationship that is forever joined at the hip is that of interest rates and stock prices. Money flows to where the greatest returns can be found, and you can see this graphically above. If you look at the stock meltdown of 2007 and 2008 you can see that as we neared the bottom, there was a monster rally in the 30 Yr Bond. Of course this was initially a flight to quality in the safety that Government Bonds provide. However, what ultimately happens in these instances, is that the yield on those bonds gets driven down so low when this happens, that the return on the money becomes unattractive. As a result, what typically happens is it then works it's way back into equities creating big rallies.

The opposite is equally true, when stock rallies carry on for a long time, money leaves the safe haven of bonds and pours into equities. During these times such as now, there is very little fear at all, and the price of bonds drops ( yields rise ). There again comes an uncle point where money will flow back into the higher yield area, once rates move up enough to move the relationship again back out of balance. We saw a minor case of that in the middle of the chart where I have marked Minor, and it caused a decline in stock prices. If you look at what we have now on the far right side of the screen, we have a much larger divergence beginning to develop. The price of bonds has been declining sharply in recent weeks, and this is going to spell trouble for the PPT at some point. They of course are trying to make all these things move together, which is just not possible over long time periods, and something is going to give here.

Timing the exact turn with this type of a fundamental is impossible, but it always factors into what I see as my overall view on things. These are some of the reasons why I have been saying recently, to tighten your stops on things even though it is not time to go short stocks. There are bond models that use this type of logic you can find on the web. Yardeni has a good one although I am not sure if you can find it free anymore. It compares yields of various asset classes and there uncle points in terms of inter market relationships and money flows.

If we combine this with the 18 week cycle I wrote about yesterday which is this week, we now have a couple things falling into line here. We also have the January seasonal tendency out there, so now what we have to do is start looking at price action to see if anything is brewing there.

We don't really have anything here at this point. We see price moving steadily higher, thanks Ben! What would need to happen in my world in the next couple of weeks is for my momentum indicator to move underneath it's trend line first. Next we would need to have some type of break in price to accompany that. If we were to move sideways in price over the next couple of weeks this could develop. We have to pieces in place now for something, but the price has to confirm it. Trading off fundamentals alone can leave you on the wrong side of the market for long periods of time and that is no place to be.

Watch the Bond Market carefully here. If you are a bear, hope for it to continue to roll over. That will be the end of the stock rally if it does. We are really on the border line now of what is not quite such a huge divergence between stocks and bonds to make it a no brainer. It is just getting close to that uncle point. I will cover this more in upcoming posts.