Sweet Ending

I will get to why I have today's title what it is at the end. First, I want to cover a market setup I think is getting close, Crude Oil. Like many markets, the across the board push is lifting this market along with many others. I commented over the weekend that thus far we have not seen commercial selling yet on these rallies, which would certainly make them better. In fact we have seen buying. This could well mean the setups are no good. However, the COT report is not the end all, and at times as most of us know who reference it, the positions can be dead opposite of a move for months at a time. This has to do with their hedging function and how they establish their positions and what they are trying to accomplish.

The COT report is studied pretty widely now I think, and he is where I think some of the "experts" go wrong with it. Many of these experts I don't think trade much if at all. If they do trade, they are making their money from analysis and not trading profits. This is why I think the academia of the analysis leads people astray. Without mentioning them by name, one of these services has just been dead wrong about virtually every market for the last 2 years, then they came out with the "look at me" I called this decline, when we imploded on July. The problem is any of the subs would not have had any money left to take advantage of the call, or if they did would likely not have acted on it due to lack of confidence after a string of 2 years of incorrect predictions.

Larry Williams, as most readers know, is my mentor. The reason I feel he is the best source to learn the COT stuff from is that he actually makes millions of dollars trading using it. That is a significant difference. The others seem to use their analysis of it to generate their income, Larry uses his analysis of it to make trades that generate his income. We all can have the same tools, but it is the ability to use them to make money that matters. Anyone remember Ron Paul saying Buffett knew nothing about derivatives? Buffett went on to make $5 B on them. I guess Ron Paul should write a newsletter but not trade?

This is also why "insiders" like Realtors got the real estate crash wrong. They did not make their money by being right about price direction, they made it on commissions in transactions. They essentially had no skin in the game. I made over $1 Million dollars profit on the last house I bought and sold at the end of 2005, yet I was told by Realtors that I was nuts calling for a market crash. Again, the Ron Paul/Buffett scenario. I was made fun of at a party in my old hood after my escrow closed by the real estate people. "What does a commodities trader know about Real Estate?" "We have spent 20 years in this business and we can tell you that you don't know what you are talking about." My response was I know more about price cycles than you will ever dream about knowing, then left the room. One of them has since sought me out asking for future price predictions for real estate!

Those are two exact quotes that I won't ever forget.

You get the point, analysis is one thing, but making money is another. They often do not coincide. This is a lesson I have learned the hard way over the years. Being right is of no value, it is how much money you make in your trades that is the measure of success or failure. There are great traders that only win about 30% of the time, yet make big money. How, they catch large moves when they get wins, and lose small when they are wrong. Often they take several stabs at the same trade, eventually catching it.

I have to admit, I need to be somewhere in between to satisfy my own personal demons. If I am in the 55% to 65% range I am happy, and that is where I generally fall in terms of accuracy. However, my average win is many multiples of my average loss, so it works out well. With that in mind, we get to the Crude Oil setup at hand. We will never "know" if a trade is going to work or not. I just strive to play where I think there are as many things pointing in my direction as I can get, and understand that I may have to take a couple of swings at times to catch the trade. Obviously I prefer to get it right the first time, but who doesn't?

This market is showing the POIV diverging up here a sign of underlying weakness. The Synthetic COT indicator is also there where it needs to be. This market is also weaker than both Heating Oil and Unleaded Gas. This is pretty much a green light special as far as setups go. The next chart is the weekly, which shows the higher time frame version of the setup.

Notice how we had the huge divergence in POIV on this weekly chart, which gave us an advance warning a bounce was coming. We are right at a key seasonal point as well. This is a good setup to watch.

Last, the payoff pitch and the source of the title of today's post. I exited the Sugar trade I had been riding for a little while for a nice gain of $20,000. You will notice that the POIV (purple line) was starting to lag quite a bit here, that bothered me.

I had been trying for the target that is displayed on the screen having orders each day that bracketed the price action, neither one of them getting filled. When I felt that we were at a stalling point in equities at least for a short period of time, and the POIV was here, I felt it was best to take profits. It is a screwy world right now with stocks driving literally every single market. I just reasoned that if they pull back, it is likely everything else will, and I am really looking bigger picture to short rallies in commodities. With all this in mind I exited intraday where the green arrow shows and took 20k out of this one.

I don't like to brag about numbers, and this is not a huge gain. However, on some level I think it gives some credibility to what I am doing in that I am not a one lot trader. There are decent sized profits that come in on the winning trades.

Net net, I am still looking for an equity retracement here which I think will in turn drive everything else down with it.

Good Trading

WAX ON WAX OFF

Just like the Karate Kid, the markets move along. The ES rises, every other market except the dx and bonds rise. The ES falls, all the markets fall. They have been joined at the hip for so long now, there is just no period in history to compare this to. This has never happened before. Yes inter market relationships have come and gone, but I cannot find any period where almost tick for tick, this has happened for this long. I was just watching Coffee this morning, and it was ticking down almost directly in sync with the ES 5 minute bars.

What must be happening is that the large funds that trade have locked in their models to buy and sell everything in concert with stocks. Since everything is electronic, when one goes so do the others. Obviously it makes no sense that Coffee should be that sensitive to small movements in the SP 500, but yet it is what it is.

It appears to me we are retracing to set up a great buy signal in the indexes, and it could form within the next couple of days. Time to watch the short term stuff to see if it begins to turn back up. Once it does we could be off to the races.

I know I rail on politics here and there, and we all know the economy is sliding down not improving. However, you have to separate these things from the markets. I have gone through all of the reasons for this ad nauseum in here, so I will not cover it again today. I did some research a couple of years ago when it became clear to me that the new government was trying to convert us into a more socialist system, to see what effect that had on stock prices when it had happened in other countries. What I found, was that it did not have much of an effect in either direction. The one asterisk though was that I found the other countries when this happened tended to just follow the path of our stock market prices.

The one thing that we have no precedent for is the US who leads, making such a move, and what that might do. It seems that we would follow whomever wound up being the new world leader, if one were to emerge. I don't believe this will happen. There is enough push back on the movement now, to essentially stalemate it for the time being. As a result, the net is that I don't think we can consider it either way any more. If they do manage to get over on the wealthy and raise taxes, that is going to bring the markets down, but it seems Congress is going to block any such attempt at least for now. So, forget about that crap, and watch the cycles. They are bullish, so we need to be.

The next chart will thrill Gold Bugs. I know there has never been a single thing that has ever happened that they did not think would make the price of GOLD rally. If Notre Dame won, gold should rise, if you dog peed twice on the lawn, it should make gold rise. Aah the fiat currency skit, one of my favorite ruses of all time. Nonetheless, it has been on an incredible upward path and I think we are setting up another upward move. It appears to me now that just about everything I watch is lined up for this market to have a big rally.

First, we have that critical support that I pointed out when we went there, did hold and we saw Sentiment very low at the recent low point. We have huge commercial buying into this dip. We have open interest low. We also have a good seasonal influence for a rise, and the cycles not shown are also very bullish.

Setups do not get much better than this. However, it is a setup not an entry. You have to figure out if you are so inclined to go long, where to get in. I do not see any of the setups I look for in play yet to buy this market on the daily charts. I am looking every day, so hopefully something will develop. If we do happen to go down under the recent low point and close a week down there, this setup will be invalidated and that would likely confirm a top that will probably hold for decades. My bet is we do hold and have a nice year end rally, which setups up the sell of a lifetime in January.

Maybe this will appease some who think I just bash GOLD all the time. I have made good money trading GOLD and SILVER over the last few years in both directions. The whole point of my railing on this topic at times, is more to try and save some novice people who are getting suckered into thinking this can never decline. Without any further discussion, I will leave you with this thought on the big big picture. 

Lets say you are an alien and came down to this planet, and someone showed you monthly charts of commodity prices and you saw how they go up and down, always reverting back to the center. You know nothing about any human spin or BS marketing stories, fiat currencies, or any other explanations of anything for that matter. All you have is historical data on commodity prices. Since you are an alien and have been smart enough to build a spacecraft to get here, you can look at data intelligently.

Then our soldiers tell you to decide whether or not one of these markets can do something that none of them have ever done from the data you have studied, go up for 20 straight years, or whether it is likely to do what it always done historically. Your life depends on it. They pick GOLD a market that has risen for 10 years. With your life in the balance would you guess it would go up for 10 more years or down?

I don't want any emails about this and why I am wrong. Maybe I am, and if you think so bet the farm on the long side, it does not matter to me. This is just a simple analogy with all BS taken out of it. This is the main reason I have the position on this that I do. All of you brainiacs who are probably smarter than I am, have these detailed thesis explanations of why it will go up forever. You may well be right, but this is my core reasoning as to why I do not agree. I just look at the historical data. I trade based on history and technical indicators, not on my economic opinions.

Peace Out

GET READY

This past week or so has been very tough. The market environment that has always given me the most trouble is those times where the market just goes in one direction every single day with no pullbacks, no wiggles, no nada. It is just a plunge or a zoom. It does seem to me that we are seeing more and more of this in recent times, however that is an observation and not based on any facts or research. Overall, we are living in a time of tremendous opportunity, yes you read that right. For us traders, this is boom time, not gloom and doom like everyone else is talking about. Volatility is our life blood and we are sure getting plenty of that.

I think we are going to work ourselves into some fantastic selling situations here for short term trades fairly soon. One such situation that I think is here right now is Cattle. The above weekly chart shows the COT picture here. I went back and searched for situations like what we have now, where we had a price run up, a decline, then a potential lower high. I also required that on the right shoulder portion of this, we had large commercial selling like what we have had here. I found several that were kind of close, but I felt this one was really very similar.

You can see what happened here, a pretty good decline. One of the things to keep in mind when looking at weekly setups and COT data, is that these types of things setup right when the shorter term daily charts are in a strong trend in the opposite direction. Commercials generally sell strength not weakness, so this will typically be the case. The Hog market is somewhat of the same picture, so you can take your pick. I think Cattle is better due to the accumulation picture which shows declining buying over the last week, where Hogs show new highs in those indicators that matches price. Often when we have a COT based setup, the markets just continue in the direction they have been, so this is why I always emphasize, they are not market entry types of situations. You need to wait for the daily price action to come in line with the larger time frame. Be patient on these.

It is my feeling that we should be looking for sell signals in these two markets this coming week.

Here we are with the indexes, and I am conflicted here. The sell zone via the red band is one of my very best indicators and you can see just looking back at this chart, how well those lines serve as support and resistance. As a result, I have to look for sells right here. However, we are also right at the ideal seasonal low and have had an explosive rally that has started. I know from my experience that on a short term basis, buying these spikes is not a good idea, but the question really becomes, once we get the retracement, what do we do?

The answer to that is that we look to our short term indicators once it happens, to see if they are supporting a buy. I think they are going to the way it looks now, but we will just have to see. Do not let your view of the economy enter into this, that is irrelevant to stock market pricing. You may get some all star to come in here with a starched shit and give us some insulting discourse on how there is this 6 month advance read for the economy from stock prices, and that is just a joke. I think most people are slowly figuring out that all the BS that comes from wall street is just that.

I heard some "expert" on CNBC yesterday while I was working out say that the energy prices are driven each day by Sentiment? Huh? What the hell does that mean? It is amazing to me that a reporter can cover a sector for years, and have absolutely no idea at all what they are talking about. My Saint Bernard's literally know as much as most of the commentators on CNBC, there are a couple of exceptions. The older I get the less I want to hear an opinion on anything from anyone. There is just too much BS out there.

Stick to your indicators and leave your opinions out of it.

The next market to cover is Bonds, and what appears to be a decent buy signal setting up.

Here we are into the buy zone of the bands, and this is a good time to get long Bonds typically due to seasonality. This is interesting in that it comes at a time when it appears the stock market is about to take off. These appear to be opposing scenarios, since these markets trade inversely. Here is the difference to me. Bonds are in a well established up trend, so the buy is in line with the longer term trend. Stocks are in a down trend, so any buy there is a counter trend trade. This is why I say the first look for stocks needs to be the sell, the trend is down.

Many commodities markets are rallying in down trends right now, one thing that seems to be the theme is that there is not any commercial selling on these rallies yet. For my taste, I always want that accompanying retracement entries if I can get it. It just loads the trade up better to me. To use a football term, it gets us running down hill. What I am hoping for is diagrammed on the next chart. I would like to see some commercial selling come in as we move up here into the sell zones.

This is Crude Oil and it looks like many commodities markets right here. It is rallying against the down trend. In this case one thing we do have supporting a sell is the strong sentiment reading of 83. You can see how well these bullish readings have led to declines pretty regularly, so this rally is looking like a sell even though the commercials have not been selling yet. It would be best if they did but it is not mandatory.

In summary, the first look here needs to be to sell these rallies. Then if we get a downward move, we can assess whether the bigger picture bullish cycles in stocks will drive a long side entry there.

Just a passing thought. There is a commercial running about the Chevy Volt where some little fat kid drinking a soda is busting the balls of some guy who drives up to a gas station in the Volt asking him why he is there? No kid better ask me that question if I ever buy one, I would tell him it is none of his ...... business what I am doing! I would ask him why he is taking in all that Sugar when he is already 20 lbs overweight? I know commercial is intended to be funny, but in an odd way it confirms how acceptable it is becoming in our society to meddle in everyone else's life. I am sure the writers of that commercial did not have this in mind at all, but I would be willing to bet that the way the table has been set by the government had some subconscious effect on what they wrote. It is just a subtle cross current that is a trend being set by the governments of the world. They want to control everything we do. So the dude can't even take a pee in peace without some little fat smart ass kid busting on him.

After hearing an unbelievable story from one of my best friends last night about how socialized medicine almost killed his mother when she had a simple infection and a doctor lied to him saying that he excised a piece of hard matter from the "tumor", it just makes me wonder how this is all going to end. Had my friend not flown to Canada and stayed with her everyday, she would have died from a common infection.

He forcefully took her to another hospital and it cost him 6 figures out of his own pocket, and he saved her in spite of the attempt by the first hospital to basically kill here. The fact that the doctor lied about removing part of a tumor is just beyond what most of us can imagine here. Yet our government wants to bring that to us. I don't think by the time the countries problems are worked out, the end is going to be very pretty. I think in general, this is likely to make the up cycles in stocks, shorter than they might otherwise be, but time will tell. We have one at hand, so we need to get on it before month's end. All of these manipulations are going to come to an end at some point and free market forces are going to take things eventually to where they should have been allowed to go to in the first place.

Best of luck trading this coming week. Sorry for the tangent but it makes a point hopefully.

DO NOT CHASE THIS

I want to focus primarily today on the stock market. This has been an incredible rally here, just straight up after the false breakout of the trading range at the bottom. At the time I thought it was a false reversal due to the larger cyclical picture which was telling me the low was likely to come at the end of the month. We did have the screwy mystery chart, which called that low almost to the exact day 1 year in advance. This is once again giving credence to the predictability factor of that idea. I have not divulged what it is because it is not my work originally. However, now that we have had a chance to watch it live for months in advance, then see it call a low this accurately, you can bet I will be giving it some serious consideration come early March when it calls for a high point, then next June when it has another significant low.

In the mean time, what to do now? Keep in mind the bigger picture here, and this is what that picture is the way I see it.

First, we are still in a down trend on a weekly basis and are into a resistance zone that should provide some type of down move any day now. That is the larger trend, so the biggest moves should in general happen in the direction of the main trend.

Second, on a daily basis we are still in a clearly defined trading range which I have drawn out on the chart. Generally the way these act on the edge is that you get a false break and quick retracement, just like we had at the lows. Or we get a false break that retraces back into the range, then takes off again in the direction of the original breakout.

Third, we are at a time during the year when typically a rally takes place and we also have some larger picture cycles confirming that a significant low should be forming down here. This gives us reason to lean to the long side breakout of the range thesis.

Fourth and perhaps most importantly, the Bond Market has been very strong which is bullish for stocks. The general idea here is that money flows to where the greatest returns can be had. As a result when interest rates get really low the prospect for higher rates of return switch to stocks, so that is where the money goes.

Of course we never know for sure what will happen, and we could easily just go back down quite a bit here even though I don't think we are going to. In any event, it may be tempting to some to buy after a rally this strong, but statistics tell us that is not necessarily a great idea.

This table shows the results of buying after we have reached a Percent R reading on a 22 period basis, of > 85 while my COT Synthetic is between - 8 and - 15, which are the conditions at hand coming into Friday. Then once in having no stop and just exiting 10 days later. Obviously, this is not a very good result, so buying right here on average has not historically been a great idea. The prudent move at this point is to wait for a retracement of some type, then get aboard buying strength once it turns back up again. This is what I am looking to do.

Here is a prior instance I found of what I consider to be similar price action in a trading range. You can see we had a false breakout down, then it immediately shot all the way across the range to a false breakout on the high side. We then retraced back into the middle of the range, which was the buy point. In this instance we got very choppy upward action afterwards, but the point is to identify where I think we are now just based on a sideways price range for a couple of months. We could also argue that we were in an up trend coming into the trading range in this example, so it was logical we would break to the upside. The point was just to find bar patterns that were similar, not over analyze it.

In general Friday's do not tend to be reversal days, so with this early strength I think we will stay strong today. If we are going to get a reversal here back into the middle of the range, it should happen pretty soon. The alternate scenario is just to fly out of here which could also happen. Just know what you want to do when you want to do it. Then when the time for action comes, you just click the mouse and don't get tied up in your underwear in the process.

The last chart is that of the Sugar trade I told everyone about, then did it, and here is how it looks currently.

The market is moving up, but what isn't at this point? You can see where my target is here, very unlikely to be hit today, but the orders have to be in just in case. The trailing stop is now well above my entry price, so the worst case now is a decent profit, with the chance for a good sized one. If there is one thing I can impart to readers who are newer to this profession, it is the following. You have to catch larger moves to make a lot of money trading. If all you ever catch is small little wiggles, you are never going to get anywhere. Even in my day trading, I look for larger moves, and not a few ticks. It is true you will get stopped out alot doing this a get small little wins and losses along the way, before catching larger wins. It is frustrating when you can look back and say "well I could have taken X out of that had I exited" and that would be much better than the dinky little win you got when your stop got picked off. You have to step outside of that type of thinking. What we are trying to do is trap price movement and get in sync with price trends, then let their momentum bring us the returns.

It puts so much pressure on you if all you ever get is $500 or so a contract, to just always be right. It is a very stressful way to trade. One thing you have to keep in mind is that it is how much you make, not how many of your trades win or lose. This is a big lesson I have learned over the years. I had many years where I had 70% or more winning trades for the year, but my biggest years have always been when my percentage of wins was lower than that, yet I caught some big moves. Once I got past "myself" and allowed things to move a bit I became a much more profitable trader even if it meant at times I had weeks where I did not make any money. It is about the larger picture, not short time frames.

In the above trade since it was setup on a weekly basis, my logic is I am looking for more than a little wiggle in it. The target may change, what I have displayed is just what is there for today. I am not going to get into how I arrived at it, but in general it is just based on the Target Shooter tool that is displayed. I project many things, and when they form a cluster in an area, that is where I usually put the orders. Of course just like anything else, it is a judgement call.

Good Trading and have a nice weekend

POT POURRI

Here we are in the critical zone of price I pointed out on the weekly chart, and look what we have here on the daily chart. The Synthetic COT indicator on the daily chart, has now dropped into the sell zone again. You can see the last 2 times we were here what happened. As it is with other COT stuff, zones of price where reactions have occurred in the past need to be looked at versus the indicator. What amount of commercial buying or selling was required to stop or start a move. In this case it has been clear that this amount of commercial selling has been what has stopped recent rallies, so that has to be the first read right now until we blow through here and it fails. Net net, this is a sell signal right here. How anyone may or may not decide to get into a trade is an individual judgement call, but I think this is a sell zone on a short term basis right here.

Here is an interesting looking chart, Silver.

Once again we have moved into the sell zone in this market as well, sells can be done right here. We also have the seasonal pointing downward, so this is lined up pretty well. We also know the back has been broken in this market and the probabilities are it has topped for many years to come. Overall this means we need to be looking for sell signals. The larger scale cycles do still point up until years end, so we don't have everything perfect here, but we rarely do. I know I have readers here who do not agree with my big picture view on this market and you may well be right. However, this is a short term signal so the larger picture does not matter for this setup. Besides I am the one who is dumb enough to go out publicly with my views every day and eat crow when I am wrong, so what you get here is my views not someone else's.

Here is the Wheat market which had a Mr Bills wild ride the last 2 days. You may recall me posting a chart the other day with an error I made in this market that wound up making me a small amount of money. It was just my gut that the market needed to base a bit more, before a big rally could happen if it was going to. You can see we had a monster up day, followed immediately by a monster down day. This is the type of price action I was talking about where the market congests some, and forms a base. With equities on the verge of cracking here, this may well just head back down again, but in any event I am glad not to be long and getting whipped around here.

The next chart is an ugly price pattern, the Yen.

Boy is this a mess, the Yen. I have looked at this chart each day because I have been looking for a sell in this market, but good lord what to do with this? It is my view that when you get something this choppy you need to look somewhere else. What often happens in situations like this is exactly what happened here. You get a monster bar breakout, that clears out everyone, and lures a few suckers in, then retraces the very next day right into the middle of the price zone again. For my purposes, I need to see some bars clear of this mess before I will do anything. Since this is a flight to quality vehicle, it has held strong during the stock market turmoil, so it it likely this won't tumble until stocks begin the year end rally.

This market might be telling us with the last 2 days of action, that stocks are not quite ready to make their cyclical and seasonal up move just quite yet.

There was a question in a prior thread about my comments pertaining to the COT data and the stock market. What appears to have happened here is that there is so much cross indexing and arbitrage type of stuff going on, that the numbers get out of whack for these markets. For many years the COT data was just great for stocks, but once the onset of the emini's began, the effecacy started to diminish.

The above is my guess as to why this is taking place, but it does not really matter. Traditional COT buy and sell signals in the stock indexes just don't work any more. There are a few top analysts of this report, and some of them publish newsletters. They have been wrong time and time again with the directional calls they have made the last few years. If these folks that know this report better than I ever will can't get it right, how can we hope to make anything out of it.

This is the main reason I have been dinking around with my synthetic COT indicator that I display so often. I have been trying to find the best true measure of what the insiders are really doing and the COT report for stocks does not do that anymore. At times I think I have the grail with this tool, but other times it is dead wrong, so I am not sure at this point what the true value of my creation is.

Good Trading

MOMENT OF TRUTH

As we approach my resistance zone here in the Russell, the red band, we are already at it in the ES and the Naz. This has been a spectacular rally there is no doubt about it. I did not think we were going this far this fast, on that I was wrong. Ironically the one trade I was monitoring, which was to sell the VIX, was based on an oversold condition in the DOW that was never quite reached. This was why I thought we were going down a bit more before the year end rally began. I suppose we still could do so. However, it does appear now that if we do decline, we are looking at a higher low type of situation as opposed to a big washout. Experience has told me that these bands I use have a very good record of spotting places where price moves stop, so until proven otherwise up here, I think we will decline from this zone soon. Whether it is a small or large dip I do not know.

There is a lot at play here from the PPT, which is likely heavily involved here to help get the attention off of several other problems that are going on. I have to admit, this is a job extremely well done and I think it is going to work. I do urge folks not to chase this especially in the zone we have reached now where a retracement should take place. I am trying to take sell signals intra day in the ES up here if they come along. At press time though everything is up, so no sell signals are in sight at the moment.

We also probably have some short covering that has propelled this up so fast. The Hedge Funds were net heavily short at the trap low point. At some point the cry of Uncle calls out when you get worked enough trying to hold a short in the face of a run like this. Just ignore the COT stuff on the chart, it is not worth looking at in the stock indexes anymore for the most part. It was just on that chart when I captured the image. Net net here, get ready to buy the next dip for a hold of several months. The trick might be that it could be a small dip, which is always tougher to buy than a large one. However, it does indicate strength it if is small, so keep that in mind.

Here is a trade setup that I think is pretty good, Coffee. You can see we have POIV divergence down here at a time when a seasonal low typically occurs. We also have COT buying at the same time. I personally want to see a smidge more basing here, but we could very well just take off here without that. As always, it is up to individual trading styles how to get in and out of things, but the basic setup for a rally is here and I am looking at this one.

The meats are also setup for a trade here in a few days, the next chart is that of Hogs, but Cattle is also setting up as well.

I have drawn what I am looking for here, I have no idea if it will happen or not. The setup is here I just now am looking for some type of price confirmation. The way I see it so far, is just a retracement in an up trend. I want a high test or a false breakout that quickly reverses, etc.. Neither of those are here yet in either of the meat markets.

In summary, I think it is likely we have seen the low now, although there is an outside chance we could get one more move down to get to the oversold level for the VIX trade. I am looking for buy signals now on dips once they begin. As far as commodities go, I think we have to sell big rallies if they occur because the trends are so decidedly down. The million dollar question is, will these two blood brothers finally detach. Commodities and stocks have traded lock and step for quite a while now, yet it appears that the bigger picture is saying buy stocks and sell commodities. This is where using short term entries will help us. This is a big picture view, but we still have to trade the setups as they come along and they may not line up with this view. It would be a good situation if they were to detach and we could get a stock rally without a bunch of inflation. I have my doubts about that but we can always hope!

Good Trading

WHAT HAVE YOU DONE FOR ME LATELY?

John Paulson’s lost advantage

Hedge fund titan John Paulson has a shrinkage problem.



The billionaire manager’s flagship Paulson Advantage funds are quickly losing altitude after peaking with $19.1 billion in assets under management in March. As of the other day, the combined AUM of the Paulson Advantage and Advantage Plus funds had fallen to $15.7 billion, according to investor sources.
 
The news has been coming out that one of the all time great traders has hit a tough patch. I just googled and found this as one of many long articles about it. I have no idea who the guy is who wrote this, it is one of many articles. This type of thing really irks me. It is things like this that have kept me out of the money management business. He has made billions of dollars of profits for clients, now he hits a losing streak and it is the all time pile on by one scrub after another who never hit a ball out of the infield. Trading is not a one way street. I do not care who you are, there are periods of time where you get your butt kicked. This is true in any sales job as well, or sports for that matter. How about the self titled "Dream Team" the Philadelphia Eagles. They can't beat anybody.
 
What people do is seek out the hottest streak, then put their money with that person. They place the money right at the peak of fame and fortune the manager enjoys. Of course they hit a drawdown, that is virtually a mathematical certainty. Next these people get discontented, flee and bad mouth the manager, maybe even sue him. Complicating matters more for high profile big hitters is the problem of trading size. The larger the amount you trade, the fewer places you can go and the harder it is to hide what you are doing. There are people who will front run you, fade you, take the same trades effecting fills, etc.. This makes it tough at times to act on the best ideas effectively.  It is much harder to make a large % return on a large amount than it is a small one.
 
The most prudent approach to selecting a manager in my opinion, would be to pick one you want to use, then wait for that person to have a bad period. If they stay true to form, and return to their historical norms, you will have a home run. This is no different than waiting for all these "confirmations" when chasing a stock market run. When all of the confirmations finally are there, the last person to buy that would support your trade has already done so, then an immediate retracement occurs. I had a bad period last year, I had a 19% drawdown, my largest ever. Had I been managing money then, I am sure people would have left me. They would have missed the fantastic run that followed. OF COURSE! I would have been a bum, a con artist, who knows what. I can tell you that having a career worst drawdown of only that amount is pretty remarkable. It probably is a sign that I don't trade aggressively enough. Yet had I been managing money and someone had signed on right at the top, they would have had a 19% drawdown at one point. At the time it happened it felt pretty bad, it was quite a bit of money.
 
Of course it is rough if you just placed money with someone, and you find yourself down almost 50% as some of those with Paulson have experienced. However, you used bad timing placing the money. It is your fault on some level. These folks make the big money on incentive fees, so they do not take losses intentionally just to piss you off.  When redemption requests hit, they further hurt the returns, because the funds have to liquidate good positions to raise the money to refund it, cutting off big winners in the process.
 
The moral of the story is, I hate to see this happen to anyone, and I feel for the people who are being hurt. However, this is part of the risk you take in trading. Some trades just don't work. What else can I say?  Sometimes you lose.
 
With that off my chest, time to get to work. We have had a spectacular rally off that trap low. It does not really matter, if it was and is the PPT, short covering, or something else. The fact of the matter is price rules. We are now close to the weekly sell resistance area of 1198 I have determined should be a place to look for sell signals. I have no idea at this point whether or not we hold there, then go back down, or just blow through. We never know that when a retracement in a trend is taking place, whether the trend is changing or just setting up a continuation trade. For me the first look is always with the trend until it changes. Therefore, it should be sells up above 1200 or so until we blow decisively through there.
 

Here is the weekly chart with a few things labeled. First, the 1198 area which is where my band for selling comes in. The way it looks right now if we consider the strong seasonal and cyclical influences that should be coming into play this month,  is that we should be looking to buy dips that come if any do. The trend is still down even though we have had a moonshot here the last several days. I am hesitant to get too aggressively long until the trend reverses back to the upside. In a situation like this it probably means I won't get in as close to the low as I was hoping to.  That is really more ego than anything else. The easiest trades to do are the first pullbacks after a trend change occurs. At times the market turns on a dime called a V top or bottom, and we don't get a first pullback. That is ok by me, I play the probabilities for the best trades, and guess what, I miss some! I am more worried about what happens with the ones I take than the ones I miss even though it does tick me off at times when I miss certain things.

The other thing worth mentioning here is that the POIV may have had an exhaustion move when it went way below the similar levels it had before and prior got nowhwere near as low. This can be argued either way, it could be telling us we are still coming back down as well.

So in summary, I am not long yet, but am looking to get that way on a pullback assuming other trend change items are in place when a pullback occurs. Since we have had no pullback at all now, and the weekly trend is still down, I am looking to short this not buy it at the moment. However, I don't see a trade in either direction at the moment.

I have been talking about Sugar recently, and here is that trade. It is doing ok so far, but it has not moved much, so could still wind up being lousy. This market is to me setup for a rally on the weekly chart very well from sentiment, to trend, to commercial buying to open interest, seasonals, cycles etcc. This does not mean it will work but it does mean it is a market I need to be looking for buy signals in. There is one possibility that we have to consider. The monster stock rally is pushing up everything else and bonds and the dollar down. If the stock rally fizzles, many of the commodity moves might also do so. This is what stops are for. They allow us to park dumb opinions like that on the sidelines and trade the fundamentals we study.

You can see I did something here that I do at times depending on how I feel about the trade, I added up to my full position on a pullback. Why did I do that? It was my judgement that we had been in a pretty good down trend, and even though we had a pretty clear trend line that broke, I felt that the strength of the trend was such that it would retrace a little no matter what. It did but not much. I had the order to add 20 ticks under the original stop entry, so I barely got filled. I suppose it was lucky, but who is to say, we don't know how the trade will turn out. It still could be that I will wish I had not done it if we go back down.

The life of a trader is rarely a contented one. You have to just stay true to what you know to do, and live with what happens. Most of the time I enter all in and all out at the same price, this was a bit unusual for me.

Good Trading

SOMETHING I FOUND INTERESTING

The most significant factor about this immediate convenient “magic rally” of about 90 points off the 1074.77 low is that 70% of the rally came in the last 50 min on Tues [44 points], +8 points in the last 35 min on Wed, and about +11 points in the last 35 min today. It certainly looks as if the PPT was involved in pushing this rally, because the last thing the Obama gang needs right now is a significant market collapse, which would seal the deal for making him a one term President.

This is a quote from Kevin Haggerty out of the trading markets website commentary he posted last week. He is one of my early in my career mentors, and the person who first made me aware of the PPT and what they do. This goes back many years, way before even the Bush Administration. I am not picking on Barry for this, it did not start under his watch, and he utilizes this tool just like any other president in the past would in this situation. I did mention the other day that the huge reversal was suspect because of when it happened, but I was not completely sure simply because it also occurred at an obvious reversal zone. Kevin understands what they do better than anyone, for reasons I will not get into here. Simply stated, he does not allege this, he knows it happens and how they do it.

This brings us to a broader question. If in fact this was them, which is hard to dispute based on that 3 day scenario, which I really had not been aware of, can they reverse this whole thing down here? I have stated in general that the PPT needs a couple of conditions in place to reverse market slides. The first and foremost requirement, is low volume. Just the shear dollars required to reverse a 200 point down day is in the billions. We know they seem to have endless money, via the printing option they have. However, the public seems to be growing weary of money printing finally. Further, the balance sheet of the FED at this point is massive. Adding hundreds of billions in futures positions to it is probably not a prudent move by them at this point. In spite of the publics growing contempt, they have shown no inclination to pay any attention to that whatsoever. As a result, net net, they are going to do what they do regardless of what we think. If you have not figured that out yet, you should wake up.

The rumor has been that they "house" these trades and positions at Goldman and JP Morgan. I have no proof of that whatsoever. I have just been told this by someone. It does seem to make sense to me if you just watch the nefarious relationship the government seems to have with these two firms. It really does not matter, and unfortunately as we trade we can do nothing about these interventions. I am not sure that they do anything other than make short trades choppier. When the big volume selling hits, you can often see their attempts fail time after time. They are obvious most of the time when they show up.

One thing they can do, which is more effective than these late day buy programs they launch where they catch everyone sleeping, then cause a ton of short covering into the closes, is the QE stuff. This is a broad based approach that keeps a bid under the market. Let's just theorize for a moment that they decide to do something like this in the next couple of weeks. We know as Kevin states, that politically, Barry is DOA if the stock market really tanks here. We also know that the manipulators are well aware of this also. Therefore, if I were them, this is a great spot to launch a large "lift the market" attempt again. We are at the time of the year where at the end of this month the market typically makes a low. We are also at a time in the Presidential Cycle kicks in during year 3. They have plenty of cover here to commit the crime. Of course it is really not determined if in fact it is one or not, that is a tongue in cheek comment.

Where I think the PPT makes mistakes is when they do their buy programs. I think if they had a trader advising them, they could launch them at times that would be a bit less suspicious than the last 30 to 60 minutes every day. Nonetheless, we have them operating, and in this case I think they are going to come in handy. Let's revisit the mystery chart once again here. I know it might be aggravating to not know exactly what this is. My apologies for that but I have to keep some things to myself. This is someone else's idea, and I do not feel it is right to freely expose it. The next two charts are just the same thing going back in time to show how this continues to be incredibly "dead on balls accurate."

Look at how incredibly accurate this has called the swings. I have come across many things over the years that had a "look back" feature that were as promising as this, that turned out to be a bust. The difference with this is that these turns are projected one year in advance. The red line is activity forwarded 52 bars. This turn date here this past week was known 1 year ago!

The above chart shows this back another several years, again showing incredible accuracy. I think at this point we have to give this some credibility. I did find one miss, the 95 rally. We know years ending in 5 have rallied every time in history, so I think that was one we could have reasonably ignored this and gone long. It caught the 87 top and bottom, just overall this is quite a tool. It says we rally out of here now and when that is combined with the PPT showing increased interest now, the Presidential Cycle being here, the fall low point basically here, we need to buy dips here.

If we go by this model it tells us to hold the longs into the beginning of March.

Get your buy plan ready, the next dip should be our entry spot, lets hope it is a big one.



IS THE LOW IN?

Here I have mapped out two possible scenarios of what might unfold in the SP 500. There was a question in a thread about whether I think the low is in or not. First I want to apologize, these charts appear on my end to be fuzzy. I am having a heck of a time trying to upload charts to Blogger the last 2 days. Today I emailed them to myself in a different format, then went to my notebook and uploaded them from there, then logged back in on the main computer to finish this off. I seem to get past the Blogger block doing that, but what a pain in the ass. Also, the image quality appears to have degraded. I am putting this in the Geek Squads hand amongst a few other things over the weekend. I paid for a one year software support when I bought my new machine, so I guess that is going to wind up being money well spent after all. I am sure I could figure this out but it is not a good use of time.

I think we have to keep in mind that we are in a trading range, and we had a false breakout to one side of it, and now we are back in the middle of the range. In a trading range you want to trade on the edges not in the middle, sell at the top and buy at the bottom. The main reason I am bullish about a low being near is that there have been so many times I have tried to outsmart big picture cycles only to have them prove to be correct, that I am done with that exercise.

We know that the government manipulates price around this time of the year with interest rates for political reasons, and this has been going on for a very long time. The only thing I could see that is possibly different this year, is that rates are so low already, that it seems that lowering them further may or may not have any effect. However, I don't like to get caught up in all that second guessing. The cycle is here and I am honoring it. Perhaps I am wrong, but I have a plan now to look for buy signals in the next couple of weeks. Also my shorter term indicators are now no longer in the sell zones, they are neutral. They need to rise some, then pull back for an entry to be confirmed. Although I will not always show all of what I look at, I will post in a timely fashion when I think the buy signal is here. It appears to be at least a week away right now.

It certainly is possible that the trap reversal at the low of a few days ago is the low and we will test that only and not violate it as our buy entry. Of course we could also take it out. I really have no idea, I just am going based on the cycles, that we should make a low in a couple of weeks. I think I would prefer it to be a higher low because that would indicate more strength, but it really does not matter. I guess that is a lousy answer but it is an honest one. I think on average the low occurs between the 20th and the end of the month, so that gives a general time window.

Recently someone mentioned they wanted mistakes covered, which I do discuss in here. The above trade was a really stupid move by yours truly that I got away with. It is almost unfortunate to get away with mistakes because it can reinforce a bad habit. This is the Wheat market, one that I was looking for a buy signal in. The reasons for the buy were mostly based on my short term indicators so let's not get too tied up in that aspect of this. You can see where I went long, right above the high of the inside bar with a down close. I know that these are good setup bars to enter trades, and I let that cloud the rest of my judgement.

Markets typically bottom making higher short term lows to the right of the actual low. At times like March of 2009, they make V bottoms and just take off. You will notice that low was an inside bar with a down close the day following the actual low itself. I have seen enough of these over the years to be aware that big moves can launch from them. However, here is the mistake that I made. If we look at this market, it is in a very pronounced down trend, along with the whole complex it is in as well as all of the commodities markets in general. You could have argued that as well in March of 2009 in the stock market. But life is a judgement call, and at that time the market was so incredibly over sold that to me that was a different situation.

As I was looking at a profitable trade after the first day and during the night session following that day where it rose more, I realized that I really needed to see more bottoming action that what had taken place and that I was being too aggressive with this entry. The minute I realized that I went to the market and exited the trade. I made 6 cents per contract, so $300 per. Now we see the wisdom in that decision as the market has moved back down. This was really a stupid trade that I never should have done. Fortunately for me I realized the error in time and got out without getting whacked. Now I am looking again for a long entry if we start moving back up.

This was the same logic I used for the Sugar trade in not going in lower earlier in the week. Although we can never find anything that works every time, in general I want to see some time of confirmation that a trend has changed, as opposed to just buying something as it plummets trying to pick a low because some oscillator tells me I should be buying. The stops are more well defined doing this also which allows me to clearly identify risk.

The moral of the story here, be patient, then when things are right, be impatient. I was impatient before things were right. Also, when you realize you have made a mistake, get out immediately. You can always get back in. Once you are flat you can re group and determine what to do next. Holding on hoping that a mistake will pay off is not a good strategy in my opinion.

Here is the Dollar Index, which I had been mentioning I was looking for a decline in. You can see it is moving down slowly. I have not shorted this market yet. What I am looking for now is a high test of some type to give me a pattern to quantify risk and move ahead. This is moving inversely to stocks, so the stock market will determine the fate of this trade, as well as just about everything else.

Have a nice weekend

ROADS, BRIDGES AND SCHOOLS

Blogger is not allowing me to upload any charts so far today ( I did get one by them somehow ), check back in later. These types of things normally resolve themselves.

The point of today's post is based on something I read last night, an article written by Michael Lewis

www.vanityfair.com/business/features/2011/11/michael-lewis-201111

about what has led us all to this bad economic place we are in. As I listened to the push for building new roads, bridges and schools the following thought occurred to me. I bet most people do not understand what is actually the biggest problem with doing this. The reason most people don't understand what I am about to explain, is that they have not worked in sectors of the economy where they came into contact with this problem.

Certified Payroll/Prevailing Wage

From a political standpoint it strikes me as very odd that the conservatives do not bring this up. Why don't they just say, "we will sign the bill with one asterisk, remove the mandate that union workers be used." Allow the money that is going to be spent to be competitively bid. If union based contractors can fairly win the sub contracts then so be it. However, since in many cases the wages are double, it is doubtful that would happen. I have nothing against union workers per se other than I don't think they should by payed double what non union workers what do the same job for, just because they have political leverage. This is where the whole union scenario has gone south. It has gone from a noble idea that workers need to be protected, to extortion.

The reality is whatever jobs would be created by this bill, if there were any, would certainly be larger if the wages to pay the people were half the amount wouldn't you think? Wouldn't we be able to help more people and get more done? Of course. Mandating in public works projects that unions be used means we get about half the bang for the buck. It is nothing more than a payoff to constituents. Now I am sure there must be some other payoff on the other side as to why they do not point this out. I am calling Congressman Issa's office today to ask this exact question. However, I bet most people do not realize that these contracts are mandated to be this and as a result we dramatically over pay to get them done just to appease unions.

 At some point, and we are obviously well beyond that point now, this type of stuff has to stop. I am very worried about where all this is going, and I am glad that it does not effect trading too much. The end of all of this is not going to be pretty. Greece has come ashore now so be careful and be safe. I hope this will all remain non-violent, but I doubt it will. Read the above article about what has happened to that one California city, this is going to happen elsewhere. This is no longer an issue of political sides, both sides know this can't go on anymore now and biting the bullet is not the american way. As we can we with the prospect of doing so on the horizon, those who are effected are getting very angry. Anyone who thought this would not happen here, ought to wake up. I don't feel sorry for those who have to "give in" and approach what most of us already have on our hands, providing for our own retirements.

Here is the updated Sugar chart ( the one I got past Blogger today ) with another day having elapsed. As you can see what I am looking for is a down close bar. I have no idea if one will occur today or not. If one does, I do like the long above it's high for tomorrow. There is one clear fly in the ointment here and I am not completely clear on what to make of it, the COT Synthetic. This is heavily in the sell zone on a decline which is unusual.

What it should mean is that we are going lower here. However, I have not studied this enough to be able to make a definitive conclusion. By the general rule I have established with this of take the last signal, that would negate this trade since the last signal is clearly sell. This requires some more review by me before tomorrow to make a final decision. Maybe we won't close down which takes me off the hook anyway.

I also wanted to post a chart of the Yen, which appears to be setup for a sell to me if we break down from this area. It does not appear this will happen today at press time here.

Also I had been talking about shorting the interest rate markets and those did provide entries a couple of days ago for those looking to make those trades. The indexes are still a mess, we just had the false trap breakout of the lows and quick reversal, and are now back in the middle of the trading range. Ironically, had I kept all of my shorts and trailed stops I would have been taken out of all the trades at the same place I exited them Friday.

It does appear to be now that price is speaking pretty loudly. I think we buy the dip now for a good ride up that should last several months. When you have something not going "where it should" it tells us to look the other direction. We had the recipe for a big waterfall and have not gotten it. We have the presidential cycle still out there telling us we should close up for the year, so time to get long give or take a week or two here.

It does appear the sell the VIX parameters are not going to be hit unless we happen to free fall Friday after the NFP report, since we are rallying nicely here. However, we can see that things can change quickly from day to day so we never know what tomorrow will bring.

I just tried for about the 30th time to load the other charts and it is just a non starter today unfortunately.

I guess I strayed off the non political discourse path I promised not to go down, but is it Bloggers fault for not allowing me to get any charts through today. It has indeed been a teachable moment for me, I have learned to blame others just like he does when he teaches us.

Peace Out

SOCIAL RETURN

Here is a trade I pointed out yesterday, Sugar. You could certainly justify being long this market as of this morning. I have not gone in yet mostly because I noticed we were trading right up into a trend line. You never have everything it seems, but I don't like buying in downtrends into trend lines even though at times they just blow right through them and I miss the moves. What I would ideally like to see here is a down close tomorrow, then a Friday penetration of Thursday's high. That would likely put the entry above the trend line. At times I am too picky and at others I am glad that I am so we will just have to see what winds up playing out here. It is probably the prudent play to have already gone long today, then if what I diagrammed plays out you would either add to your long or if you were stopped out just take a second entry.

One of my early mentors told me that trading is nothing but a series of probes, and that you just have to put yourself in position to "get lucky." As with all mentors, the older you get the more the things they told you ring true. When you are young you think you know it all and dismiss words of wisdom with a lark.

I heard this morning we should rebuild all the roads and schools because we can borrow the money so cheaply and there is a good social return. Huh? Really, has that what this has come down to? We know we are going bankrupt so we focus on a feel good approach while we crash instead of a fix? In the midst of this wonderful world full of many great people, there are sure some ding bats in important places. If you have been reading here long you know I predicted the Greece type of protests were coming here at some point and we are on the verge of that now. I wish I had been wrong. However, this does not mean the stock market cannot rally. It is going to start a rally pretty soon. Maybe it will rally enough where we can give the free loaders what they are angrily demanding, and also lower taxes like the other side is demanding ( not as vociferously ), because things have improved so much. Time will tell.

Normally after a classic late day save like yesterday, I would be pounding on the PPT. Although it is likely to have been them especially due to the timing of it being close to when the Imperial leader was talking, there is one thing that gives me pause to accuse them again. I texted a friend yesterday who emailed me about the Dow getting ready to crash and I told him this was a good spot for a snap back.

The reason I thought that is we had just taken out the low from a couple of months back, and that was an obvious trap spot in my mind. Since we often see reversals in the normal course of business when we are in a trading range environment like this, when we hit the extremes, it could have been a normal market reaction and not manipulation by the the PPT. I feel the most important characteristic of manipulations that make them easy to spot is that they come out of the blue at times when none of the normal market situations are at hand for buy programs. I think many of the normal buy program parameters were in place yesterday, so I am not sure if this was the PPT or not. On the surface it appeared to be, but I am not sure a booth review would uphold that call on the field.

In light of those comments, I think that reversal is going to be short lived and we will drift back down some over the next couple of weeks, where our buy spot will develop.

A couple of other miscellaneous items to point out. For those looking for dividend plays, I suggest Annaly Mortgage ( NLY ). At yesterday's close the yield was 16% due to the price dropping. This has been a good spot to park money over the last few years, and I will probably park some there when I think this low is at hand. Also, the sell the VIX trade is there at Fridays close if we stay down under DOW 10750 on a closing basis. This is a zone type of trade, there is no magic in selling it right at the close. A Dow close at that level will trigger the setup to be in play. How you buy or sell things is always an individual decision.

I am not sure if I provide any Social Return here but I am pretty sure I am providing Financial returns for readers. In summary, I am expecting us to drift a bit lower again here over the next couple of weeks, then it could be off to the races on the up side.

Aye Carumba!