STAY THE COURSE

For the most part all we really have to do is study this chart to determine which way we want to trade. As we saw once again over the last two days, when stocks rally everything else comes along. Of course the crazy uncle Natural Gas is the exception, and to some degree the grains have also been. For what it is worth, and I stated this last week also, this is one of the toughest trading environments in history. You have to stay the course during times like this. I would suggest not getting discouraged. You can go home one day with a monster profit and have it completely wiped out overnight due to a huge stock index move that influences everything else. It can happen in either direction. I cannot tell you when this will return to normal, but my gut tells me not any time soon.

What is causing this is market manipulation by governments, and they are above the law so there is nothing that is going to stop this. They are afraid to allow a downside washout for fear of the wide spread harm they perceive it will cause. Whether or not they realize behind closed doors they have caused this whole thing or not does not really matter. We are where we are, and they do not want to be the ones that presided of the great epic meltdown that could occur if they back away. Unfortunately, what they are doing to combat the fallout is more of what caused it. It is hard for me to see how in the end we are not ultimately going to where we need to go to clean out all of this leverage. However for now, "Leverage for everyone!"

I love the comments by Alan Bubblespan the man who got this whole thing really rolling. This guy should play Carl Spackler in the next Caddyshack, he blew our whole golf course apart with his policies inflating bubble after bubble. So what this leaves us with is a market that "should" rally to the seasonality and cyclical influences. However, the economic back drop is awful, so we are getting this horrible day to day chop. One thing to keep in mind, corporate profits are screaming due to the Feds interest rate policies, so all is not lost.

The chart above shows that we are still in my weekly sell zone for the SP 500. All this tells me is that we are still in a weekly downtrend, nothing more. You can see at the recent lows we had buy signals based on COT activity. I think COT data in the stock indexes is completely and totally worthless so it should be ignored. Let's just stick with the trend, which is still down. As to whether or not we will have a meltdown here, I doubt it. The setup was there the other day for one to happen and it immediately rallied like crazy after the one big down day. This tells us there is a decent bid under this market. I still think in general dips are buys, but if I get sell signals up here in this sell zone, I will take them.

This tells us that this should be about the same thing for most other markets. However, that is not necessarily the case. Let's look at a few here.

Here we have the world's favorite market, GOLD. This market "shockingly" resembles the SP 500 also, what doesn't?  As I noted on the chart, I have had some conflicting information here. During the sharp drop recently we went right down to a very long term trend line, which held. I pointed it out at that time. I said things are ok if this holds, and also indicated if it did not the game was over for a decade here. It held. However, what had also happened at the time that down move was occurring was, we had a trend change via my bands. There are some rules for that, but in a bland state, if focuses on gaps with the bands. Not all gaps are trend changes, but all trend changes have gaps like what we had where I have the black arrow. What this whole thing told me was to buy the levels where the trend line held, then look for sells when we reached the upper red band. We just reached it.

This market is a sell now in my world. However, Silver and Copper are so much weaker, that is where I will likely do my selling here. As per usual, this is not a sell at the market situation. It is a market setup for a decline. We could have a couple weeks before daily trades come along here, but I REALLY like this one. The reason for that is that we saw on the recent decline what is going to happen when the bottom does fall out of this market. It will be a decline for the ages, and one to get rich on for those who can catch it correctly. There is hundreds of millions if not billions of scared money on the long side of these markets. When the tide turns, the exits are going to get crowded incredibly fast.  Cycles tell us January is the time here, but that is one tool only, there is also a seasonal top due in a couple of weeks, so maybe that will be our kick starter here. You can see Sentiment is high again here so if we are lucky, in the next two weeks that will continue to climb, which will better set this up.

Here is Crude Oil again, a market that has exploded higher in the last couple of weeks. This is why you cannot enter at the market based on weekly setups. This weekly setup is still in place as it has been for a few weeks. We how see Sentiment even more bullish, which is bearish. There is nothing more that I can say that I have not here, this is a very good sell setup. Obviously, RB has been the weakest, with HO in the middle. Sells if they are done would be best served in RB. I have a triple divergence in one of my short term indicators right now for Crude, which does not happen too often. These normally spot very big moves, but there is not a sell signal on the daily chart in sight yet. This is more a market to watch for an entry, but there is not one here yet.

Part of doing this and showing live trades is paying the piper when one does not work out too well. The Aussie dollar short I did last week was one such trade. It became a ONE DAY WONDER. I really wish I was smart enough to always know in advance when a trade would give me a huge one day gain, then completely reverse the very next day. Of course when the stock market rallies 500 points, being short in most things is not going to work out too well.

This is a trade I showed live, it had everything I could ever want in a trade except one thing, I nice profit! We had significant POIV divergence indicating down. We had a really clean trend line for price that broke. We had a large range bar down on the day it broke. Normally in an instance like this I would carry my stop above the high of that large range bar, and let the price wiggle around. In this case since the trade had moved so much in my favor, I felt that stop point was too far away. As a result, I moved my stop to where I was in, and got picked off Friday. This was a judgement call, and this market could very well just go back down. However, if stocks stay strong, this market is not going to decline independently of that. All of the stimulus that is going on to keep the bubbles in the world inflated is going to continue to keep pressure on the dollar, hence currencies will hold up.

I still have short term things here saying to sell so I may be back into a short again here in a couple of days, you just never know. This market did stay weaker than the others, validating that I did choose the correct currency to short. However, in the end the trade was no good, so it does not really matter. You can certainly take profits when you get a big day like that, but you will never catch a large move if you get in the habit of doing that.

In summary, here is what I am looking for. My short term tools still are not bullish for stocks yet, so I am looking for sells in the indexes. This is not an at the market situation, it never is for me. I think Gold is in a spot for a decline, and think shorts should be looked at in Silver or Copper. I want to apologize for one inaccurate answer to a question last week. The Cattle market was setup as a sell on the weekly chart and I recall telling someone who asked that it was not. My apologies for that mistake. Rallies are sells in the Cattle market the way I see it. I am also still bullish on Bonds but have not been able to find a way into the long side of that market yet.

That is it for today

Good Trading

ONE DAY WONDERS

I have pointed out days that have huge one day moves and you can see that with all but one of them, the one day was it. This is what I call One Day Wonders. Any time we take a trade we all want the market to just move huge in our favor immediately. I would argue that is exactly what we don't want. As you can see here, virtually all of these trades wound up scratches or at the very least you had to sit through a lot of crap before they wound up working out. We don't want the market to move so far one day that it immediately becomes overbought or oversold. If that happens we often get the painful retracements.

It seems to be more of a phenomenon of against the trend than it is with it. The logic is the you get these moves that start and all the scared money panics and exits their positions that are with the trend. This accelerates the intra day move into the close. Cooler heads prevail overnight and the huge move gets consolidated or reversed a good portion of the time. We do seem to be seeing a lot more of this now than we used to. It seems to me that the large funds with the brain power they have, index all their trading off the S & P 500. When it starts to decline they sell everything, when it starts to rally they are all in buying. 

The question becomes, how do we handle these types of days? If you get in the habit of being a jack rabbit and just taking profits quickly on these days you will get a good feeling initially. You can take good profits for hours of work. However, I can assure you that you will never ever catch even a medium sized move if you get in the habit of doing that. The big move and the one day wonder are going to look the same at press time. The fourth arrow is one such instance. You got a big initial move down, that almost immediately retraced it's full move. However, look at what followed. Those are the types of moves you want to catch. My argument would be that you should live with getting a lot of scratches trying to get these larger ones and just accept that one day wonders happen. However, if you just want to always look to hit singles, take the money.

We had what appears to be a one day wonder at the moment the other day in many markets, the currencies, stocks, etc.. We are now retracing that move back up and for all I know we will just take off. However, if we happen to take out the lows of the one day wonder day, we could have a very big down move on our hands, somewhat like that Crude Oil move on the chart above. For me it is worth keeping my stops back in case that happens and being willing to scratch my trades if we just keep rising. Some of my short term indicators are pretty weak here, so they would confirm price if it happened to go back down again. I don't really have an opinion as to whether we just take off again or move down more, I just have no idea. What I do know is that my indicators show weakness that supports the move if it starts going down. They do not support it rising yet. I also know that they are not always right.

I also have something I do not recall ever seeing before. There is a triple negative divergence on both the daily and intra day tick charts in Crude Oil right here at the same time with one of my proprietary indicators. This is extremely rare and should in theory mean a large move down is about to happen in that market. As with it is with any divergence, if price continues up this can work itself off, but it is there at the moment.

The chart below is just showing the possible one day wonder in the SP 500 from the other day.

Here is a market I have been talking about recently, Bonds. I suppose this all depends on whether the one day wonder in the SP 500 turns out to be one or not. However, this is a market that is setup bullishly for the most part. As per our topic of late, divergence with POIV is not there in the traditional sense, but it is lagging the price quite a bit. I have labeled prior more traditional POIV divergences which you can see have signaled nice moves recently here.

YA I know you are struggling with this issue of divergence so I would suggest not worrying about it. It is one of many tools I use, and is not the grail. It is one little thing I point out occasionally. I think you are trying to look at one bar and when that bar moves and POIV does not as much you think that is a divergence. For me it has to just be obvious on the chart. You cannot force anything in trading. If you have to think too long about whether something is or is not something you are looking for, it generally is not and you should wait or move on. I suppose a really aggressive trader could buy Bonds today on an upward breakout, but I am not going to. I am however looking for a buy signal here.

The divergence I have marked at the high is not a traditional one in that price did not make a new high, but it was close and POIV was a lot weaker. That type of thing is also acceptable to me. You just have to understand that there is no magic to any one thing. There is no holy grail in trading. It is all about making decisions based on the tools you have at hand. I may use the same tools completely differently than someone else does.

Good Trading

POT POURRI

I never know as I do posts each day here who is reading or what exactly the levels of experience are. I think in general it is likely I have more beginning level types of readers. I am going to go over a few things today that might be rudimentary, but they have come up in questions over the last couple of days.

Entries

Stop Placement

Entries

For the most part I enter trades above or below prior days highs or lows. The only real exception is when I am trying to limit my way into something after it has already traded through my entry price. I would do this either because the initial stop was too big, or because I am trying to add on to something I am already in.

I have studied entry patterns for bars til the cows come home, and for the life of me I have never found anything that really has a significant edge. Many are 45 to 55% accurate, so essentially not much better than a flip of the coin. I guess for me why I enter above highs and below lows is that it gives me tangible stop loss points which enables me to dial in my risk precisely. Controlling risk is my number one priority far beyond anything else. I know as long as I only lose 2% or less when I am wrong, that I really have to have a streak far worse than anything I have ever experienced to get blown out.

I have studied inside bars, outside bars, small range bars overall, volatility breakouts. they are all the same. There is no definitive edge in any of these and don't let anyone tell you otherwise. In the case of the Aussie dollar entry I showed yesterday, it was below the low of the inside bar from the prior day. I knew I could stop it on the other side of that bar and have a tight risk parameter. It also was going to be breaking below a flat ledge in price if you look at that chart, which often leads to larger moves. None of these things are absolutes. It is simply a way of quantifying risk tying it into what I felt was a bearish overall setup for currencies and bullish the DX. 

You can also use basic trend lines and come up with your own rules as to how to qualify them. I have no magic here but I think that is valid. The reason I think that is at times they have obvious price containment points and when we break free of them we are off to the races. Some of my best trades come from this basic type of entry.

I am not doing a complete dissertation on this here, that would be for a book someday. The point here is that when I show entries, this is generally how I am getting into them.

STOP PLACEMENT

Here is another topic that there is no magic to. I would say that in general when I enter on one side of a bars range, the stop is usually on the other side of that range initially. As a trade moves in my favor I like to have targets and trailing stops. I like to keep the trailing stops above or below pivot points or on the other side of large ranges. The basic thinking there is that I know I am wrong if those spots are taken out. Beginning traders, and I did this also at the beginning, keep the stops way too close because they are too afraid of losing money. The harsh reality is that if you have $10,000 or less you probably should not be trading and should wait until you get 15 or 20k. It is not impossible, but the odds are strongly against you if you have too small of an amount. It is just not enough to allow you to do the right things. If you arbitrarily impose your own limitations of risk on markets that are billions of dollars, you cannot expect to have them honored. The markets don't care if we are afraid of losing and as a result have our stops in the wrong place.

The lion share of price action is random, so you have to realize that and not put stops just in the middle of nowhere, they will get picked off over and over again. To me I would rather lose a few grand giving something the chance to make me a lot more than that, than get picked off on a break even stop and feel good that I was saved. Are you trying to make money or trying not to lose. If you are trying not to lose you need to change your game plan. You will lose whether or not you want to, so why not also give yourself a chance at big wins?

This chart above shows all of the concepts I talked about today.  This is a trade I made recently that I told people about in advance, and this is exactly how I traded it. I had just a basic trend line down that came in right above the small range bar. I liked that because it allowed a lot of contracts just buying above the high of that bar and stopping it below the low of that bar. You could argue that the stop was too close, but I do not agree. This is all about just probing to catch moves. If I had been stopped out who cares? It is just one trade. I think I made close to 50k on this trade adding all my accounts together that I took this trade in, so that shows how powerful trailing stops and giving the markets room can be.

As the market took off we had several large range bars and I just moved the stop up underneath those bars until it hit my target where I had a limit order resting to exit. Obviously not all trades work out like this. Often when you get these big bars you consolidate within them for a day or two, then take off again. In this case had you had some arbitrary intra bar stop I doubt you would have been picked off, so you would have gotten away with doing the wrong thing. However, if you just look at charts you will not see that many moves that don't have at least a few wiggles in them. You could have just continued to trail the stop up in this trade and made quite a bit more than I did once you got picked off.

That is how I do it for better or worse. As to the overall market, we are at an interesting juncture here. We are just under the 200 day moving average here so it is still possible we could turn back down here. Yesterday's event driven decline is just another one of these events that reflect overall how the world economy is really doing. It remains to be seen if the attempt by the worlds governments to keep the bubble inflated will work. Bigger picture I don't think it will, but in the near term I think they will be able to artificially hold things up for a while.

This is a very difficult trading environment so do not be too hard on yourself if you are having trouble with it. It is a tug of war between harsh economic reality, and governments trying to manipulate that reality. I read something yesterday that said "the Italian Bond market can't be allowed to trade this way." I did not realize it was up to someone to decide what to allow markets to do and what not to do.

It is a zany world we live in right now.

Good Trading

WHEN IN ROME PART DEUX

Yesterday I went through my logic as to why I exited some shorts, and also why I felt it was correct to break the rules in that case. The one comment I did not make which I should have was, "you can always get back in." As we all know the world is full of annoying cliches, many of which aren't worth the ink they are printed with. This one for me is worth quite a bit. Part of how I trade unfortunately has a ton of discretion in it. I do have basic setups and I am very disciplined about waiting for them to show up. Once they do show up, how to get into the trades themselves from the setups is where all the judgements come in.

I used to just sit and wait for what I thought was perfect, and missed a bunch of things along the way. The world is not perfect, and if you wait for perfection you won't often find it. The flip side to that is that you can't just swing at anything, you will surely get wiped out doing that. What that leaves is a whole bunch of middle ground. That middle ground is where our evil human tendencies can bite us. It was my feeling coming into this week, that I felt the world was a sell signal. I saw sells everywhere I looked and said as much in my commentary. The trick was to try and whittle it down some since almost every market looked the same to me, and I am not comfortable risking too much in what is essentially the same trade. I am more than comfortable having 5 positions on in different things all with a 2% risk. I am completely uncomfortable having 5 positions on with 2% risk, when all of the setups look the same. That is basically a 10% risk on the same thing. This is what I warned people about doing.

I wound up choosing a couple of markets to play in and pared my bets so that overall the total risk was about 3% between all of them. If you are just starting off, it is impossible to have your risk that low because you probably do not have a large enough account balance to ever make a trade. I covered all of that in a prior post, so I am not going to get back into that again. Once you have a large enough account to do some damage, 6 figures or more, that is where these risk parameters come into play. Once you get into a trade with all the diligence done, your risk in place etc.., and something goes wrong, you have a couple of choices to make.

First, and also most of the time, you just place your stops and let things play out. The second thing I do sometimes is assess what is happening just in general. At times, and it is not often, but this week was one of them, I was able to determine that my entries were no good and I needed to bail out and regroup. I went through all of this yesterday. What I said above that was not included in the commentary, was that once you exit something if you are not sure about the trade, is that you can always get back in. Once you are flat, the emotions go away, and you get a more objective look at things. It is at that point that you will be able to see what you might have missed, or at times if you got out incorrectly. Once you have made that assessment you can always get back in. One thing you do not want to get into doing, and I have made this mistake before but not in recent years, is jumping in and out and in and out of the same trade. I think a rule of just one re-entry and no more is a good general parameter. You do not want to get carried away going in and out and feeding the brokerage firms for no reason. Be disciplined with this and make sure it is based on market logic and not emotion. The chart below shows an example of market logic in the EURO not emotion.

I was short here where indicated above and exited quickly as I explained in my prior commentary, the middle exit point. Had I held that trade I would have likely been stopped out at the other exit spot yesterday. The reason for that is that yesterday confirmed a higher short term low than the previous one, meaning the short term market structure had turned back up. As a result, my stop had I still been in, would have been at the other exit point, hence a much bigger loss than the little one I took. This is an example of market logic, highs and lows, making the call for me and not emotion. Now I am back in again, so that is that. The market structure has gotten me back in, not emotion. You could certainly argue that moving the stop down like that was too close and you might be right, maybe I just blew this whole thing. However, that is the logic I used and overall it works for me. Once again you get here what I really do, not marketing about how great I am etc.. Sometimes I make lousy decisions just like everyone else, so maybe this was one of them. However, it is behind me now, the logic as to why I did it is here.

In this case my judgement was that the sell setup especially in the currencies, was still there. I had just jumped the gun a bit on the initial entry, or maybe I didn't. Maybe I blew the stop? Maybe the trade just required 2 entries? Maybe I should have just waited for the second one only?  I say who cares, that type of thinking is small and you need to learn to get past it. Trading is about trying to find opportunities and just taking your shots when you find them. In any event, there was no reason why I should not have sell orders in last night again in whichever one I picked. I decided to pick the Aussie Dollar. I chose it because of the POIV divergence, and also the nice tight ledge it had. It also had a small stop which allowed more contracts than going back into the EURO again. However, it really is basically the same trade. The EURO will move more per contract, yet I have more contracts in the Aussie. The Aussie was also leading the weakness last night and filled first. I really see the Canadian Dollar overall as the weakest, yet it went through it's entry last overnight. Sometimes we can only over figure this stuff so much, and then it becomes counter productive.

It looks like today we have another one of these European driven declines. I still think this dip if it is one of more than a day, is a buy spot for stocks not a panic we are falling off a cliff again scenario. As we saw in the Ohio vote last night, the trend toward bankrupting the country to extend entitlements, and keep inflating the debt bubble to pay them, is alive and well. I say swing away! They may think they are getting over, but those of us who can think our way through things will find a way to profit handsomely when they bring us all down with their selfishness and greed. Just like Gorden Gekko said, "Greed is good." Too bad they don't have state futures, Ohio might be a great short sale right here! 

I still am trying to understand why a lifeguard can work 5 years and be payed a guaranteed pension of 100k for the rest of his life? Who knew they made 100k in the first place? Go figure.

Good Trading

IF IT'S TRUE FOR ROME IT'S TRUE FOR TRADING

There is a saying when in Rome do as the Romans do. I think the equivalent in trading is when you are wrong get out. Although I have been longer term bullish as I have probably nauseated people with in here over the last month, I have also been short term bearish, thinking we had one more dip before the lift off. I felt there were just sell setups galore and stated as much over the weekend. Well there is a funny thing about trading, it is not a home for BS. Price speaks very loudly, and when you are wrong, you are just wrong. You can't blame Congress, you can't blame W and you can't blame a fart on your dogs. You take the hit directly in the nose.

I listened to my own advice about being aware of the world being one trade. As I wrote down all of the possible short opps for Monday, I was very uncomfortable with how they all looked almost exactly like the SP 500. As a result, I not only pared the list way down, I took very small size on top of that. This was just my gut telling me something was really wrong. I don't ever remember a day when so many things seemed so perfect, yet they also all looked identical. We know the minute we start waving to the crowd to celebrate our great calls, we are headed for trouble.

I entered the Euro initially reasoning that it had been weaker than the indexes. What bothered me about the trade in all honesty was that it took an overnight dip in the ES to move the Euro down low enough to hit my sell orders. The minute of course the ES bounced, so did the EURO. I did not initially take a trade in the ES. It bounced so far my gut told me it was a trap at the low. However, when we drifted back down to where the entry was, I decided to take the trade with 1/3 of the normal size I trade. Something inside was just telling me this was a bad trade, but I wanted to have at least something on in case it rolled over. While all of this was happening I was watching RB fly higher, which seemed odd because it had been by far the weakest market of all the correlated ones coming into Monday.  Also, I had been trying to short the Canucker as well, and that market which had been very weak had not triggered it's sell entry. At that point we now had RB and the Canadian dollar, the two weakest markets, except Natural Gas, holding up very well. This was a sign of trouble to me. 

Once I saw all of this, I decided to keep the ES and EURO trades on a very short leash. Any sign of strength and POOF I was going to be gone. Sure enough that strength developed and I was gone. Net net, I kept my overall loss to just slightly over 1%. It has not kept down the embarrassment of being this wrong, but as I have said, that is what goes with the territory if you are honest. Sometimes you are just wrong, I admit it, get out, and live to fight another day.

The one thing you must always do is preserve capital in this business. What I have noticed with my own trades and I am sure it rings true for many of you. The good ones just go immediately in my favor and do not look back. I have shown several such trades in here recently. I do not mind missing a trade occasionally by using the caddyshack logic above, if it winds up ultimately going in my original direction. At times this happens. What I never will allow to happen, is a huge draw down by being too stubborn about a stance on something. Keep in mind that I have been of the view that GOLD is a huge bubble, and I have been dead wrong about that up to this point. Yet, I have made money trading Gold on the long side. Do not get too stuck in your views on things. This is a business for thinking, so think on your feet.

Readers may also say, "well what a hypocrite, he says to honor stops and not to watch markets intraday, then goes into this long story about how he did exactly the opposite." This would be a valid point. My response is the following rule of trading.

FOLLOW THE RULES WITHOUT QUESTION BUT KNOW WHEN TO BREAK THE RULES

Obviously knowing when the break the rules is the $64,000 question isn't it? This is really not so hard in my view. There are times when I have an incredible comfort in the trades I am looking at and the ones I am in. There are other times like yesterday, when I am completely uncomfortable with them. The trick here is understanding what is causing the lack of comfort. If it is just raw fear of losing money, that would not be a reason to break the rules. If it is just a lack of confidence due to some current or prior period of bad results, that is also not a reason to break them. The reason has to be a market driven reason. In the above logic I discussed, all of that was completely based on price action which was defying what should have been happening for me to have been right. There was not lack of confidence, or fear. I have been in a huge positive equity run, so there was no baggage there either. Those actions were strictly driven out of observing what was happening and deciding it was not consistent with what should have been happening.

I have to admit much of this comes with experience and perhaps I should not put things like this in here. However, the purpose of this blog is to have essentially an interactive inner monologue. I discuss what I do and why I do it for better or worse. I also want people to understand that trading is not a linear business. There is not just a perfectly straight line you can follow to be guaranteed of riches. It is a thinking man's ( woman's ) endeavor. If you choose a black box approach these types of decisions should not be part of the equation, you should just take the trades as they get spit out over and over. I have chosen the discretionary route, so I take the good with the bad.

I do have one last market that I have orders in for a short today, the Canadian Dollar. This market is lagging again, and if by some chance we were to have some type of equity retracement, this market is one of those that should lead to the down side. I doubt the trade will fill today but you just never know.

That is it for today, time for me to get eat my crow. We are on the verge here of no mas short sales. If we move up and out of here for a few more days, the long side is the only game in town for awhile.

Good Trading

NEXT WEEK

Today will also serve as Monday's post. I am showing what I am looking at this coming week, one that could be action packed. The above chart is that of the SP 500 with a lot of noise on it. I would suggest ignoring everything on it except the bands where I have the arrows. Many of the COT tools are ineffective with the stock indexes, which is something I have covered here in the past. I just have this template that I look at all markets with, and I did not feel like deleting all of the items I use elsewhere just to post this one chart here. One thing to point out that is very surprising, is how ineffective Sentiment is with this market. There have been several instances of very high readings that have not resulted in even minor little declines. That is highly unusual, most other markets you can almost bet the farm on fading Sentiment.

The simplest tool that there is to use in trading is trend. All of us get caught up in all types of fancy "indicators" to help us beat the trend. Sometimes I wonder if just looking at price bars and nothing else but my bands, might be the best way to trade. However, I have pretty good success doing it with some fancy tools, so I am not going to rock the boat. In this case you can see we are right into the red band, which indicates sell in a downtrend. That is why I am looking to the short side this coming week. There is not one other single reason for that view. What my tools are telling me is that we will have something like what I have labeled in the middle of the chart. In that instance we had a 3 to 4 week decline, followed by a big rally.

As much as I throw in commentary all the time about ancillary things, which I do consider at times in trades, the basic issue is always where is the trend, and how do I get in sync with it. I often try to trade against a short term trend in deference to a longer term trend in the opposite direction. The thinking there is that I am getting good location in the trade, and that the larger trend should drive a bigger move. This is why many entries I make like many you have seen recently in here, are against the short term trend that is in place at the time. This is one of those instances.

It is my view, not my opinion, that the trend is still down and this is a selling opportunity. The one point I need to make is that it is my "opinion" that we are going to rally into the end of the year and beyond. That is based on cyclical analysis. However, when it comes to actual trading, I use the tools I have to make my decisions. Most people would wonder why if I am bullish would I be looking to short this market. That is the best answer I can give. I trade where my tools and not my opinion lead me. If we do happen to keep moving up the trend obviously would change, and then my technical view and opinion would be in sync. Ironically I have not found that when my technical view and my opinion match, that the results are any better than when they do not. I just consider opinions, both my own and others, to be of no value at all. The other thing which I always say is, I could be wrong here. I would love to be able to tell you I never lose in a trade, but that would be a lie. Maybe this trade triggers and the market reverses back up and I lose. That would not surprise me here or ever. That is what stops are for, limiting risk when I am wrong. One outcome I never allow to happen is to lose money or an opportunity to have made some, by allowing my opinion to over ride my technical tools.

How many "expert" opinions have you heard in your life that were dead wrong? I trade off my tools period, and they are telling me to look for short entries this coming week in many markets, starting with the indexes. I will want to see some short term weakness to confirm entries, I do not enter at the market as I have stated many times in here.

Here is Crude Oil, and the picture here has not changed one bit. This is about as good of a sell setup on a fundamental basis, as I can have. It is my feeling now that Heating Oil is the weakest near term, so that is where I am looking for shorts. You could certainly argue that Unleaded Gas is weaker, and just by price bars alone it is. However, some of my proprietary indicators are showing more short term weakness than RB is so that is why HO looks the best to me. I think it is valid when you have a complex like this to trade the weakest even if the setup is in a different individual market. In general they move together, although we have seen that strange spread trading between RB and Crude recently.

Of course since the world is one trade, the currencies are also sell setups here. The above is the Swiss which has been the weakest of the bunch. Take your pick here. The one word of caution is that with these tight market correlations you have to keep in mind that they are basically all the same trade. If you trade multiple markets in the same direction, you are basically just taking one trade with multiple times the risk. I suggest taking your total risk dollars, then divide them into the individual risks for each market. Just make sure the total dollars across all the markets don't exceed that number. It is highly unlikely a short would work in any of these, if the stock market takes off again.

The Bond market rally I called for has started, so look for buys there. Overall, I am looking for short term sell signals in most places coming into this week.

Good Trading

FRIDAY PLAN

My commentary market to market is not any different than what it was for Thursday except for one change. I know see sell setups in a few places that could be there for next week if Friday is not too big of an up day. With the NFP report coming out, and likely to be a better one than other recent ones, I expect an up market Friday.

However, by some of the proprietary things I use, if we happen to by chance go down big, there are many stock sell setups that are there for the taking. I will have some orders in just in case, but I do not anticipate them being filled. A big part of trading is having a plan so that you know what you will do in the event certain things happen. It is not always about predicting what will happen accurately.

My plan is to sell weakness if we break down today, otherwise stay flat and look to next week for the setups that seem to be in the offing. Due to the huge range yesterday in the indexes, I will not sell below those lows if they are broken and will wait for a bounce.

GOOD TRADING

LET THE GAME COME TO YOU

As much as other aspects of life can have a negative effect on trading, one aspect of my personality that I have from other things, helps me a great deal at certain times. Here I am on the heels of several very good months of trading results, and chomping at the bit to really roll. However, I find myself at a juncture where the setups I look for are not there anywhere as today starts. I don't know if the discipline I have is from wrestling or I had it first and it is why I was so successful in that sport. Either way, I do have it, and it tells me to be patient and wait here until my setups come along. I may miss a good move here, but there is nothing more aggravating to me than to review an old trade that lost money and say out loud "what is the world was I doing there?" Anyone else ever experience that? I bet so.

I have mentioned that some of my short term things I use to actually enter trades, are at times not shown here to protect myself. In this instance, those things are not flashing strongly in either direction. I still consider this to be a weekly down trend now, and this move up to be a retracement. From a broader perspective, the cycles and seasonals overall tell us to look for a continued rally. As a result, things are somewhat in conflict for me. I do not like pushing things when this type of conflict is in place. The title of the post is an annoying sports cliche that one dumb ass, excuse me, businessman, throws out over and over. However, the deeper meaning of that is be patient and that is very good advice. I always wondered in the NBA exactly how long you can wait for the game to come to you, isn't there a 24 second clock? I guess you can wait for 23 seconds? I love the NBA don't get me wrong, but some of the interviews I could do without. In trading we have to wait a bit longer than that.

I have mapped out what I think my short term indicators are telling me is the likely path we are going to follow. This can change from day to day, and it is based on me having a general feel for how these work in relation to price action. This is by no means at all etched in stone. It will change as each bar rolls out. If this path is correct it would mean the next short term trade will be a sell signal, that would take us into the end of the month, which would then setup a buy signal. Maybe we just blast out of here and the short term things I am watching that appear to be setting up are invalidated? I have no idea I just call things as I see them roll out. I do not have a short term signal in either direction here so I am flat.

So it goes with stocks, so it goes with most other things. It appears to me that many other markets are setup for the next trade being a sell signal as well. Many of the charts look the same as that of the ES above. The next on is the Canadian Dollar, one I really want to short if we bounce a bit more.

What I really like most about this one is it's relative weakness compared to the ES chart at the top. It has been weaker, and there is a strong seasonal bias down here coming due. This is one I really want to come to me. The energy complex is also the same story as well as many others. There is no doubt that on a intra day basis, the European situation is moving the markets. We cannot do anything about this. However, I maintain that all news events are already in indicators when you study past patterns. In other words if you have patterns that you use that you have studied back for years, there were also news events going on at other points in time. If you patterns worked well then, trust them now. Do not make the mistake of over riding a trade because you think some news event will make your tools not work. If you think that, your tools are no good and you need to get rid of them and find something else. Some trades just lose. You don't want to get into the Kramer style of decision making.

What I mean by that is that haphazard arbitrary emotional judgement game. Yes you have to make judgements, but they should be based on your tools and how they work, not some arbitrary opinion about a company's CEO, or whether or not China jewelry demand will drive up gold prices.

MF GLOBAL

I think this situation bears covering. This is one of the dangers we just in reality cannot always do much about. If an individual or group of them are going to perpetuate this type of what appears at the moment to be a massive fraud, we are not going to have any advance knowledge. I do track the credit ratings and status of my brokerage firms to try and stay in front of this type of thing. However, PFG which is one of those firms, just issued a statement in regards to this event assuring clients that they do not engage in any of the types of things MF did, and that they are if full compliance, well funded, etc.. I have every reason to believe this is true. However, one of the golden boys at MF made a similar statement about 3 weeks ago. We all know the BS that exists in the corporate world, so a statement of reassurance is not that comforting. In my little world the minute someone says something like that I tend to move my money immediately. There have been numerous instances in my life, one in particular that come to mind. 

Many many years ago I was working for a textile company that was privately owned. The owners son had left a voice mail one afternoon denying the rumors that had been circulating the prior few days about a sale of the company. He vehemently denied that anything was going on. The very next morning the same guy announced the sale. This was not even a half a day. The last thing anyone wants is a mass exodus when a sale is being negotiated. As a result statements like that one above are often alerts to a problem. In this case though, with the climate we are living in, a firm making a statement like that is probably the prudent thing to do. I would have made it a bit differently, emphasizing more that they do not engage in heavy trading which is what bought MF down. It was mentioned, but more as a throw in. I would have made the whole statement about that.

In any event, what I do is split my money up some in case something really bad happens. That way two unrelated firms have to POOF for me to get really screwed. If we truly have another crisis coming, that still could happen, but the odds are reduced.

Best wishes to those who are in a tight spot due to this as I know some of my readers are based on emails. The SIPC should cover some of this, but don't quote me on that I am not sure. Tomorrow we of course get our favorite report, NFP. Based on the way they work these numbers, I am expecting to see a slight improvement. Make no mistake I think the reality is things have worsened and the report will be doctored. I am just telling you what my guess is that the report will show.

I happened to catch a question before I went to press here about my Cattle trade and the entry.

I had mentioned that this market was setup based on bigger picture things, one of which is the seasonal which you can see on the chart. The most recent COT signal was a sell which was still in effect, but nothing had developed in the way of an entry until we got that first move down then the small little rally. On the day of the outside bar which is green, I had contemplated entering that day, but decided to wait based on one thing that is not shown and won't be. It was just a read on a private indicator I have, no holy grail. I reasoned that if it just crashed I could try to catch it on a bounce and still get a good entry price. This was a good decision since the outside bar day traveled the full range twice, and would have stopped me out had I done that trade. Waiting until the next day got me in on a small bounce, then it just went my way right from there. When determining where to put the limit on the bounce, I took a very small one because I knew I wanted to be in and did not want to get too cute with it. In reality I probably should have taken the first entry and not risked missing the trade, but in this case it worked out to wait like I did. This will not always be true.

I hope this answers the question.

Good Trading

TEACHABLE MOMENT?

I guess I am bored so I resort to my old tactics of picking on that obnoxious pinhead, hence the title of the post. This is tongue in cheek because I do not consider myself so all knowing that I am in any position to talk down to people or teach anything. However, I have had a few hall of fame seasons, so at least I have some experience in what I talk to people about unlike you know who. The above chart is that of Unleaded Gas, a trade I decided not to do, and I will go into why. 

First of all, I had been talking about the energy sector as a spot where I thought a possible decline was coming. Although Crude Oil has been by far the weakest of these on a weekly basis, on a daily basis Unleaded Gas has been the weakest. I did take one short trade in this market and I went through how I got into and out of that. It was a bad trade that I was able to get out of making a little bit of money. As I was looking at this setup, the logic I used to save myself on the first try was on the top of my mind, POIV. When we made the first probe down, POIV did not confirm this and in fact it was making new short term highs while price was declining. This is bullish not bearish. As this setup approached, I noticed this condition was still in place.

I looked and their was a good trend line that could be drawn in, and the stop was a tad over 3k a contract, all within what I like to see. The seasonal was also going strongly down, so this should have been a good trade to take. One thing that has been going on here which I have mentioned, is the spread trading between this market and Crude Oil. It is very pronounced and is making for very erratic correlations or lack thereof, in this sector. This is another red flag. So, in summary, there was what I consider to be a good market setup for a decline here, and we did get one, albeit intraday. However, I passed on the trade due to the divergence that was so prominent in the POIV indicator. 

Please understand that POIV is no panacea. There are times when it gives an indication that is incorrect just like any other indicator does. The key to all of this is knowing when and how to put things together, that is the art of this business. Repetitions is how you get there, plain and simple. At press time this market is trading above where the short entry would have been. It is yet to be determined how wise passing on this trade was. However, I definitely avoided some aggravation as this has taken back a pretty big profit that would have been there at one point had the trade been done. I really want things to just go once I get in them, not chop around and give me gray hairs. You just have to work work work with your tools, then have some live action, to best learn how to do this on the fly. I would love to tell you it can all be done mechanically, I used to trade that way. However, mechanical systems just do not work anymore in my opinion. As a result it takes us back to really on good ole us to make the calls.

Another trade I covered recently where I went through my logic as to why I got out where I did and threw myself upon the court to determine if I was a pinhead or a genius, was Live Cattle.

I am not sure why in the world I do posts like the one I did the other day in a free forum to potentially make myself look so bad if I get things wrong. Fortunately for me I get them right like this enough that the victories far outweigh the blunders. Make no mistake though, the blunders seem to weigh more heavily on me than the wins. I think that is because I probably lose readers when I get one thing wrong in spite of what else I get right. Most people surf to find the holy grail, not a grass roots nuts and bolts grind it out guy like me. They don't want someone telling them it is hard work, and sometimes you lose, so they move on to the next spot.

When I went through why I exited the Cattle trade, I told everyone that it was over and I was moving on. That was true. I just happened to notice as I was scrolling all the charts last night for possible trades today, that Cattle had a limit up move yesterday. Whether it was a limit move up or whether it had continued down, the mind set needs to be the same. This was a trade I made a good profit on, and it was over. Whether or not it would have gone on to have made more or less had I stayed with it is irrelevant. That is the point I am trying to get across here. Cut em loose inside once you cut em loose outside.

I do have to confess however, that it does make me feel a little better seeing what a great judgement call I made here and it reinforces how I approach trading. Confidence is such an important element of trading, and you can gain it by sequences like what I just described in these two markets. If you are a systems trader and trade mechanically these types of thoughts should not be part of your life, but it is funny how they turn out to be. The one fallacy with mechanical systems trading is this. You still have to   click the mouse, there is still a human element. If for whatever reason you are not confident in your system you will have a hard time executing the trades. I know I have been there. When I had my trading service and had people, many of them friends, executing all the trades I called out every day, there was a lot of pressure. 

I have always felt worse about others losing money on trades than about myself. The best rationalization was that I was in all the trades also, and with more contracts, so I lost more than any subscriber when a trade did not work. There were times when after either a long winning streak or a streak of a couple of losses where I found myself hesitating on the trades. This is the part of this business that is so difficult. However, if it were easy everyone would do it and make millions of dollars. There are haves and have nots in this just like anything else. You don't need a psychologist or a book to read to deal with this. You just have to suck it up, just like you do with any other adversity you face in life. I was a pretty accomplished wrestler in high school and the one thing my coach always gave me credit for was that I wrestled from behind better than anyone else he had ever seen. In other words when I was down I was never out. Keep in mind my senior year I rarely lost, only 3 times the whole year, and all 3 of those very early in the year, but I was behind at times in many of the matches and came back to win. 

Hang in there and keep fighting. This above logic I covered in these two trades is part of fighting. You have to learn to be patient, make decisions, observe what is going on, and live with what happens. There is always another trade, so make your best judgements like I attempted to do with the two trades above, then move on to fight another day.

I don't see much to do today so I am messing around with the tick charts doing some day trading. We are getting a good sized pullback in the indexes. I am not sure at this point if this is a buy or sell on a rally. Once I decide you will be the first to know, of course after me!

Good Trading

I GUESS SOME CALLS ARE BETTER THAN OTHERS

I had no idea we would fall out of bed today ( Monday ) when I said over the weekend that the Euro was a sell right here. However, I did say it and it crashed 300 points today, so obviously this call was not half bad. I was not short so it does not matter. As I have said time and time again, predictions are for cocktail parties not account balances. In any event it was a pretty good market call and it is simply proof that when you look at larger picture fundamentals that is when you get on the correct side of the bigger moves. I suggest people spend more time on setups and less on the wiggles in the oscillators, they are more important. If you get the bigger picture correct you can almost enter in any fashion you want and still do well.

I did also say I thought since we had advanced 20% in the indexes, that a pullback would happen because it was not sustainable. I appear to have gotten that right, but I blew the call at the low missing the huge up move, so overall a C -  on the stock market or worse. It does appear to me now that my short term indicators could very well setup a sell signal on a bounce up now and high re-test. Since there is somewhat of a cyclical tendency to go down into a late November buy point, I will be looking for this sell signal to develop. It is not there yet and I am not short the indexes at this point. Overall though I do think the market is going to close the year higher than where we are right now by a decent amount. Maybe that means any sells are short term or maybe no good. The political stakes have never been higher, and there is no way they let this thing fall off a cliff to end this year.

One comment on the European situation which I know is out there in the press now, that absolutely irks me. The big banks have once again been saved by the governments by the terminology is the agreement indicating the 50% bond hits are voluntary therefore not defaults and not subject to default insurance. When in the world are they ever going to establish a level playing field and quit picking winners and losers? The answer is going to be when the meddling they do creates a massive implosion that makes the last one look small. I don't know when, but I do know what. It seems in life the rules are there but if you are special, they don't apply to you. The other problem is what it takes to be special, but that is another subject entirely.

One trade I was in that I exited today probably poorly, was Live Cattle.

I am going to work through my logic of why I exited here where I did, and admit it was actually a mistake. I had mentioned this recently along with Hogs as two markets that I thought were due for a decline, which we got. The Hogs went down ahead of and more than the Cattle market. However, these two do trade quite differently at times, so I really don't consider them to be the same. We had four consecutive down closes here with a lot of overlap on the bars each day. I did a pattern search for that and found that on average this type of occurrence tended to be a short term low more so than a continued decline. I also noticed that we were heading now into a seasonal low point, and also that we were very close to a short term target I had been looking at.

I had not decided whether or not to take the near target or shoot for a bigger one coming into today. When I saw the overnight implosion in the indexes which we know drive the world right now, I thought it would likely cause a gap down opening in this market which does not have a Sunday electronic session. Since my near term target would be hit if we gapped down and traded just a little bit lower, and the pattern history showed a tendency for a bounce, I watched the open, and exited a bit below it. At times gaps can be the end of a move, an exhaustion so to speak, and this trade was just not moving a lot.

At the moment it appears to have been a blunder, but I still made a good profit on the trade and finished off last month adding another $16k to my total, so it was not a disaster. Time will tell if this was a prudent exit or not, my gut is that I should have held this for a bigger target. However, the trade is over, my logic is now exposed for me to be revealed as a pinhead or a genius, so it is time to move on. I really can't stress enough that you cannot get hung up on individual trades be they wins or losses. It will eat you up. You have to examine the trades, what you did right and wrong, and what if anything you can learn from it. After you have done that you have to look forward, so that is what I am doing.

I mentioned the bullish Bond setup was still in place, and right on cue they rise 3 full points today. I did not see a short term long entry there so I am not long that market. The path of the stock market retracement here will dictate what so many other markets do. It appears to me that towards the end of this week from a cycle stand point, we should be in the sell zone for quite a few markets. It so happens the Government Fraud report otherwise known as NFP is released Friday. Perhaps that will be a trigger for a few declines. I do find the spreading going on between Crude and Unleaded Gas to be interesting here. I cannot remember a time when it has been this pronounced. Corn and Wheat are also starting to look interesting to me on the short side but not yet.

At the moment I am flat and do not see any new trades for tomorrow as I write this.

Good Trading