IS THE BIG ONE COMING?

First of all, I would like to thank readers for the nice comments, I guess I am a poor man's Dick Vermeil when it comes to my dogs. Also I got a call from someone, 314 area code, that I could not make out the name or a return number. If you are reading this, thank you and my apologies for not being able to call you back.

I took a day away from the markets yesterday and played in a Pro Am golf tournament with my teacher. I was hesitant to do this since I have not been playing well and I did not want him to feel bad. He is an excellent instructor. I wound up beating him by 5 strokes and played reasonably well hitting 15/18 greens. The other two players thought I was a pro also and were surprised when I insisted that I was not and never had been one. My instructor had a tremendous warm up session as we shared a slot at the range hitting 5 shots at a time then letting the other guy hit 5 etc.. His shot pattern was so tight, his worst and best shots were not more that 10 yards across from right to left. Of course my spread was about 80 yards, hitting the ball all over the place. However, a funny thing happened once we got on the course, which is the lead in to today's post.

I am a very long hitter of the golf ball, always have been going back to my beginning days. There is just something about distance on a golf course that changes how others around you play. I actually drove the ball poorly yesterday, not nearly the distance I normally do because I was not fully releasing being afraid of a left miss which is my nemesis. As a result I hit a lot of high cuts that found the fairway, yet being shorter than where I would typically hit the ball. However, even with that in mind, many drives were still well over 300 yds. I think what happened to my instructor who is a decent length driver of the ball himself but not as long as me, is he starting pressing a bit. I know a fair bit about a golf swing, and I noticed some lower body movement with him on the golf course that I did not see on the range. I did mention it to him once we started talking about him hitting the ball poorly. I think he felt the pressure to just be the best in all phases when playing with us, and he can't hit the ball as far as I do, so he started over swinging a bit and got a bit off.

He is a very good player, and I look forward to playing with him again soon. There is no doubt that he is better than I am, although I doubt he has more talent, he is just much more refined and experienced than I am.  I have seen this happen many times over the years when I have played with people and cranked out a few long drives. After that people seem to start hitting their drivers poorly trying to keep up. This is the lead in to today's topic. 

STICK TO YOUR OWN GAME

We sat down for lunch afterwards, and the topic of the markets came up like it always does. One of the guys in the group worked for a company that puts together pools of money and directs it into hedge funds, so he had some knowledge of the markets. He was of the opinion that a huge decline was coming in stock prices, but was not sure when. In situations like this I always have to be aware to stick to my game. Most regular people are not as nimble as short term traders are. They want to make a decision and stick with it for a long time, they are in or out. As a result, if you tell an average investor to get out the big one is coming, and you are wrong, you have really done some damage to him. He will not be nimble enough to go back in once the market starts moving, thinking he missed the low and it will come back. I do know people that are still waiting to get back in on the long side, having missed the 09 low. Ironically it is now time to get out, yet they are looking at getting back in.

I am also of the opinion that the big one is coming, but I do not know when. I have stated many times in here the reason I think a huge decline is going to happen again. I feel that market manipulation on the scale of what we have seen in the last couple of years, sets the stage for the inevitable reversion move. This move will be much larger than it otherwise would have been. The bubbles we have seen happen over and over in different places, are the result of manipulations of market prices. It becomes a blase argument that we should let natural market forces take things to where they should go. It is another matter for us as human beings to stand idly by and watch the world crumble in the near term while the equilibrium is being established. The temptation is just too great for those who have the power to manipulate things, to pass on it. As a result they don't pass on it, and we get bubbles. You cold certainly argue that we have bubbles in stocks, gold and bonds right here.

In the above chart we can clearly see from a COT perspective, we have the makings of a major top. We have a huge Small Spec long position combined with a substantial commercial net short position. This means we have a setup for a decline. There is absolutely no way of knowing if it is a small one or a large one. I think it is a fruitless exercise to go back and find huge tops and bottoms, and think about how much money you would have made had you held the positions for a long time. The fact of the matter is it is very difficult to hold positions for months at a time, especially when you have large open profits. We see so many violent swings in prices, it is hard to be confident enough that your whole huge gain won't turn into a loss.

I like the setup here for the down side, and I will be looking to short rallies in most markets on the next bounces. My golf instructor is a bit worried bigger picture about his retirement portfolio and asked me what he should do. What I am going to recommend to him is index annuities. These products protect against the down side, and let you participate in the up side albeit on a less than full basis. People may have to do some work to find these, and I am sure money managers don't sell these for the most part because of the nature of what they are. The only problem I see with this is if we have a huge meltdown, the re-insurance aspect of these products may be bankrupt and therefore the obligation could be defaulted on. I am not a money manager so I could be wrong about that. In any event, it is about the best way I can think of to protect yourself. I don't think putting the money in bonds or gold is going to be a good idea. The bond yields are too low, and Gold will go down with the ship.

Good Trading

A TIME TO REMEMBER

Our battle together to fight his disease ended Friday, and my beloved Zeus has now moved on to what I hope is a good place. I know at times readers probably just tune out when I do things like this and that is understandable. We are all strangers that just meet here to share our common interest of trading, and this is not part of that. I will be taking a few days off from trading and posting in here so you may want to check back in mid week, this is hitting me hard. We rescued him at the beginning of 2010 along with a female, who were both from a breeder who had lost his home to foreclosure and had to place all of his dogs.

When we first brought him home we could not even get him to come in the house, he was so afraid of strangers. He had so many extra layers of skin he could barely see, and he had significant joint problems. We had a couple of eye surgeries done and got him to the point where his eye sight was perfect, and all those layers of skin were gone. We also had some joint surgeries on him that got him to a point where he should have been good to go for a normal life span. This were looking great for him and I was so happy to see him living such a good life. Once he came to trust us he became the happiest dog I have ever been around. I can only assume his shyness was the result of a bad home. The breeder had sold him and he had been returned to him, we did not get all the details. I did not care, once I adopt these wonderful animals it is completely on me to make sure I do everything I can to make their lives the best they could ever imagine having.

Zeus never came to fully trust strangers, and that was fine with me, he loved us like no dog we have ever had. When we got the diagnosis that he had bone cancer I was just devastated. We have had dogs with this before, and it is a terrible disease that takes them away pretty quickly. We tried everything and it only bought him a little more time.

We have had a really large number of difficult things like this happen during the last year, and it has been incredibly taxing on me. It has effected my trading as well as other parts of my life. If it had not I would be ashamed of myself. My wife told our vet afterwards that she was still glad to have had him, and so was I. We all see news stories about things like this where people fight and just never really have a fair chance in life. I do think it is incumbent upon those of us who can help others to do so, even if it is simply volunteering time if you cannot afford to donate any money. There are so many scams, if you choose to do anything do it with some local group not a national one. A huge portion of donations to national charities actually go to fund pensions of their executives, and this is not the case on a local basis. I think with the Humane society less than a dollar out of every $20 you donate, actually goes to animals, which sickens me.

I am going to have to take a little bit of a break from what we do in this area, just to try and recover some. I will get back in the saddle again. I am not sure that time heals all wounds, what time does do is allow perspective to deal with them correctly.

Zeus never saw his fourth birthday and that is simply not fair. There is a kid at my country club that is 14. He has a great demeanor, is very polite, and just a model child. However, there is one thing about him that is very different, he is bald. The reason he is bald is due to all the treatments he is getting for Leukemia. He has been through an incredible amount of difficult procedures, and you would just never know it. He reminds me of Zeus, and I can only hope that on some level I am the quality of living soul that they are.

I owe it to him to give him this tribute in my small little forum here. 

ZEUS I LOVE YOU AND YOU WILL ALWAYS BE WITH ME

It does appear to me with the markets we are heading down now and the cyclical down pressure has taken hold. There are some exceptions, but for the most part we need to look at shorting opportunities now.

I apologize to readers for recent posts, they just have not been of the quality I would prefer due to the stress this fight for his life was putting on me. I pledge to return back to betters levels of discussions.

Good luck this week

CAN THEY BACK THEIR WAY INTO 7?

Can they devise a new scheme of yet another different way of calculating the number to manipulate the head line number under 8%? As a betting man , I think I would bet my life on it. If they have to exclude 50 Million people out of work on some technicality, they will back their way into something in the 7's by the election. To think that these folks are concocting this grand scheme to change our way of life to socialism, makes me ashamed to be an American. I just can't believe what politics have come to in this country. They are creating false moves in the stock market, lying about every single thing that matters at all, just to win an election. Now they are pitting social classes against each other trying to create class warfare. The President talks more like Jalen Rose a famous former hoopster who was known for his smack talking, than he does like a leader. The problem with smack talk is that it does piss off the opponents. Maybe a revolt is coming in this country? It just seems hard to believe that all the great hard working honest people that live in this great country will allow this to go on much longer. I will just state one more thing and then move on. If this jack off gets 4 more and institutes the class warfare structure he wants to, I will move out of the US assuming I can afford to. I heard a liberal pundit the other day on a talk show say that once you make more than 1 Million, the government should be able to take every penny beyond that, and give it to the people who work harder and deserve it more like waitresses and bartenders etc.. In his scheme if you make 10 million you get to keep 1 million and they take the other 9? I can tell you this, if he came to my property with that attitude he had better have his affairs in order before arriving. It is time to stop being nice to people like this, they want to ruin our lives PERIOD.

The markets continue to be very challenging. This has been the longest period of time in the last few years by far, that I have had few trading setups to enter trades recently. All I can tell readers is what I am doing and what I am not doing. First in reverse order, what I am not doing. I am not forcing trades. I am not running out and jumping from one method to another as my famous friend I talk about in here all the time is doing. The latest with him is using Advanced Get and some oscillator to trade Wave formations. Some "guy" in India is doing this he met that is doing well, and he is going to try that. As always, I hope it works for him. He is one of the best people I have ever met and has had great success in the business world. However, I told him that I would be more than happy to give him my views on this, but have no interest in using any of it. I just don't believe that if you are constantly changing methods you can ever hope to have any consistent success. I choose to try and find better ways of using what I already have. I want to be a master of one thing, not an apprentice of many. I remember a high school teacher in one of the rare times I was paying attention say, you can choose to know a little about a lot or a lot about a little. To me even at a young age the choice was obvious, a lot about a little.

As a result, I seek refining what I already use. I alluded to my college roomate who is the GM of the Indiana Pacers in a recent post. When I visited him on the way back from Chicago, I sat down with him at 1 am in the morning after their first playoff game and showed him my basic trade setups. He knows nothing about trading at all, he has a money manager handle his money. However, he is very bright and knows how to run a business. I thought it would be interesting to get another pair of eyes on my tools, to see if he could give me any insight into how I might be able to make some tweaks to what I am doing. What he said was very interesting. After showing him the three main things I look at, I showed him a dilemma I was having with one of them, the most important one. It always looks good after the fact, but at game time it is tough to read, very subjective. It is more subjective than I prefer, yet is the best tool I have ever had. The challenge is how to get more consistent with the reading of it, since it is the main cog of my method. 

He likened my method which has 3 components, to how he evaluates players and their ability to succeed in the NBA, which also happens to have 3 components. What was the most interesting is that he has one of the 3 as the one he gives the least weight, and uses it as a tie breaker. After listening to me explain my 3 tools, it was very clear to him that the one that I was having the most trouble reading consistently, should be the one given the least weight. Ironically, that is the one I give the most weight. This is the beauty of having some one with no biases look at what you are doing. It was very clear to him with no bias, that the most inconsistent tool should be given the most weight. I have been so biased towards it because of how well I have done with it, I just never thought of it that way. He did see why when I showed him lots of examples, why I like that particular tool, but he was troubled by how tough it was to read at the time the trades took place. In his world he has to be right most of the time on players, so he has to have a method to make decisions with, that will be consistent over time. Sound familiar?

On some levels I do think trading is just like any other business. People get hung up in how different it is, but I don't really agree. Yes it is incredibly challenging, but so is opening a restaurant. How about playing the PGA tour for a living? In any endeavor small percentages of people succeed and others do not. Trading is no different. Now that I have gone through rearranging my tools under a scheme of logic I put together with his hiearchy, I have removed the subjectivity from my setups. Now I can go back through prior periods and look at trades that were generated mechanically to see how they did. In one market I have done, it has not had a loss in 3 years, and in Gold it only had 2 losses in the last 3 years, with 18 wins. It will not generate as many trades as I am used to taking because it filters many things out. When you trade really subjectively, there is always a trade because you are winging it. It is very tough to be consistent doing that. I am kind of in between some discretion but mostly mechanical. This still keeps me in the middle but pushes me more toward mechanical. I cannot make this completely mechanical, because I can't code what the one pattern I see in one of the tools is. It is clear when it is there or not to me, but to a computer it misses them no matter how I try and describe it.

Moral of the story, don't chase your tail. Look to someone from the outside at times you might be surprised what they tell you.

Good Trading

HOW LONG CAN THIS LAST?

Here is a photo courtesy of Kira Brecht the Managing Editor of SFO magazine. She sent this to me after I met her in Chicago. This is what the pits used to look like "back in the day." One of the reasons why trading systems don't hold up over time can be seen in the above picture, things change. Look at the frenzy of action that is going on there. Today you can hear a pin drop at moments there it is so quiet. It logically follows that trading systems that worked back then are not going to work now. If you craft one to fit today's action it may not work tomorrow.

One thing I am sure of, we are never returning back to the days featured in the above photo. I heard an alarming stat last night on FOX business news. Of the last 59 weeks of revisions to weekly employment numbers, 58 have been to the upside.

58

Anyone care to venture what the odds are of that occurring in what should be a random series of events? This is another manipulation of the numbers by the government. Most of us who live in the real world with other business interests, know the spin about the recovery is complete BS. I was talking to a close friend of mine yesterday who works in a business that is as closely tied to day in day out economics as anything there is. He told me things have gotten eerily quiet for his company and "the government spin on the recovery is just that, there is no recovery." He went on further to say that he spoke with some of his vendors and they all told him they were experiencing the same thing.

The reason I am mentioning all of this is as follows. We see the trend toward all trading being electronic. I saw last week the lack of any locals to take the other side of trades making it really easy to move this market in a certain direction virtually un-opposed. We also see the about stats that essentially prove the government is altering data they report to us. We also have seen a lack of volume during the last 3 years worth of rally in the stock market, yet it keeps going up and up. This leads me to conclude that these types of trading conditions could persist for much longer than we think. We had all better figure out a way to trade these types of conditions.

History has told us that one thing that is constant is change. Typically when we get these quiet periods they are followed by volatile periods which are then followed by quite periods etc.. This is a natural flow that occurs in everything in life. That flow occurs until someone starts manipulating it. We are all guilty of trying to control our future due to the fear of the unknown. Unfortunately for most of us, we simply do not have the power to manipulate those things we try to. We are seeing that there are those that do have the power to do it over periods of time.

From a systems development stand point you have to do is layer things that cover certain time periods, and weed them out if they start to under perform. It is amazing how certain patterns in things that worked for decades, stopped working in 2000. In the ES and Bonds, there have been some patterns that have continued to work, but not many.

I would suggest in your research, developing patterns or approaches for the data period up to 2000, then test them out of sample from 2000 to present. If you find something that works well, guard it with your life. Most of the things I had back in 2000, have not carried forward at all, and have completely blown up. There are things that have not, and that is where my research is taking me.

I have not spoken about the Bond system because there have not been any trades generated since the last one. So far it has generated 3 trades, 2 wins and a loss, with the loss being more than the 2 wins combined. This is typical of systems with high accuracy from my experience. You trade off the payout ratio to get high accuracy. It works because you don't take many losses. It remains to be seen if that will be the case here.

I have marked on this chart where I see a decent looking shorting opportunity. It is not part of the system, it is a discretionary trade.

Good Trading

SELL IN MAY AND GO AWAY?

These are the results if you shorted the S & P 500 Big Contract on the first trading day of may and exited on the 20th trading day of October every year since 1995. I chose the 20th day of October since I know that is the optimal time to go long for the year end rally that happens with such high probability. 

At first most people would look at the win % of 42% and kick this to the curb instantly, not me. For something to be right only 42% of the time and make this much money, there has to be something going on that is worth checking into. One thing I got out of the trip to Chicago that was completely unexpected, was a different view on systematic trading. Tim Rea the winner of the Robbins contest last year has a surprisingly low percentage of winners with his systems. I will not reveal what it is, but suffice it to say that it is not what most people would expect. I suspect this is why he does so well. He knows that over time the big wins overcome the small losses. He is one of the world's top traders, so I think that is a lesson we all can learn from. Perfection is what we all strive for, yet it is rarely attained. Further, the attainment of it is not necessary to trade profitably. The key to doing well trading is catching big moves. If all you do is scalp out little gains over and over, you just have so much pressure to have a very high winning percentage that ultimately you blow up.

There is a troll who surfs the internet who claims he has a 40% per year annual return doing what is basically arbitrage. He claims to be able to scalp and make that type of money. Of course he is looking for money so obviously he is not making any. Some liars just aren't very smart with their lies. I went back and forth with this clown through emails for about a week before kicking him to the curb. I finally realized he was just completely lying about everything. I suspected he was but thought it was worth checking out just in case. In that type of strategy you have to almost never lose because you make so little on the winners, that one loss wipes out a whole series of them in the equity column.

What we have above is a good dollars won to dollars lost ratio, which is a good start. To me that tells me this is something to look further into.

Skipping forward to wait until the first trading day of July to sell things look better. Our accuracy goes up quite a bit. However, notice the money made is much much less. What this tells us is that we probably are typically getting some choppy price action at the top and the rollover starts a bit later, about July. These statistics are not anything that you can trade with, they just give you a bias of where to look.

Here we are skipping forward to August, selling on the first day of that month. Our profits kick back up quite a bit here and  the profit factor jumps up as well. The next summary is very interesting to me, selling the first day of September.

This is surprising, but the numbers speak for themselves. It is a very poor strategy on average to look for large September swoons even though I think a lot of people have it in their mind that big drops have occurred at that time.

In summary, by the numbers, May, July, and August are the best times to exit the market or go short, with the idea of getting back on the long side in late October. Most people understand that you need a bit more to take a trade than just something as simple as this above example. However, this does give you an idea of when the big moves down have occurred on average. We know we need to catch the big ones, so it is time to look for the big ones to be down. Once we get to the fall, that view will do a 180 and we will begin to look up.

Simple enough.

I DID NOT MISS MUCH APPARENTLY

This is a shot from the mezzanine level of the CBOT last Friday. We were given our awards up there and then we turned and held them up and were cheered by the folks in the Eurodollar options pit. I took a picture with my Blackberry while we were standing there waiting for the awards. I also took a few others before getting spanked by the head of the exchange since they don't allow pictures! A few observations about the CBOT.

First, it was striking initially how many fewer people there are down there than there used to be before the electronic markets were introduced. It is relatively quiet most of the time down there other than frenzies right at the close. We caught a Trading Places type of close in the Soybeans that was hysterical. We were standing right next to the pit when the final 15 seconds came around. You could have heard a pin drop, until finally the one buyer gave up the edge and was bombarded with sell orders. Five just guys screaming right in his face. It was priceless.

Second, it is awesome to be down there with all the history that goes along with this place and what it represents. If by chance Chad or anyone else from Robbins happens to check in, thank for you a great experience. I enjoyed myself immensely.

Third, it is on the other hand sad in a way to see how this great bastion of capitalism has taken a hit. I wonder in 10 years if anyone will be down there filling orders at all? It was really interesting to be above in one of the conference rooms looking down after everyone had left at about 2 pm, and see all the little pieces of paper on the floor waiting for the clean up. It still reminded me of the good ole days down there. I never traded on the floor, but I am just referring to what it used to look like. Even the S&P pit was dead. It is certainly very easy to see how the Fed can manipulate a close now, by dropping in buy programs during these slow periods. The price has no choice but to zoom up, there is nobody there to take the other side. The guys might as well be looking at their nails to check their manicures out.

This elongated period of very light volume that started in 2009, is really bizarre when watching at home on the screen. It is even more eery watching it live. There was just nothing going on in many of the pits as we walked around.

I had a nice dinner with the other two contestants, and as I suspected, their styles were both completely different from each other and different from mine as well. This goes to show that there are many ways to skin the cat as I have always said. There is no "right" way to do this.

On the way back I stopped by Indiana to see my best friend from college Dave Morway who is the Gm of the Indiana Pacers. I went to a playoff game with he and his wife and kids. I can tell you this, going to a sporting event with the GM is a little better than going as a general admission fan! First, I did not need a ticket which was different. It is kind of like being President for a day. You go wherever you want, drink and eat way better than you normally would for free. You get complete access to the whole place form the locker room to the media area to you name it. I even got to go into the coach's office and talk some X's and O's with him after practice the day following the game. Just a great experience. I even got worked some by his staff whom he had obviously told that my award presentation was on Fox. They all told me they saw it. I had no way of knowing if it was BS or not. I was filmed live at the time, but I had no idea if it was on the air at that moment, or was going to be aired at a later time. As a result I was a sitting duck for getting worked on it, and they did work me a bit.

I will link to the footage and interview I had once I get the links. I think I did ok but I guess we will see once the footage comes out. I did not make any wise cracks, the mood was just not conducive to that. I had the privilege of being the only guy in the zip code who was not wearing a blue suit and a red tie, I guess I missed the memo. I don't wear suits and ties so they had to live with my standard attire upgraded slightly from flip flops to shoes etc.. The head of their security was one of the 4 FBI agents who captured Ted Kazinski, kinda cool.

The guy who won the contest Tim Rea is a complete systems trader to the point where the order entry is automated. He got me to thinking about getting more into developing more of those types of things again, which I am working on now. I am not a huge fan of systems, but they do take the stress down quite a bit assuming they work, a big assumption at times.

I think the stock market is going to make new highs now the way it appears. All of my sell signals are long gone. I am also looking at Heating Oil on the long side here. I am tired from the trip and crashing early. I will get more individual market commentary going again tomorrow. There is nothing that jumps off the screen at me tonight.

The Bond long was exited tonight on the open at 142'24 for a gain of 2/32's. No new signals there for tomorrow. This was a crappy trade in that we had to sit in it for a few days and be within one tick of a stop out at one point, before rallying to basically get a scratch. However, in systems all the trades are the same. This is no different than one that made 2k or lost $1600, and that is how you have to look at this.

Good Trading

Here I am back in Chicago gearing up for my gig on the floor of the Merc this afternoon. I am hoping to meet one of my favorite guys Rick Santelli. The folks hosting the gig know him well so if he is there and I get a chance to talk with him, I will relay his comments.

As it relates to the stock indexes, by the way I define short term trend, it is still down in spite of this lift off we are getting.

 

We did get an early notice of a possible trend change when the trend line broke here a couple of days ago. Sometimes these breaks can be false although generally they are pretty reliable. I would like to see a higher short term low now higher than the one 4 days ago for final confirmation of the trend changing to back up again. It certainly appears this is in the works.  Since I am in the "green room" waiting for an 11 am tip off here, I turned on CNBC for a twice a year check in. I do like Joe Kernan, I think he is a guy I would like to play a round of golf with. When they released the GDP numbers Bob Pisani made a very interesting comment. He said with the numbers the futures should have dropped quite a bit more, and the fact they did a quick 3 point dip and rally to new highs was QE3. 

In other words it is completely main stream now that the FED is manipulating the ES contract. It is mind boggling that this is so widely accepted. However, CNBC had a director from the CFTC on and they were discussing speculators manipulating the markets. They zeroed in on 10% as being a threshold that a speculator should not be able to exceed as a reasonable guideline for new regulations. This seems reasonable to me. Then Kernan asked why then the FED was allowed to own more than 10% of the treasuries and why they should have unlimited position size? He stated that it is basically we only resent people having large size and influencing markets, when they go in a direction counter to what we want.

This is the crux of the whole matter now isn't it?

This is exactly what I have been saying all along. If the FED were shorting the ES or otherwise manipulating it down, all hell would break loose. Since they are manipulating it up it is ok, every one's 401k's are rising, life is good. We don't have free markets any more is really the bottom line and it is sad. It is true that if the government got out of the way, markets would likely drop sharply initially. However, they would find equilibrium at some point and begin a natural rise based on fundamentals, that would be much more healthy. For those of you who think we should have everything based on GOLD, economic growth would be severely limited by that, you need to think about what you are asking for. I do not have the answer, and don't really care what it is. I trade short term, but I think just pointing these various things out is prudent.

If Pisani's comments are right, the FED is really day trading, and that is very alarming to me. However, it does tell us which way to look doesn't it? If we know they will move the market up even on a small dip like this, that means buy dips aggressively.

It looks like the trend is turning back up, so off we go again. I am still looking to short the markets soon, but just because I have cyclical things calling for a turn, that does not mean I can just blindly sell a strong market.

Have a nice weekend

Stop for the Bond trade is still in the same place and tonight was not a profitable open so the long is still on. Just for the record I puked out of my short for a loss early this morning.

I am busy preparing for my trip. The Bond trade with the system is still long, the stop was approached today but not hit. It is at 141'02 so it winds up one tick below today's low. When trading a system you just can't have opinions, so the trade is a long until stopped out or reversed.  Exit remains the first profitable opening.

If by chance we happen to trade below today's low tomorrow, much of what I have turns down sharply, so that would be a bearish development on a short term basis.

MOTHERS PREROGATIVE

As the creator of the Bond System I am it's mother, so it is my choice what I want to do with it. In this case it says to be long from the other day with a stop below. At the moment that certainly appears to be a bad trade, but as we know things can change in a flash in the markets. If that trade goes on to become a loss that will be two in a row, setting up a good time to start trading that system. We can perform a statistical exercise to measure the probability of certain outcomes, when you have an overall percentage that you know exists, and in the near term the percentage is off that mark.

An example would be that we know if we flip a coin 1,000 times, the distribution of heads vs tails will be essentially 50% of each. If there were a period of say several heads or tails in a row, that distribution is out of sync, and you would bet on it moving back to 50/50. It is the same with systems. This one has been generating about 87% winners. Now if we wind up with two losses in a row, the odds will be more favorable to start trading it than when it had several wins in a row, which was the case when I first introduced it here. It had a string of 10 straight wins, so a loss was likely coming maybe even two, just like we are seeing now. This trade is not over yet so we don't know if it will wind up being a loss. If this trade does wind up as a loss, the odds will favor trading the system going forward. Of course the other possibility is it is an early sign the system is breaking down. This is something that is impossible to know. You have to have an uncle point, and you just honor that if it continues to do poorly. Often running a moving average of the equity works decently. Once it breaks that you stop trading it until it gets back above it.

I said the other day that I did not take this long trade, and that I had decided to watch this before trading it live again. While I was busy not trading it, a sell setup developed that I thought was worth taking a shot at. I mention trap patterns often in here, and this seemed to be one to me a couple of days ago. When we had the breakout to new highs above the recent consolidation, I reasoned if it were to come right back down which it is doing at the moment, it would have trapped some breakout long players. Basically the stock market drives everything in the world, and with a bullish early move in the ES due to Apple, bonds declined and many other things rose. It just is what it is folks. I don't like this one bit because the FED basically has not only the nations finances on it's back, it basically has every individuals as well who has any investments. If they let the stock market go down, everyone will be hit. They know this and it is why they are not allowing it to happen. It will reach a breaking point, and that is going to be horribly ugly when it happens. It is going to be worse than 2008, but I don't know when it will take place. However, make no mistake about it, what they are doing can only end one way and it is not a "happy ending." Massage parlors are where you are going to have to go to get one of those when this starts.

The Gold and Silver action to me is interesting here. I do think they are setup on a weekly basis to rally, but the price action is very weak in both of them.

Gold is holding up better than Silver, and the COT picture is bullish. However, the price action is telling us we are still in a down trend. Until we break out of this down trend, then have a pullback, I will not be going long in this market. If for some reason the stock market heads back up again, and this does not come along, it would be a very bearish sign due to the high correlation this has to stock prices. It is too soon to tell at this point. For the moment it is setup fundamentally for a buy, price action is not confirming.

For those who say I am always bearish on Gold, I guess you will have to take a bite out of this one!

I will be traveling back to Chicago to accept my Robbins award at the Merc on Friday. I probably will not have time to do a post for Friday depending on what happens Thursday night. I don't know if this is going to be televised or not but I did have to sign waivers to the video footage rights, so perhaps it is. It is going to be done Friday afternoon. I am not sure what I am going to do spending a whole day at the Merc surrounding this event, but it should be interesting. I will probably be able to provide a link of the footage in here afterwards. I am usually good for a wise crack off the cuff quote, so hopefully I will come up with one or two on the spur of the moment when the time comes. I will have to gauge how serious everyone is, and whether or not there is a sense of humor in the house at the time.

Good Trading

REALITY OF A TRADING SYSTEM AND THE TRUTH FROM YOURS TRULY

This chart looks a bit funny to me but the new blogger platform is so god awful it could just be the way it is showing it to me while drafting this. You can see that the short was reversed to a long on tonight's open at 142'22. As a result the short lost 29/32's. The long could have been entered at a better price since it drifted a little lower after the opening.

So far we have one small win of 5 ticks and a loss of 29 ticks, so overall the system is down. For those of you who think you can just trade a system and just win on every trade, you really should just go do something else. There is nothing that has ever been or will be created, that will do that other than a time machine. I got an email from one of my favorite readers today and he made a remark about how large the stop was on the add on for the original trade I did was. What was lost in that was the add on was done at a price of 13 ticks better than the original. That meant the risk was considerably less than the original stop.

If you are intent on trading with systems, the one thing that has always been and always will be the case is stops need to be wide to get high accuracy. If you want to trade bonds with a $500 stop go to tick charts and scalp, or better yet just take half the money you want to risk and donate it to charity. That way you will have saved 50% of what you would wind up losing, and will have done some good in the process. I have seen so many trading systems that have failed including those concocted by yours truly. Wider stops give your ideas a chance to work, small wins condemn all ideas even good ones.

In the full disclosure department, I bailed out of the short Sunday night early when I saw that I was looking at a short in the ES. It was a judgement call, but it resulted in a small win with the add on and a small loss on the original, for a net scratch. I will probably never trade this straight up until I watch it live for a while to see how it does in live trading. I am not in this long tonight, I have decided to watch these trades for a month or so first. So I made a net 5 ticks basically screwing around with the first two trades, and basically not following my own rules on the second one. I like to think that my discretion at this point should help enhance results, but who knows if that really is the case.

It appears that my software is not predicting for the next day the correct price levels to enter these stock trades. I projected a close to the levels I posted and the software showed the trades were generated. Yet when I look at the levels in the indicators where the closes did meet the rules, the readings are not sufficient for the trades to be initiated. I have to call Genesis tomorrow to ask why this happened. I am going to have to figure out if I can correctly call these in advance or not, possibly not. The NSC parameters were correct, so that trade is filled by the rules. Also there was an annoying typo that I am fairly sure was not there when I proofed the stock trades. Did I mention how much I hate the new blogger?

The only trade I can see that excites me that is new at all is the Aussie on the long side, but it has to break out above the channel it has been in which seems unlikely tomorrow.

You just never know what is going to happen, but what I don't like about this long is how weak the POIV is, it is making new lows way ahead of the price.

Sorry there is not more, but I am not finding many trades right now. This is a very tough trading environment with a lot of sideways choppy action.

Good Trading

LOOKS LIKE SOMETHING MIGHT BE BREWING HERE

First of all for any readers who have their own blogs and use Blogger, I would assume you dislike this new platform as much as I do? It is impossible to find anything.

We have a classic triangle pattern here on the above chart of the Russell. I think we are going to break down out of this due to the heavy selling showing on this bounce here by the Commercial Proxy Index. You can see I marked the last two times this happened, so this should be the same outcome. The short term trend is down now, so the path of least resistance should be lower. The longer term trend is still well intact upwards, so I am not overly enthusiastic about trading against the FED. However, it is what it is. There is a legitimate setup here, and it could also be easily stopped and reversed to the long side, if we get a false break down first.

You can also see the new highs to new lows index I have at the bottom. This is something I referenced a few weeks ago as a reason to tighten stops and look for a decline to be coming.

I am kind of in a lousy mood due to a weekend long project from the wife down at the barn, that was brutal. One funny thing to mention was I was using cable ties to secure some material to a chain link fence as a smart part of this big project. While I was doing this I had the world's worst pick pocket, Vinny, constantly bashing into me and trying to muscle the cable ties out of my pocket. I could hardly get mad at him because it was kind of funny, but he has no future as a pick pocket. He almost knocked me over once and came close a few other times, he is pretty big now at 8 months, about 150 lbs already. He kept sneaking up on me that banging into me when I was not expecting him to.

I do have a new stock trading method I have developed that hopefully addresses some of the flaws of the one I had before. Here is what it has for tomorrow just to call a few out live to watch.

BTU - short any up close MOC

HAL - short MOC any close >= 33.29

NSC - short on a limit at 69.05 or better

There are others, but let's just watch these. No stops will be in place with these and they are very short term trades. The method only trades in the direction of the short term trend of the overall market which is down, so that is why they are all shorts and no buys.

The Bond trade still has the same stop and exit parameters. I also am looking at the long side in Cattle and Feeder Cattle for Monday if we start rallying.

Good Trading

WRITERS BLOCK

I am having a hard time finding things to write about with the markets as dead as they are. It is a good thing we have the Blind Man's Bonds system to talk about. You can see in the above chart the system is short still from 141'25 and I added to the short position yesterday at 142'06 where the arrow indicates. This was a discretionary call of course, but it is my blog and I can do what I want to, LOL! It was just my judgement for better or worse, that it was getting more and more stretched and I thought we were going to come back down some. The trade is not closed out yet so it remains to be seen whether or not this move was the correct one.

In the old days of using this system, I used to do this type of thing often since I knew the system was spitting out 90% wins. I felt that if I could get in better once already in a trade, that the odds were good it would work out. It did not always play out favorably. Often the good trades just roll right from the beginning, and you never have a chance to get on them this way. If and or when this is ever released as a service, it will be up to subscribers how they manage the trades. It will be my suggestion that it be done by the rules strictly and not to do this, but this web site features full disclosure, so that is why I showed this.

The stock market is controlling everything from the world economy to the presidential election, to the dollar. You read that correctly. Stocks are controlling the dollar it is not the other way around as so many people are writing. Just watch the intra day charts and see which moves first and which follows. I can't for the life of me see why so many people get this wrong. As a result, it will be necessary for stocks to stay strong for this short to work. Keep in mind that if the DOW was at 7000 now instead of where it is, people would be jumping off the nearest cliff they could find, and this knowledge is not lost with the FED.

Even though I am looking for a bounce in stocks into month end, if the market were to close right where it is as I type this, I would have a short term sell signal in the ES for Monday below today's low. The day is young so anything can happen.

I am now working on a short term mechanical S&P system that I hope to have done soon. We will also watch that live in here for a bit once it is ready, and see how it does. I have plenty of things that work but it needs more trades than what I currently have constructed. I have no time table on this one.

I wish I had more but I can't find a trade right now, perhaps the ES on Monday. There is one outside shot at something in the Aussie for today. If it were to get above yesterdays high I think it is a possible long up there.

Good Trading

REVERSAL

Bond trade #1 is in the books as a profit of 5/32's. The open tonight was 114'26 which was greater than 114'20 our entry so exit at the market, my fill was at 114'25. There was also a new trade generated on the opening so the system is now short at 114'25, I am in the trade. For the purposes of the blog some of these entries are going to be posted a few hours late like this. If this actually becomes a service, they will be posted in the web site in a timely fashion so subscribers can catch them in time. Most of the time you can catch them after the fact anyway as they typically go against the entry direction for at least a little bit even in the good ones. You can typically limit your way into them after the fact. I don't do this because you don't want to start out smarting a system, if you do believe me it will out smart you in the end. I take them just as they get spit out like a blind man would. You can see on the screen where the stop is being carried. Like every trade the profit objective is the first profitable opening unless we get a signal in the other direction, in which case the position will be reversed. Let's see how we do.

Ironically in my discretionary trading this market appears to be setting up for a sell although it is not ready quite yet. I have not bothered to study how often these mechanical signals sync up with my other types of entries, but it might be an interesting study. This system is just designed to catch moves on a very short term basis, whereas my other trading is designed to catch moves of 3 to 15 days or so. My old S&P 500 System has been a disaster in recent years. When I went back and looked at it, almost none of the old setups for trades in the mechanical system have held up at all. The ES is the toughest market to trade by far because it is comprised of a million people with $5000 accounts who have no business trying to trade. They get scared every time they are down $50, so the charts are just so choppy intraday it is brutal. I am not trying to be an elitist snob, that is just reality. You should have at least $25,000 in your account if you want to make a run at trading. You can do it for less but you are very limited.

My very short term indicators are looking very strong for stocks for tomorrow. Then depending on what happens, they could turn back down Friday on a decline, so we are at an inflection point here. I am leaning to the long side, but am not in a trade in the Indexes right now because I don't have an entry pattern. There just is not that much to talk about right now, the markets are horribly choppy.

One market to mention is the Yen. I do think that now this is setup to be a sell on a bounce of a couple of days.

We are in a longer term down trend, we rallied enough to trap some people into thinking the trend is reversing. Next we broke the short term support market on the screen. Now if we bounce up a couple of days then start heading back down, this will be an ideal short setup. If we just take off right here back up, the trend will have changed. It is in a show me spot right here.

DITTO

The Bond trade parameters are the same as in the last post.

I think it is time to go on the record here officially on the price of Gasoline.

This chart does get a bit messy but you should be able to click on it to enlarge it. The black line is the net position of the Large Speculators ( Funds Basically ). It is as clear as can be that they are the trend drivers both up and down. They typically are scale in on the way up, scale out on the way down or into short positions. This has been the nature of how they have traded for as long as I have been at this, and quite some time before that. This reality is what makes trading with the Commercials so challenging at times. They are constantly fading the market moves to hedge their bets. You have to keep in mind that the commodity markets were formed to allow producers to hedge their bets. As a result that is what they do now and always have done.

Along comes technology and large traders can trade somewhat mechanically and push trends up or down. There are multiple examples of both instances on this chart. In some respects it is true that the large specs are the trend drivers, so you can blame them on some level for prices being high. However, you also need to buy them a beer when prices are low. You cannot have it both ways. If they are to blame for rising prices then it is also appropriate to pat them on the back for low prices. Oops, I guess most folks do not have interest in the second part of that equation. The government just wants to control everything. I saw today now Barry wants to spend $52 Million to regulate Gas speculation more? When will this a.....ole ever save money on something. He just spends and spends and spends. The regulations are in place but there is one very big problem. There is one very dominant player in the middle of this mess, Goldman Sachs.

Allegedly they were involved the last go around when Oil prices flew higher housing a fund that had exemption from position limits even though it should not have. They also are rumored to be one of the proxies for the PPT. Net net they are very "inside" with the government. They also make quite a bit of money from their trading operations. As a result, I find it hard to believe that anything will really change here. They make their secret back room deals in exchange for agreeing to take the public spankings in the way of fines etc, while all along the insiders game gets more inside. Allegedly. Now even if we accept the opposite view that none of this is true, just the sheer size of the trades they make for others put them in a very strong position to be able to push prices here and there.

This is just the way the world works. Joe at the local bicycle shop probably has a favorable margin on a pump he resells making more profit than you would think. I don't really care about any of this and neither should you. If you just follow the price trends, this is just noise pure and simple. If it is pure folly it is irrelevant. As traders we can see the trend is still strongly up here on a weekly basis even if the daily chart has broken down a bit. We can see that the Small Specs have the largest net long position in history up here, and that is a looming problem for this trend. It is tough to step in front of, but if and when we get a trend break with that fundamental as a back drop, it will be time to aggressively get short here. Not yet.

I don't see much in the way of trades for tomorrow. I do have some weekly setups I like but drilling down to the daily is not giving much in the way of congruent entries. Just not much to do here other than watch the Bond trade. This is typical in that we cannot expect every trade to be great. I am glad the first one out of the gate is crappy like this one, so it does not give people false expectations. Trading is never easy and this will be no exception.

Good Trading

FIRST THINGS FIRST

The Bond trade is still going since it did not open this afternoon > 114'20. You can see the stop on the screen and the green arrow showing the entry. If the market opens tomorrow afternoon (Tuesday for Wednesdays trading day) > 114'20 the trade is exited otherwise hold the trade with the stop at 140'00. In this type of trading we don't concern ourselves with the fact that it did have a decent profit at one point today, the rules are the rules. You can't have an opinion one way or another when trading a system, you just take the trades blindly. I think I will rename this Blind Man's Bonds.

It appears to me we have some sell signals for tomorrow. The ES and the Currencies are basically the same trade, but they appear to be sells to me.

Here is the Swiss Franc. This appears to me to be a sell if Friday's low gets taken out. The trend broke there on Friday, and now has bounced. If we clear the highs of a couple days ago the setup is off. The Euro, Pound and ES are all basically the same as this. The ES ironically appears to be weaker. It would be a surprise to many if the stock market fell out of bed here so it makes me wonder if it might. The Bulls have had a stress free ride for 2 years here, maybe it is time to shake the tree a bit? We know the PPT is lurking which is the always present fly in the ointment for short selling the indexes. 

Even though we know they are out there we cannot consider that in deciding what to do. It is frustrating to watch an otherwise good trade get reversed into crap in the last hour by these guys, but there is going to come a time when markets return to their normal flow and you never know when that will start. I talk about it a lot but I never consider it in deciding when and where to short. I would say in general that I am looking more toward the end of this month to short the indexes ideally. It seems to me we are into some good support right here so shorts are going to be light for me until a bounce.

Most markets are just not quite right for me here, but I will short those currencies if we break down tomorrow.

Good Trading

BOND UPDATE

One final note on the Bond trade. If the afternoon session on Monday opens greater than Sundays opening price of 141'20 the trade is exited on that opening taking a profit. It is possible we could have a trade going in the opposite direction upon that opening, but for the purposes of monitoring these trades, they are all exited first profitable opening. Some of them might be reversed on that opening but we won't know that until the day session closes tomorrow, and the orders are generated for the next day.

Do not waste your time looking at oscillators and other things trying to figure out what is generating these trades. The odds are millions to one that you could ever figure it out.

Capiche?

UPDATE

I have added some patterns to the Bond system and as a result, there is a trade for tomorrow for us to monitor.


 Current Position:   NONE


Place the following order(s)...

To Enter Long:     BUY 1 Contract at MARKET
         (Rule:  "LM 12")

If entry is filled, cancel all other existing orders and place the following order(s)...
To Exit Long:     SELL 1 Contract at 1^20 below the Entry Price STOP
         (Rule:  "Exit Long: Stop Loss")

The System is indicating to buy the open and carry a stop loss 52 ticks below the opening price. We are going to monitor these live here for a month before I decide whether or not I will offer this as a service. For all I know it will crash and burn, but it has been pretty robust recently. The reason I feel this should work well overall is that all the patterns that are in this have worked for years and years and have stood up to the change into electronic markets. Time will tell. I am not a huge fan of trading like this any more but I also like to diversify some.

A GOOD SIGN

I am sure there are a few readers of the blog here that have subscribed to LW's new trading service. He has had a very rough start. I would wager this might be the worst stretch of trading he has ever had. He has a position in the above market which I won't reveal exactly since that would be a violation of confidentiality. This trade is not doing well at the moment and appears headed for a loss. He has had a string of them and I am quite sure many people are bailing out on him right and left, which is too bad. I am also quite sure knowing him and also knowing his track record and skill level, that he will right the ship at some point. These people that are bailing out are the same people that sold their stocks in March of 09 and never bought back in.

I admit that I have gotten concerned due to some unusual activity that I have observed in markets where these trades have been done. I think it is mostly because most of the subs are 1 lotters who are not following the rules correctly, thus causing erratic volume surges. One very encouraging sign occurred just the other day. My friend I talk about from time to time, just bailed out on the service. He is a very good indicator to fade generally in trading. He is the epitome of someone who has success in other places but is seduced by trading. What he fails to realize is that knee jerk emotional reactions are what will kill you trading. These same gut impulses can serve you well in other types of ventures. He is so emotional trading that he will never succeed. I think it is time to double down since he just bailed. It is highly likely the service will get on a roll now. For those who might be down on LW I can tell you he is a man of the utmost integrity and I am sure he feels terrible about the performance thus far. I would ask people to give him a chance, I have seen him trade live enough times with real money and make large amounts consistently over and over.

I had the trend line that is on the above chart in here the other day and you can see we went right up to it and crashed back down. This market is at the seasonal low period so if it is able to get above that down trend line and change trends, this could be off to the races. It has not done so yet, if that line holds we could just keep going down.

Here is a market that is set up for a potential sell, the YEN.

The one thing that really jumps out at me here is the huge bullish sentiment reading that is in place, the blue line where I have the arrow. This is happening during a rally in a down trend which should make this a good selling opportunity. It appears to me the Dollar is about ready to rally so most currencies then will decline, if that takes place.

It appears to me that energies and stocks are a buy right at the moment on this dip, which should set up a potential end of the month top.

Since one market is basically a proxy for another now, the Crude setup might as well be the ES setup, risk on risk off as they are saying. Let's just go with it until it changes which it will at some point, but we have had this going on now for a couple of years or more, so it is not a flash in the pan. I think as long as the FED is manipulating prices this phenomenon is going to be in effect. I think that means until the economy gets better, which is not going to be any time soon. If Barry gets another quattro I would expect the economy to be bad for at least 4 more years or more. He may have done enough damage for it to be bad even if he is gone, he is that talented. I wish someone on FOX would interview a  rich guy and ask him how many people he will hire each year per 100k Barry wants to take from him? To think that raising taxes as much as he wants to is not going to effect employment, is so ludicrous that nobody could be dumb enough to really believe that is a good idea.

If you are one of those people rooting against the rich people you are a moron. Has there ever been a great country that featured all poor people? Some people will always do better than others, trying to penalize those that are doing better is so preposterous I just can't believe anyone is dumb enough to think that is the solution. I have things that I do, and if that DB raises my taxes I will stop doing them and people that need help from people like me won't get it. Maybe it will have to be tough love to show these people. Maybe we should just step aside, let them makes us France. The DOW will go to 1500, then we can start all over again. Rich people hire poor people, poor people don't hire rich people. I have traded terribly for the last month or so, who is going to bail me out? I would not ever accept anything like that.

The wealth effect the stock market rally has brought has been helpful to the psyche of the american public, so that has been a good thing.

The next chart shows one big problem I see for stocks moving ahead.

This huge bullishness in small investors is a big problem that should lead to more of a decline than what we have seen so far. However, for the moment I think we are in buy the dip mode on a weekly basis until this really breaks. Once we bounce then it will be time to take another look at things.

There is no Bond trade for Monday, I warned you this system only trades 3 to 5 times a month.

Good Luck next week