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 December
15, 2004 Commentary (mid-week edition)-
The
commentary for today will be the last one until I return from my 'vacation' and
post the weekend commentary on January 2, 2005. As I have said, I will not be
answering e-mails, shipping books, or writing commentaries during this break.
The only way to communicate with me during this time would be to go to the
sunniest golf course in Tucson and look for the guy with the stock market
T-shirt, the carefree look, and the choppy swing. That will be me. We hit 80
degrees a few days ago.
If you want to order books during this break that is
fine, but understand that I won't even see the order until I start checking my
e-mails again after the first. If this bothers you, please wait until I return
to order. If you still want to get a last minute order in, I will check my
e-mails until Wednesday evening, December 15. If I get the order by then, I'll
ship it out.
In the meantime, please take this time to go through some of the
one hundred and forty or so free archived
commentaries, and the free
articles. Also, don't forget to download the free new pattern from
Harmonic Trader that he will
be releasing on January 1. Lot's of free stuff, so take advantage of
it.
I'll mention some market related issues, and then we'll look at
some charts. As I brought up recently, the commercials are still holding a
historically large net short position, exceeded only one time before, right at
the March 2000 top. They have been basically holding this steady the last few
weeks. They are making a bet that costs them some $30 million dollars per point
as this rises.
If the S&P hits just 1250 they would be about $1.5 billion in
the hole from here, for example. They have deep pockets and can take a lot of
heat, so this is not a precise timing indicator. On the other hand, they have a
100% correct track record when they set up extreme positions. Again, this is
based on the information that I have, and that the information is
correct.
Let me give my thoughts on all this. The VIX has now hit a new nine
year low, give or take a few days. The bullish sentiment is the most extreme I
have ever seen. Every single person I talk to is wildly bullish. I failed to
find a single bear in my search for one. So, let's see. Everyone is bullish,
the volatility index is at extreme complacency levels, and everyone has the
same target for the S&P. All the while, the big money players, who, in my
opinion, actually run the market, are betting historically large that the
market is going to get crushed.
Here's the 'food for thought' idea in this.
If this is a new bull market, and this rise has been the start of bigger things
to come, why did the commercials, the big money players, use this entire rally
to build a huge short position? Instead of making money all the way up, as they
usually position themselves to do ahead of time, why did they choose to get so
short and take so much heat building this position? This is the exact opposite
of what I would expect to see in a new bull market.
Now, from a
practical standpoint I am not saying I am shorting anything right now based on
this. Far from it. The market is going up, and it looks strong. Many stocks,
indices, and sectors are at new all-time highs, and this thing is a powerhouse.
That has me working with the trend, and that is clearly and obviously up. But I
adjust my exposure based on perceived reward/risk for a given situation, and I
perceive greater and greater risk every day.
I will use this information to
switch to the short side when I actually see the charts going down.
Instead of thinking every dip is buyable and that this will go up forever, I
will pay heed to an actual, observed change in the chart, thinking instead that
the odds favor a change in price action to the downside as being a new trend
start as opposed to another dip.
My 'Trading Plan' allows me to
enter, scale out of some, move my stop, and manage trades such that if it's a
false start I can get out and wait for another opportunity. I totally 100%
follow the actual market movement as it exists in front of my eyes right now,
but I must also factor this information in when looking at the 'odds'. Although
no one but the commercials see 'eye-to-eye' on this with me, I still want to
let my readers know about this. Now I watch the commercials and see what they
do with their holdings.
Let's finish up with a few charts on an opportunity I
spotted on Monday. The ES dropped down to an area that was clearly a potential
trade area. What I want to point out, though, is the 'second chance' it gave. I
called this live in the chat room, and it turned to the tick. Let's start with
a 13-minute chart of the first potential trade area.
The ES formed a nice 5-point pattern, set up
to continue the uptrend. This is a classic setup for my methodology. The ES
also came back to close the gap. There were so many factors pointing to this
area besides the pattern it was just a gift.
Let's drop down to a 3-minute
chart, and see what happened.
I've highlighted the pattern. The ES popped
up right off that, and then began to roll over. It did this, though, with a
clear structure that I watch for. Depending on the particular trader's strategy
and 'Trading Plan', he or she may have scaled out, stopped out, or could still
be riding at this point.
Let's go down to a 1-minute chart and look at some
detail on what I was seeing here.
The ES set up a classic 5-point pattern with
a grouping less than one tick wide. This 5-point was set up to 'test' the
larger 5-point pattern. This was just a fantastic setup, and as I mentioned, I
called this live in the chat room as I saw it unfolding.
Let's look at
this latter pattern and grouping close up.
The structure was fantastic, and the grouping
was tight, well under one tick wide. In a situation like this I just sit back
and wait for my chosen entry trigger to signal an entry. Let's see how this
played out on the 3-minute chart.
The ES reversed to the tick on the pattern
'test' of the larger pattern, and went up strong for the rest of the day. How
much of this move a trader may have caught would depend on the management plan.
Let's look at the 13-minute chart and I'll discuss this a bit.
I've highlighted the larger pattern, and
shown the .886 retracement completion point for the smaller pattern. I also
highlighted that smaller pattern's completion area with an arrow. Now, given
this look, what would the management plan be? I don't see a lot in this run up
to trigger me out of the trade in this timeframe.
This gets back to the discussion
from the last commentary. Sure, we have some nice patterns here and some nice
setups. But they are my potential trade areas (PTA's), and that's it. That is
only one small aspect of my comprehensive 'Trading Plan'. I am looking to
accumulate small edges throughout my 'Trading Plan'.
I need to
maximize my run if I catch one. To do that, I have to choose the best
management options, based on the information I have at hand. And in order to do
that, I have to correctly assess my traded timeframe. And there doesn't have to
be one 'correct' traded timeframe. Many different possible opportunities may
exist.
What's important to me is to not only choose an appropriate traded
timeframe, but also to then draw the appropriate conclusions from that choice.
This affects my entry trigger, my trade management, even if I may open the
trade at all. Assessing the 'context' is a major aspect in all
this. The 'context' helps me form my trade premise and decide on my traded
timeframe. It all comes together in a comprehensive plan where the pattern
itself is just one small part.
As I wrote the book series I came to realize
just how much I focus on an entire 'Trading Plan' and not just on the potential
trade area i.e. 'the setup'. This is just one of the many ways that make my
approach very different than what is generally shown out there. Almost
everywhere I look I see what are claimed to be better and better 'setups', with
the occasional simple management plan thrown in.
I focus on an entire plan for a
trading business, and that's why it took seven books and two articles so
far to lay out. You will only be able to see a small fraction of that plan in
this commentary. My focus is on a comprehensive plan trying to gain a
collection of small edges, not on trying to gain an unrealistically large edge
in one area such as the setup. Give this some thought and see if it makes sense
why I do it the way I do, and why so many teach it the way they do. You may
come to some interesting conclusions.
The next commentary will be on January 2,
2005, after I get done with my rest in the great outdoors of the southwest. And
yes, I know I said today's commentary would be a short one…
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