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 March 7,
2010 Commentary (monthly edition)-
I'm going to
start out, as I have in the past, with a quote from last month's intro: "What a
month that was, huh?" I don't know what all my reader's opinions are, but to me
this market is just incredible. For those that only see it as range trading
with not much going on are missing a lot, I think. If one looks over the
various areas (stocks, indices, commodities, currencies (I consider currencies
commodities nowadays), and so on) on all the liquid timeframes, there is action
all over the place. For example, drop down in timeframe and look at that
British pound lately! Today I will show some of the recent action in the
various markets that we have looked at in here. In my opinion, and this is just
one man's opinion, take it with a grain of salt and after doing your own due
diligence form your own opinion, I think if this market isn't good enough for
you, you should examine your approach and your 'Trading Plan'. I can't get over
how much action there is. If you are struggling with your trading I wouldn't be
blaming it on the market.
Today I'm going to take a little bit different of an
approach. I am going to show more charts than usual, and do a bit less as far
as comments. I chose this route because I want to follow up on what we covered
last time, and instead of asking you to go back and brush up on what we covered
in the last commentary, I wanted to show the charts 'side by side' so that you
can easily see where we left off, and what happened. Hence, I expanded to ten
charts from my usual eight. The theme for today, since I am trying to have a
clear theme for each commentary, is 'context' and 'top-calling'. I can't get
over how many traders and analysts I saw trying to call tops this last month.
Pretty much every blog and newsletter I saw was calling that last high 'The
Top', and once it started back up (right off an area I discussed in my private
forum in great detail, to the surprise of my readers in there, who also mostly
thought there was going to be a lot more downside), those same bloggers and
newsletter writers called the 'Wave 2' all the way up. In the meantime, I
pointed out many bullish setups in my forum, warning about calling the 'Wave 2'
in there.
We'll wait until we get to the charts to discuss this further, but
the idea for me is that I am a trend-following style trader. I look for trends,
on whatever liquid timeframe I can find them on, and then I look for ABCD
corrections to get in on that trend, as long as I think the trend may
have some room left to run. Once in, I try to stay with the trend until the
trend tells me it is over. I follow the trend for as long as I can using
various trailing stop
methods. This is redundant for my regular readers, but I don't use 'profit
targets' essentially ever, I let the market tell me when the move is
over. Over time I've come to realize that while everyone says 'The trend is
your friend', I see most people fight the trend most of the time. Most traders
I see out there are going countertrend pretty much every time I see them act.
That's fine if it works for them, but I hear them saying, while they do this,
that the trend is their friend, and they always go with the trend.
I've actually
come to the conclusion that the reason trends exist is because most people are
fighting them most of the way. Without that character of human nature I don't
think we'd have trends. I believe that if people understood the true nature of
price action and trends the market would be a much different place. What makes
all this so fascinating to me is how people can so inaccurately assess what it
is they are actually doing. I recall when I first started writing the books I
discovered that I thought I was doing various things in certain ways, and when
I was forced to detail the process I found I wasn't doing what I thought I was
after all. It was a great learning experience for me to learn skills in the
self-assessment arena. Just as they say it is hard for us to see ourselves as
others see us, it is just as hard, I think, for us to see what it is that we
are actually doing, as compared to what we think we are doing, what
we perceive ourselves to be doing. And without accurate assessment, it
may be difficult, or impossible, to reach our goals. I think this is especially
true when it comes to trading.
Before we start with our chartwork, let me
mention one more thing on this topic. One of the things I have seen posted in
forums and such many times, and heard in chat rooms, is how much trouble the
various traders have if it is a 'trend day'. They wind up trying to call tops
(or bottoms) all day long, getting stopped out over and over. Myself, I love
trend days. It would only make sense if someone is a trend trader that they
love it when the market trends. I'm coming to the conclusion that most traders
fade the moves, and that works a lot of the time because the market ranges a
lot more than it trends, it seems (I have my own views on this, in that I feel
the market is trending almost all the time, as long as you know which timeframe
to look on, but that is an entire topic for another commentary). I have had
more than a few people come to me saying they need to find a way to not get
killed when the market trends, and they seem surprised that I say I love
trending markets, intraday or otherwise. I've yet to have a single person come
to me and say they love trends or do well on trend days. My point? If the trend
is your friend, why haven't I met anyone to date who likes trend days?
Let's start
our chartwork with a look at where we left off last month on the S&P index,
on a daily chart.
Source: QCharts.com
For review, recall the two hash
marks are the two key line areas we have been watching on the weekly, and that
after 'consolidating' below the lower line area, the market decided it wanted
to 'test' the upper line area. Given we are zoomed in on the daily chart here
and the lines are weekly or even higher timeframe, this is all one area in my
eyes. Now, the S&P pulls back to this .382 area. I will quote what I said
last month when the market was right here at this area:
"I added a
key .382 retracement, and a set I have had on there for awhile. If you do the
workup in the ES you can see some really incredible lines. There are a
lot more things to add to a full workup on this one. I'll leave it to
the readers to do that. So, all I am showing here is a very basic framework.
The curious thing is what people, in general, seem to think. You tell me,
conduct your own informal survey. How many people are bullish right now? My
survey said: absolutely zero.
Now, don't misunderstand me, we all know the
top callers and perma-bears are bearish, but all those mega-bulls, are they
bearish now? No, but I couldn't find any willing to buy into this weakness yet.
They all say it has more to go. That has me thinking the most likely scenarios
are as follows. One, we go right back to new highs for this 'bull', leaving
them scrambling and chasing in as it gets away from them. Or two, we go up from
here, and just when they feel it is safe to jump back in (and they do), it
rolls down for another leg, the CD leg of an ABCD perhaps."
For me, I was
very bullish off this area. Both of my most likely scenarios had this moving up
off this area, with my number one scenario having it head up and that low being
'the low' for the correction. This was not a popular viewpoint, let me tell
you. And that is precisely why I came to the conclusion I did. Not only did I
have technical factors stacked up in my corner, I had sentiment. To me, that's
a very powerful combination. And what else did I have in my corner? The trend.
As we will see shortly, the trend since March of '09 is still manifestly up.
We'll discuss that a bit more shortly.
Let's see what happened from here.
Source: QCharts.com
The S&P reversed right off the
area, and went up strongly, right back now to that key line where I added the
third hash mark. Now, notice the little pullback around that gray dashed line
there. If you go to the ES and drop down in timeframe and look at that, you'll
see it was a very nice-looking ABCD. I mentioned this in my forum, but even
there those calling for this to be a 'Wave 2' and the resumption of 'Wave 3'
down were predominant. I found this to be an extraordinary setup for the long
side, be it to initiate a position if one missed the bigger long setup, or to
add on to an existing position. There was also a setup with a pattern right
after the reversal off that lower area, and another one around that 1120 line
there. It was just one setup after another. Yet all I saw everywhere I looked
and read was how it was going to roll down into 'Wave 3' at any point now. And
all I did was focus on the long side.
Now, let me make a few things clear. I think
this market is totally manipulated. I think the market is bloated and
overvalued here not just a little, but a lot. I don't think there is any
sane argument that justifies buying at this level based on value. But I
am talking about trading for me here, and that is technically based, and goes
with the price flow. And that price flow is clearly 'up' to me. I don't care
why it is going up, I only care that it is. I can trade countertrend back to
support on the lower timeframes during this process, but I am always acutely
aware of the higher trends, and they are up right now. This gets into more than
I can cover in this commentary, and to the heart of my trading philosophy, and
what I cover in detail when I mentor, but I'll do a brief synopsis here. I am
forever harping on this in my forum.
As a trend trader, I am not trying to pick
tops or bottoms. If I play countertrend, I do it within the 'context' of the
trend, and only back to clear support areas. On the traded timeframe I am just
about always looking to flow with the trend. Then I try to lean on the trend
until it breaks, as I like to say, that is, until the market tells me the trend
is no longer in place. I want to get out after giving back some of the profits.
My style is a 'give back' style. I need to give back in order to be fairly
certain the trend is done. That means I won't catch tops or bottoms, and I'll
be late to the new party. I'll be on the wrong side at every trend change. I
want to be on the wrong side at the trend's nascense. If I'm not, my overall
philosophy will not work. So, get ready to have your mind blown as I finish
explaining. Most people can't even begin to grasp this.
I am looking
for established trends, and then I look to get on board those trends.
Nothing about looking for an established trend has me trying to call the very
point where that trend starts. Hence, no calling of tops or bottoms needed for
my methodology. So, let's say I'm 'leaning' on an uptrend. That means I am
hitting every long setup I find. Eventually that trend will end. I have no idea
where, though, especially if the issue is at an all-time high. I may have areas
where I think it could have trouble, but without a pattern, a convergence, the
synergy of factors that makes up my methodology, I can't see that as an area to
trade against. So, I stay with the trend. As the trend gets older I know the
end is getting closer, but I don't know when. So, I go with the flow until the
market says otherwise.
By this time many, if not most traders are trying to
call the top. They use all sorts of rationalizations as to why the trend simply
can't go any further. This is the kind of fuel I like to see. They start
calling every push up off one of my areas a 'Wave 2'. They hit these to the
short side over and over, and keep getting stopped out. They argue with me that
this surely is a 'Wave 2' this time. And they get stopped out yet again.
Meanwhile my approach is to keep hitting the long side. But here's the travesty
as far as the trading goes. I look to trade countertrend (at times, and only on
a lower timeframe) back to these setups, but then I want to position for the
long side. I then try to ride this back up to 'retail' price, usually some
variation of a new high for the move. The top callers get or stay short, and
then get stopped out. Maybe they break even, maybe they lose a little
bit.
So, they argue, it's worth the shot because eventually they will
catch one right at the turn, and they will really nail it. Full profit
potential. But here's the issue. Say I hit the long setups and catch six or
eight or ten of them (no claims, just saying, for the sake of this discussion),
while they get stopped out, perhaps at break even or a small loss only (a nice
trick if they can do it, but let's give them the benefit of the doubt for this
discussion) for all these spots. Some even take two or three short shots for
each of my long setups. Now after all these tries, they finally nail the top.
Dead bang, almost to the tick. They really catch it nicely. So, they have one
winner, maybe worth double one of my trades, and they have six to ten small
losers or scratches. So, overall, maybe they are even a little profitable. Now
compare that to an approach where all those long setups each paid off
handsomely, and then finally the last one was a stop out.
Now, I'm not
claiming I can hit every one of those long setups and make a profit, in fact,
when I say 'I' in this example, I mean that figuratively. But can you see what
I am saying? One way the trader hits most of the setups, until he or she is
proven by the market that the trend is no longer in place, and the other trader
fights the trend all the way, not only getting stopped out all the way, but
losing all that potential profit by not only fighting against it, but by not
going with the flow, and then finally catches one. Yes, the trader catches that
one right at the turn, but so what? Is the goal to be able to brag that you
caught one out of ten trades at the turn, or to try to maximize the net overall
returns? Mathematically, I just don't see the sense of trying to call the tops
and bottoms.
I will add one thing on to this discussion. I am talking about a
top or bottom caller who is trying to call the top or bottom for a big move in
the opposite direction, a true trend change. I have seen many intraday
countertrend scalpers play tops and bottoms all day long, but they scalp it out
as soon as the initial countertrend move is over, once support is hit. In a way
this is not too dissimilar to what I do when I countertrend trade, regardless
of the timeframe I do it on. This is not what I am talking about when people
fight the trend. Countertrend trading can be productive in some cases if the
trader is fully aware they are doing it, and they have a sound technical basis
for the trade. I feel this is a very advanced skill, and one I constantly tell
beginners to avoid like the plague.
So, let me conclude what I thought was going
to be a rather quick and simple explanation with this thought. I want to be
'wrong' (please read my article about right or wrong on a trade) at the
start of a new trend. If I'm not, I am not following my methodology. And when
I'm 'wrong', those very same top or bottom callers jump up and show me their
trade, how they nailed it to the tick, and how I 'missed' it. No mention of the
ten stop outs they took up to that point, or all the missed potential as they
fought the trend, or of all the setups that played out for nice moves as they
fought them. That's just missing the point. As I say over and over, there is
only one thing that matters to me, and that is the bottom right number on the
brokerage statement. My goal is to work on that number getting bigger. I don't
care about tops and bottoms.
Before we go to the next chart, let me go back to the
technicals on that S&P. Notice this is right back to that key line. This is
the chart of the month, again, shown on the weekly. Is this a 'deep' 'Wave 2'
here? That's what I have been hearing, it's still not too late for the top to
be in. Hey, maybe, you never know. I won't know until after the fact on that
one. But I do know that the S&P 500 isn't the entire world. I have been
watching many other things, and some are painting another story. And if I'm
trading those other issues, they have already 'blown out' the 'Wave 2' areas,
as they are at new highs for the entire 'bull' market. Too late for 'Wave
2'.
Let's look at a few other indices for some perspective. Here's the
S&P Midcap 400, on a daily chart.
Source: QCharts.com
I had to scrunch the chart up a bit
to show all the data from the March '09 low. The Midcaps are smoking off at new
highs for the 'bull'. The S&P 500 may still be below that recent 'bull'
market high, but the Midcaps are on fire. 'Wave 2' chances are long gone here,
nothing but new highs. So, trading off that recent ABCD has already taken out
the high. Once again the trend prevailed. One can look at the MDY for this
index, or the futures, among other choices.
Let's look at
the Russell 2000 Smallcap index.
Source: QCharts.com
Wow, is that thing a rocketship.
Look at that close, just like the Midcaps. Keep in mind this is an index of
2,000 stocks. Look at the trend since last March. Do you want to try to call
the top to that trend? I don't. I want to go with the flow, until the flow
stops. Maybe this high close is the highest value the index will have for the
next ten years. But I'm not going to bet on it. My methodology tells me to keep
leaning on the trend until it breaks. Maybe that is at that S&P 500 1,400
area, maybe it is right here, maybe it's way higher. I don't know and I don't
care. I let the market do what it does and I flow with that. (For this index I
look at the IWM or the Russell mini, among many others.)
Before we
move on, take a look at the retailers. Try the index $RLX, or XRT. Look at
AAPL, ANF, and so on. There are stocks out there in many sectors that have
shown zero intention of selling off lately. That may change in a heartbeat, but
you tell me you want to short AAPL at a new all-time high, well good luck,
eventually you may hit one just perfect. All I want to see, though, is a
sequential series of the bottom right hand side of your brokerage statements
showing me how well that approach is working for you over time.
Let's move on
to rates, from last month, on the 40-minute chart.
Source: QCharts.com
Here's where we left off last month
on rates. I'll quote from the last commentary: "So, if they pile money back
into stocks it may rotate from the 'safety' of treasuries, and as they fall,
rates rise. So far, it all fits. Will they do it at all, we'll see. I just find
areas of potential support and resistance, and see what happens, whether I am
looking for new setups, or managing existing trades." The point is, just like
in the S&P, I have the area, and then I see if it triggers or not.
Let's see
what happened. In order to show two things at once I'll also add some labeling
onto the chart.
Source: QCharts.com
Rates did jump right off the area.
To me, this was quite remarkable. And to boot, they not only did an ABCD on the
way up (take a look at the ZN for fantastic detail on this), they also hit into
a big bearish ABCD with that bullish ABCD in the BC leg, as labeled. I'll leave
it to the reader to do a workup and see what else fell into that completion
area. I will also leave it to the reader to pull up a chart and see that this
dumped right off this bigger ABCD. So, if I were on the long side at this
point, would I be aware of this, and factor that into my management plan? That
goes without saying. Again, my main point is, look at where we left off and how
I pointed this out, and what happened.
Let's jump to copper from last month.
Source: QCharts.com
Let me quote from last month: "Now,
copper rolls down to the area of a key median line (the thinner red line
there). I also added an interesting trendline onto my charts (the thicker red
line), which also turns out to be a near perfect sliding parallel for that set
line, too. This trendline was anchored off the first two swing highs there.
Notice how it was 'tested' from above and below multiple times. Now we have
copper right at this key area, as the other things hit their key areas. Must be
another coincidence. Even if nothing big happens for anything at these spots,
it is still noteworthy to me that they all seem to be hitting key spots at the
same time. That tells me they are still 'in sync' with each other, and that the
high correlation is likely still present." So, what am I expecting is a likely
scenario here? And can I attempt to use that to create a trade premise?
Let's see
what this one did.
Source: QCharts.com
Wow, copper sure liked that area
and that synergy I mentioned. Right back up to a sliding parallel, where it
looks to be 'consolidating'. Up and over, or down? Depends on what the 'Wave 2'
people say. Notice how everything seems to be moving in unison? It truly is
simply 'Risk on' and 'Risk off'. They buy everything, or they sell everything.
I heard the correlation between commodities and stocks is at like a twenty-five
year high. Oh, market manipulation is great, isn't it?
Let's finish
with a look at gold, on the daily chart, where we left off last month.
Source: QCharts.com
Let me, again, quote from last
month: "So, gold gets just crushed in the last few days, and all the
gold bubbleheads just eat it up. They are likely shorting this like crazy. But
I have a major area for gold in this vicinity, anywhere from right here to just
below. And guess what? It's hitting right as all the other things are hitting
into their areas. Take a look at silver. Talk about getting crushed. Silver
would have to get blown up and reinflated by a super compressor just to be back
at the level of 'crushed'. But, if you do the work, silver has a major area
where? Right here. Another coincidence. Now, maybe nothing happens at
all here. Maybe things bounce, and then roll down and get killed. There is one
structural thing here in this gold ABCD that isn't quite right, so I am
cautious. But here's what bothers me. It's not whether these areas will or
won't 'play out'. It's that most, if not essentially everyone I hear or know
won't even consider them." So, did gold do anything with this
area?
Let's see where this went from here. I will use the same chart, but
I will zoom in a bit, and change to candlesticks, to show the candles in the
reversal area more clearly.
Source: QCharts.com
Gold went right up off the area,
with everything else. It went up just over a hundred dollars from that low! And
look at that plunging red candle and the one following it. What did that say?
Now, for those that say gold didn't get deep into the area, well, that is true,
based on the area as I sketched it out. But recall I always say these are
frameworks, not complete workups. Do the full workup and see where everything
hits, and fill out the levels and the broader area. Even with this workup, it
did get to the the beginning of what I laid out, and based on price action on
the lower timeframe and what everything else was doing, it was clear to me that
this one was 'there', and the time to watch price action was upon us. Remember,
as I always say, think areas, not exact spots. And take a look at silver, now
that's some jump right off its area.
Now, does gold have a possible bearish ABCD
right here? Yes, it does. And copper is at its lines. And how about the
S&P, back at its last possible 'Wave 2' spot for a rollover. And we are
back at square one. The trend in all these is up. Maybe they are done, but I am
not going to try to call that top. I may play countertrend, on a lower
timeframe if I have a setup, but I want to think management mode here for
existing longs and see what happens this time, and not trying to get short to
call a top. So far, staying long side bias has served me well. I want to stay
with that until all the top callers are laughing at me. Then I know I am
trading my plan correctly.
So, how do you think the methodology and my posts did
last month as far as showing some interesting spots and providing some
worthwhile analysis and premises? I think I did okay. Any time I can show some
areas, with explanations of my reasoning, and give the reader something to
follow along in real time, then I am adding value to the experience, I think.
Many times areas are ignored. That doesn't reflect badly on a methodology (mine
or anyone's), since many times the market does whatever it pleases. The
important part is to have a detailed, comprehensive 'Trading Plan' laid out
from start to finish, one you feel has an edge, and then to apply it over time
to attempt to exploit that edge. Play the game as a probability game, over
time. Hopefully today's commentary has been of value in helping all my readers
in the development of their own personal 'Trading Plan'.
The next
commentary will be next month's edition, posted by Sunday evening, April 4,
2010.
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