Here comes a non-technical blog entry. (I'm entitled!)
The price action over this last rally top has been super erratic. This is a sign that we ain't in Kansas anymore. Conditions are changing and it is fundamental. The game is changing and the market is reflecting that change in volatility. I interpret the action as heavy distribution.
Yesterday, we saw a false breakout at the open. The event occurred at a key resistance level and that triggered both short covering and the momentum trade. But this breakout was different. It was empty and that was clear from the gappy pops in the thrust. Then there was the heavy selling that just didn't give up. Why should it? After months of conditioning the day trader to buy all dips there were plenty of buyers for the shares. Even the cautious bulls get roped in as they see the down waves stabilize and prices drifting higher - tick, by tick. It's too much to resist. They start buying in anticipation of their traditional reward. Just when the coast seems clear and folks are buying, the next violent down wave hits. This process can be repeated many times, in many time frames. There are enough bulls who are convinced that it will keep going up - just buy, buy, buy!
Take today. What a setup! Who in their right mind covered their shorts on this news! (If you did, please take no offense - just get back in there!). The jobs number, along with any other news item for that matter, is nonsense. It is simply a super short term momentum driver. A pivot point for short term traders. Again, prices rose on short covering and momentum chasers. The media pumping the good news, calling the blow by blow on Bloomberg. All sectors up! No end in sight to this rally. Job data was soo good! We are saved! Get in the market now! This is the greatest buying opportunity ever! Then again, maybe it is the greatest selling opportunity ever - as demonstrated by the big boys when they dumped and shorted this for another 20pts. Fool me once, shame on you. Fool me twice, shame on me. There are a lot of shamed folks out there with third degree market burns.
The problem with all traders - bulls and bears - is that we are impressionable and so easily conditioned. We are also arrogant and think that if we "know enough" we can rationalize the market. The truth of the matter is that there are very few things that we can rationalize about the market. The few things that we can conclude are generally concluded by everyone at once - when it is too late to act upon.
This is a big boys game and the sole objective is to feed off of the smaller guys. We need to be aware of the herd, just as a wolf is aware of his next meal. I also hope the herd can now smell the predators, because though it is too late for many of them, I am well positioned to profit from their panic.
I have no apologies for this position - as I know many of you have similar positions - plus it is a big boys game and folks should trade at their own risk!
Have a great weekend - and short the heck out of all rallies!
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6 comments:
Dave,
But then again, is'nt price always the ultimate judge. Is't the price the final word. And is being right not the same as being agreed with by the market.
Yesterday, the $ and stocks moved inverse for the first time since long.
$ up, stocks and gold down right?
No not friday. Just gold.
$ up, "carry trade" counties down right?
Not friday, all up.
I'm heavy, not full, short like you, Trusting my strategy and homework.
But doubting the market and sentiment.
Good luck.
Hi Paulus,
I love commets that make you think and explore your beliefs...
The market does indeed discount eveything - and price action reflects that fact - the efficient markets theory...
If the market discounts all, then historic price action serves as our tea leaves into the future - the history repeats itself theory...
Now the cool thing about all of this stuff is that it applies in all time frames - the fractal nature of price action...
So, my first rule is to read the tea leaves (study past price action) and assess possible future outcomes (assess the potential of specific setups). I do try to stick to that as much as possible.
Beyond that, on a Friday night, I like to ease of the analysis and reflect a bit on what I think is happening - recognizing that it is all baked in - regardless if I am right or wrong. Ultimately, our accounts will be up or down - and it does not matter if we are right or wrong about a piece of the puzzle!
I will say that every technical signal is as clear as can be. There will be a pause, correction, and at minimum wide range consolidation in the coming weeks/months - possiblly proving that we are in fact still in the major downtrend heading to new lows. I have a post later today to justify this statement.
With respect to the dollar comment, my observation is the opposite - meaning the dollar and equity trades HAVE been INVERSE for quite some time. Meaning, the index rises and dollar falls and vice versa. I have also said that this relationship will eventully break. Regardless of the dollar direction, the stock indexes can not continue to rise. I think the world has made it clear that the dollar can not continue to decline or it will no longer be suitable as a world currency reserve.
The evidence of this is clear. Most recently, Japan announced it's intention to intervene. Gold purchase are on the rise by countries such as Russia and India. China has threatened to stop buying our debt. Finally, Obama has acknowledged that if we do not start to control the debt we'll get that double dip recession.
Gold is on a tear, as I would expect. The inflation risk is high and the fear factors of default are building. Frankly, I do not know how the world is going to escape a major currency crisis in the coming year or two. But this is going to take some time to unfold and the everyday actions of the participants have to be interpreted in a broader context.
In the mean time, the dollar is still trading within it's long established down channel. I have been able to profit from this channel many times and until we break up or down I will trade the range. (See a post of mine from a week or so ago describing this channel).
Bottom line for me is that now is the time to be short. The upside risk is probably 40pts and the downside risk is perhaps safely 100pts, likely 160-200ptspts, and perhaps as much 460pts+.
Cheers Paulus - and thanks for your posts and viewership!
Hi David ,
I have to note how almost all of the major moves in the zig zag top have been such the unless set up prior , no one got in , and it you tried to get in, it was a trap. First 5 minute, last 10 minute move , Holiday move.
Three times this week on the shoot up I went short, I know there was a time not so long ago I would have gone long and wrong . Reading your Blog has been part of my education.
There a few Bull cases to note ,
Its not to hard to turn the triple top into a expanding triangle .
( We would need to hit 84ish and bounce off )
We are still in an up channel inside the larger channel.
The triple zig zag , should end with one last blast up.
On the other side , I have no delusions that I can count the mess that is the currant chart,
That said , a 5 wave up can be seen
from turkey friday low . wave 4 being the late day sell off Thusday , and wave 5 being Fridays high.
Paulus , I am not sure I would agree that the $ and the spx where disconnected Friday, after the shot up , the market moved down as the $ rose, the late day rise was as the $ cam off its high .
Sunday Night should tell us if the $ trend has really changed .
Good Luck to all
Remarks much, very much appreciated Guys
Not to defend myself, but I was referring to my aex (dutch) index positions wich closed almost on HOD. My "all" was an inaccurate word.
As I'm trading in europe my charts were: €/$1.506 open €/$ 1.488 close.
Aex + 1.2%, (SPX + 0,52) at close. So my disappointment ( 4+ point up) showed.
Anyway my lesson is either trade more Emini, so I can relate direct to $ and US TA (and your work Dave!), or focus even more on differences between the continents.
Have a great weekend
Hey Payline,
Check out my latest post - it will help you step back away from the noise of the last week or so. You may recall, I predicted increased volatility during the topping process several weeks ago and when this happens, move up in time frame and view CLOSING LINE CHARTS ONLY! I blogged about the 10year weekly today - but look at the 100 day daily CLOSING LINE chart. It will help you to feel more confident about what is about to occur!
Hey Paulus,
Nice to have the influence from Europe on the blog. Thanks for posting your thoughts and I am glad you get something out of my rants!
Cheers.
I'm short but I am not making any big predictions. We are definitely in the middle of a big squeeze right now. SPX is weak but some other stocks were fairly strong the last few days.
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