Human Nature 1.0

As you may have heard – the Mole does not read the news. Actually, to be more precise, he avoids it like the pestilent mental contagion it has evolved into over the years. A bit over a year ago I actually wrote a pertinent post in which I encouraged all readers to unplug themselves from the matrix and in its stead adopt a strict information diet as part of an effort to regain peace and mental balance. However, that said, as a financial blogger my readers often feel the need to share with me salient articles, especially those high on the list of needing to be preserved for posterity.

And with that I present to you this morning’s jewel:

Dow 20,000 – here we come. It’s different this time.

Now whether the Dow will one day actually touch 20,000 is not the issue here. What is however is that of human nature. In a world where information can spread across the planet in a matter of seconds, where the relevancy of news often only lasts days, and in which the lifespan of our devices delivering said information is now measured in mere years, and sometimes even months, there is one important component that has not been upgraded for a very very long time.

Yes, you probably guessed it. It is us. Human beings have not changed significantly for tens of thousands of years. We may have been smaller or even taller at times, we dress differently, and our social customs have evolved over time. But the human brain of a prehistoric fellow bashing it out with saber tooth tiger some 15,000 years ago is almost identical to the hipster yapping on his cell phone in the theater while you’re trying to enjoy the latest 3D blockbuster featuring said saber tooth getting clobbered at the local cineplex.

So here it is – the weak link in the chain – and the final recipient of the flood of information that now is being channeled into our collective minds. The hype, the gossip, the fear du jour, the big news, and of course the small news courtesy of our latest glorious digital contraption designed to enrich our lives – social networks. We are now being inundated with information 24×7 and we all squeeze it into our strained frontal cortex and leave it to our synapses to duke it out with each other. Somehow we all try to make sense of it all. Whether or not this is a good thing or a bad thing isn’t the purpose of this article, I leave it to the reader to make a call on this one.

What is the issue is that we have not changed in any significant way. Not only are we the same human physically we are almost identical mentally. So effectively we are using the same brain designed to alert us to that saber tooth lurking behind the next rock to drive cars, operate heavy machinery, write essays on a computer, analyze charts. You get the point. Basically we are still running the very same mental firmware that kept us going tens of thousands of years ago. Fortunately it’s rather plastic and thus far we have managed to somehow keep up even if sometimes it feels we’re scraping by the seat of our pants.

There however is one aspect of our consciousness that has barely changed and is almost identical to that of our ancient ancestors: human nature. If there is one constant you can expect in the game of trading the markets then it is that of human nature. For one, and all wishful thinking to the contrary, we simply don’t learn from past mistakes. Yes, we may realize that touching a hot plate will result in burned mittens. But even that one gets re-tested every once in a while. Predictions are another mental flaw we keep on pursuing – for some reason we constantly try to predict the future. Sports, lottery numbers, our personal future, the weather (although we get better on that one), you name it. Are we any good at it? Yes astonishingly we are – but only when it doesn’t matter. But we are in fact pretty horrible at making predictions when it matters the most. When it comes to tsunamis, earth quakes, terrorist attacks, stock market crashes, we have a pretty bad track record. Just ask Nicholas Taleb.

Which brings me to the financial markets – supposedly a system built on market efficiency. A hypothesis which asserts that financial markets are informationally efficient, whatever that means. The truth is that it is good old human nature, yes the original version, release 1.0, that still drives us and thus the markets. And that invariantly leads us to conjuring up silly predictions like the one featured above. Let me ask you – the reader: Did you back up the truck and loaded up on long term Dow 10,000 options in March/April of 2009? Or two years before that – did you sell your house and borrowed a few hundred grant from your local loan shark to short the heck out of the S&P in mid to late 2007? And then took profits in early 2009? Of course not. You didn’t do any of these things because you didn’t have a damn clue.

But for some unknown reason that doesn’t keep us from trying, does it? It’s human nature – v1.0. And I don’t expect an upgrade any time soon. I leave you with a few quotes from some enlightened minds – who knows, perhaps somehow they managed to acquire an early release of v.1.1?

“Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.”
– Albert Einstein

“Never underestimate the power of stupid people in large groups.”
– George Carlin

“People often claim to hunger for truth, but seldom like the taste when it’s served up.”
– George R.R. Martin, A Clash of Kings

And my favorite:

“Most human beings have an almost infinite capacity for taking things for granted. That men do not learn very much from the lessons of history is the most important of all the lessons of history.”
– Aldous Huxley

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Cheers,

Boring Thursday Morning Briefing

Welcome to our morning briefing. Here we are reviewing short term setups ahead of the NYSE opening bell. If you are a scalper or swing trader then these setups may be of interest to you. As usual keep in mind that these are short term setups although they could be used as early entries for more longer term positions.

Things are pretty flat out there right now and the only short term setup that caught my interest this morning is the NQ which however is a pretty nice one. First up we’ve got increasing Bollinger compression here as the 100-hour is closing in after three sessions of sideways churn. It’s sitting right on top of its 100-hour SMA and the 25-hour is swinging up to meet it in a few hours. Finally price are closely flanked by a NLSL and a NLBL – pretty sweet!

I’d be long here on a breach of 3,356.5 with a stop below 3,347.75 – short on a drop through 3,342 with a stop above  the 100-hour SMA. I can’t guarantee you it’ll take off today but it’s a good inflection point and that’s the best we can hope for.

FYI – stay out of Pound related FX trades around 12:45pm EDT today. And tonight at 7:30pm  we’ve got the Japanese CPI numbers – that ought to be good for a few wild swings.

Before I go here’s a little goodie. The AAII Investor Sentiment Survey now bears the third most bearish reading in eight years. Alright, see you guys in a few hours.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Cheers,

Why So Serious?

Wall Street is going soft and I have a ton of charts to back it up. Bottom Line: After four years of endless bailouts and quasi unlimited QE cash traders across the board as well as investors have adopted the mental fortitude of an out shape boxer on a cookie dow diet and a matching waistline. Of course when you let yourself go you lose your edge quickly.

And like on the street when it comes to staying ahead of the game there usually is a price to pay. A new guy shows up and takes over your territory. It may not happen tomorrow, next week. or next month. But based on what I’m seeing some change is on the horizon. A great example was my previous post today (yes, I have been a busy bee) in which I highlighted how fund managers across the board just sat through an 18.5% correction in AAPL without lifting as much as a finger. They just sat there and took the loss. That’s great work there hotshot – I personally know house pets that would do a better job at managing my money. And at least they’re genuinely excited about those fishy treats.

But nothing shows the level of complacency among investors like the SPXA200R – the percentage of symbols on the SPX trading above their 200-day SMA. As you can see the threshold for buyers has been moving up steadily and is now in the 70 percentile. That’s a far cry from just a year ago when it was somewhere around 20%. Now on the sell side of things there’s not much play left. We dropped from 95% last year to about 80% now. Perhaps we go back to 95% and I have it all wrong but that still leaves the fact that investors have forgotten how a meaningful correction feels like.

While we’re on the subject – here’s the NYSE version but in this case it’s a 50-day SMA vs. 200-day SMA ratio. A break lower usually seems to happen below the 1.0 mark. And we are talking bad breadth here and it’s not due to poor dental hygiene. The moral of this story: If you only have a handful of symbols maintain your index then you’re in big trouble once they start disappointing.

As you may recall we painted a nice divergence at the top which finally managed to trigger gravity. I think medium term this leaves the door open for a more meaningful correction – more on that below.

NYSE up vs. down volume – here we are now in what I call ‘end of minor correction’ territory. Again, I’m going to cover this in more detail below, so stick around (and perhaps buy a subscription).

NYSE advancing vs. declining issues. Obviously the quality of the recent rally left a lot to be desired and we have been painting a monster truck size divergence since after August. Now we are back in the bounce zone despite the fact that we dropped – what 60 SPX handles? Better call the suicide headline – this is clearly considered a major correction these days.

While many investors are expecting a correction and a b-line back to new highs post election market makers – usually the smarter guys on the trading block, seem to remain cautious. Note that the ratio has remained on the low side. If this keeps up despite a bounce then we may get a repeat of what happened earlier in April – a bounce followed by a more extended sell off. I’ll keep my eye on this one, no worries.

JNK vs. TLT – that’s actually one of the more bullish charts on my watch list. Sitting on a solid support line and has barely given up turf. So a bit of a mixed bag across sentiment/momo charts.

But my point stands, which is that investors seem to be rather complacent and oblivious to the cracks that are apparent across the board. And by cracks I mean lack of participation, lack of momentum, degradation of breadth (i.e. internal strength), inability of overcoming important resistance levels (remember the volume hole?), and now non-confirmation over in commodities and on the Forex side.

And of course failure to recognize selling opportunities, which implicitly translates as blind trust in the presence of eternal buy interest. Let’s also not forget the point I made via my AAPL post – a complete lack of short interest after systematic destruction of the bears over the past four years. And that can really bite you in the butt if things are getting thrown in a tail spin. If you think 2008 was bad then think again – at least back then the bears were alive and well and ready to take profits at important inflection points.

So let’s talk equities and where they may head next. Some of you may recall one of my favorite (and probably most simplest) of my LT charts. That weekly stochastic has been spot on for several years now and once again it did not disappoint. What is it saying now? Well, over the past four years we usually have seen a quick push above the 20 mark (our long trigger) but until that happens we may experience more red candles.

My SPX point and figure it out chart apparently has not seen enough blood as it’s pointing at 1380.

That would put it near the 25-week SMA on my weekly panel – I don’t see any long term support ahead of that.

If you recall – just a week ago we received a bonafide VIX signal, and those have rarely failed us since the 2009 low. And it looked like a pretty safe bet until Friday when a juicy first day of month candle up was followed by a complete wipe out. Now, for the record, unless we breach SPX 1402.92 that VIX buy signal remains valid. So Gandolf is providing a valuable service here as it shall not pass indeed. For if it does then we’re going to 1380 and perhaps much lower. On the daily panel shown above we now have a NLSL line up with the 100-day SMA. I think that makes a perfect buy/sell threshold. Above that I want to be long but as soon as we lose it we may be heading into uncharted waters and I would be betting on some red.

A lot more where that came from – let’s look at some P&F and more long term charts. They don’t call me the hardest working mole on Wall Street for nothing!

Here’s a recent favorite of ours – gold – we often seem to be catching it the right way and I hope we can keep that up. As you can see we are now near the 100-day SMA and that means it may try to plant at least a temporary basecamp here.

The weekly shows support near 1660, so if 1670 fails that would be my next candidate for a bounce.

Of course the P&F has to be more bloodthirsty again as it’s insisting on 1560. What’s this, the Spanish inquisition? Frankly I find that a bit pessimistic but given the level of complacency among gold bugs (they must be talking to the ones in love with AAPL) I won’t rule it out either.

Crude has been a sucker for punishment and it seems there’s nothing in the way until about 80 when we may run into some lower weekly BB boundaries. Near that is a monthly Net-Lines sell level (NLSL) at 82 – incidentally at the right end of a rough diagonal support line (sorry for not painting that).

Of course the P&F won’t have any of that and is insisting on 77 as our bearish price objective. It’s evil and I like it – that would be a great level to look for a long entry. In the meantime I will remain short until about 82, after which I’ll re-evaluate my options (pun intended).

Copper looking equally poignant and let’s not forget that it was warning us about equities in early fall. It’s now trading below its P&F target and I don’t see much that would put a stop to it, at least right now.

Here’s the P&F – the price objective has now been fulfilled that means it’s officially in technical no-man’s land.

But not all is lost. The EUR/USD however has suddenly turned into my favorite LT setups of the week. On the weekly we dropped below diagonal support and it also seems that all that monthly resistance looming above has been holding strong – frankly we didn’t even get near that NLBL in the past four months.

And here’s what I’m so giddy about: A brand spanking new double bottom break down on the FXE just triggered on Friday. Possible price objective: 124. Suffice to say that this greatly pleases the mighty Mole as he’s earning in Dollars and paying bills in Euros now. That’s right, I’m going to show that Euro-trash who’s boss!

But that’s not all! Here’s the long term FXY panel which now has us below the 100-week and at the drooping end of the lower 25-week BB.

And as coincidence may have it the Yen also triggered a triple bottom break down last Friday. Price objective – wait for it… all the way in the basement near 118.2. Now that would be a nice X-Mas present, so let’s watch the EUR/JPY, the EUR/USD, and all the rest for some nice entries this week.

Public Service Announcement: I have been working like a dog this weekend and besides the two posts I spent a lot of time continuing my development on the NinjaTrader version of the Mole indicator. I’m a bit too exhausted for a long winded update but in a nutshell let’s just say that I’m discovering exciting new patterns and that great things are in the works for 2013. So stay tuned – I’ll keep you guys posted on all fronts.

Cheers,





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