Steadily – Consistently – Systematically

Oh boy – the horse-wash I have been hearing over the past few sessions deserves a category on its own and they should be giving out Oscar nominations for the most hare-brained mental masturbations. It seems the hamster is running in overdrive as justifications for blatantly bad trading decisions are literally crawling out of the woodworks, blaming everyone from the Fed, ZeroEdge, the Chinese, Russian hackers to the Easter Bunny. Without exception the one true culprit is being ignored, which of course is the very person who placed the losing trade in the first place.

2015-08-25_trade_gone_bad

Turns out that certain individuals, who should know better and shall remain unnamed, took it upon themselves to go massively long ahead of the weekend. Quite frankly I don’t even know where to begin. Not only have I (and a few others) repeatedly documented evidence pointing toward large scale distribution in equities over the past few months. But at minimum it should have been clear that market conditions were changing and that the bull market we had been traversing since 2009 had either ended or was limping along on its last leg.

But even if you ignore all that for a second – at minimum the sheer fact that intra-day volatility was steadily increasing was screaming at us from almost any chart. On a daily basis now we have been witnessing wild swings in equities, futures, bonds, forex – the signs of market dislocation were literally everywhere. Now taking out large directional positions is considered a fool’s bet in normal market conditions, but to take large risks in a sideways volatile market is tantamount to begging to be stomped on. If one insists on participating then the exact opposite should be done – hunker down and use small position sizing in combination with wide stops. Volatility now works in one’s favor as opposed to wiping out your account if you happen to be wrong. And the chance that you’ll be wrong in a sideways volatile market is the only safe bet one can take.

But all this is symptomatic of a much more serious underlying disease. Many retail trader don’t have a system and make discretionary trading decisions based on hunches and spurious trading ideas. I keep seeing a sole focus on taking entries instead of position sizing, campaign management, and most importantly self management. To once again quote Van Tharp: Successful trading is 40% risk control and 60% self control. In turn the risk control portion is only half money management and one half market analysis. Yet most traders emphasize market analysis [and especially entry taking] while avoiding self control and de-emphasizing risk control. To become successful traders need to invert their priorities.

What I find even more tragic is to see experienced long term traders with years of experience ignore very basic tenets of the trade and engage in what I would categorize as pure gambling. Not only does this lead to more addictive behavior but it can as quickly destroy one’s career and even one’s family as it can wipe out a trading account. Over the past few years I have repeatedly documented my journey as a trader and in particular have highlighted that small incremental gains in combination with compounding is the only avenue leading to a successful long term career in trading.

Now if you sat the past few days out then you may just regret that fact and kick yourself for missing a ‘huge opportunity’. As a matter of fact one of my readers here decided to ‘take some time off’ yesterday after he was unable to pull the trigger on a volatility long  play before the weekend. And you may guess what I’m going to say to that: Better wishing you were in a trade than wishing you were out of one. 

Clearly being able to act when the odds are in your favor is a big aspect of successful trading. But I ask you – are the odds really in our favor when market volatility is on the verge of exploding? You always hear about the story of the guy who was short before the market tanked (I actually held a small number of contracts but so what). The story you should be paying attention are the ones of dumb or emotional trading decisions in the face of mounting evidence that things are about to become unhinged.

So there is no reason to kick yourself over sweat over virtual profits you may have missed out on. I suggest you fade all the noise and excitement which you see circulating right now. That’s all yesterday’s news and although we may see more red candles what happens in between those big memorable days is where the real coin is being made. Steadily – consistently – systematically.

2015-08-25_spoos_LT

There is not too much to be said at this point. The obligatory snap back is in motion as I’m writing this and things are about to get a lot more interesting. Because what follows over the coming days will decide whether we are done here or if this was the first leg into a LT bear market. Clearly a lot of technical damage has been done over the past few sessions which is now on the books. Unless a small miracle happens we will most likely close below the monthly NLSL at ES 2023. At minimum however I expect a gap fill on the weekly panel – if we don’t even get this then we may be looking at a full scale crash situation. And that means – don’t get greedy – take out small positions. Don’t be that guy I described in my intro.

2015-08-25_NQ_LT

The NQ touched both the 100-week and 25-month SMA. May just be coincidence as it has very little technical value given that we haven’t touched either in many years. So price is going to have to do the talking for us here – what we need is more context. Absolutely follow the Zero – it has been invaluable over the past week – as usual.

The future is now – so don’t bring a knife to a raygun fight. If you are interested in becoming a Zero subscriber then don’t waste time and sign up here. A Zero subscription comes with full access to all Gold posts, so you actually get double the bang for your buck.

Cheers,

The Tale Of The Big Bad Bear

Once upon a time there was a big bad bear who lived deep inside an ancient forest. Very few had ever seen him and many decades had past since the last time the bear had emerged from the sanctity of the forest to satisfy his eternal lust for blood. In fact so much time had past, most of the people living in the villages surrounding the forest started to doubt the very existence of the bear. When reminded by their elders to heed their warnings and to not enter the forest, many youngsters laughed at them and openly professed that the big bad bear was just an old folktale and that there simply was no such thing. For one they had never seen such a beast in their entire life and surely a creature with such wanton lust for blood could not possibly exist without anyone taking notice.

Embarrassed by the constant ridicule of their youngsters the elders eventually stopped talking about the bear and as more time passed the tale of the big bad bear slowly faded away, along with the few elders who still remembered him. Many seasons came and passed while the villages around the old forest grew wealthy and complacent. One day the villagers all got together and proclaimed that old forest was in the way of progress. Many more fields could be planted if some parts of it could be cut down. Plus all the wood from the trees could be used to build more houses, bridges, churches, and to grow the villages into one big city. There was no mention at all of the big bad bear as the knowledge of the old beast had long since been forgotten. In the minds of the villagers it had simply ceased to exist.

big_bad_bear

The very next day the tree loggers arrived, eager to finally cease the opportunity to cut down many of the huge ancient trees in the forest. They brought in horses, wagons, and the biggest tree saws ever made, which stirred up quite a bit of commotion and many of the animals living in the forest began to run for their life. Which turned out to be their blessing, because the loggers had decided that the ancient forest was so thick and so inaccessible that parts of it had to be burned down. They laid a few small fires expecting only a few trees to be burned but the fire grew out of control quickly as the old brushwork was so brittle and dry that it acted like perfect tinder. By the time the loggers regained control of the fires a large part of the forest had burned to the ground, only leaving ashes and the burned remains of the unlucky wildlife too slow or old to escape the flames.

Many miles away the villagers were celebrating and preparing to lay claim to the new land freed from the grasp of the old forest. They could see the plums of smoke from afar and were wondering what was going on. So they sent a young messenger to go and inspect the progress of the loggers, then to report back to them. The young man mounted his horse and rode off while the villagers waited eagerly to hear back. Several days passed but the messenger had not yet returned. There was no more smoke coming from the forest and the families of the loggers were getting concerned. So the villagers instructed three more young men to go and search for the messenger and then to report back on the status of the logging.

Three more days passed and the three men never returned. Now the villagers grew very concerned and they decided that enough was enough and that it was time to send in the military. The next morning a company of soldiers rode off with big fanfare and headed toward the forest as the villagers waived goodbye wishing them good luck. A whole week passed and the villagers grew ever more nervous. There was quite a lot of rumors circulating in the village and among many theories on what may have happened the old tale of the big bad bear had once again started to circulate. Many of the villagers ridiculed the very thought and insisted that there must be a more logical explanation as nobody ever had seen such a beast.

The next morning a single solider returned on foot half starved, exhausted, and haggard with great fear in his eyes. He told a story of utter death and destruction – upon entering the forest only a few of the loggers had been found dead and maimed, everyone else had simply disappeared. He claimed that he had fallen behind his company after relieving himself and whilst attempting to catch up suddenly heard screams of terror followed only by eery silence. When he finally caught up with his comrades he found them and their horses torn to pieces with blood and carnage everywhere. In terror he ran off on foot, walking several days and hiding in one of the ancient trees at night. Shivering with fear he had never slept a minute and he swore that he had heard the growling of many bears all over the forest.

See, the old bear had never disappeared and neither had he ever lost his appetite for blood. Many years earlier while hunting he had encountered a sow and thus nature’s instincts took over and produced many more cubs which in turn spawned new generations which spread all over the forest. Neither of the bears had ever seen men or horses and until the loggers arrived had been perfectly happy with the prey of the forest which consisted of deer, rabbits, and the occasional fox. But then the loggers had arrived killing their prey and burning their forest in their boundless avarice. And now, just as many many years earlier, the bears’ lust for blood had been triggered and much of it would flow in the years to come.

Moral of the story: Just because you have not seen the bear for a long time doesn’t mean he’s not out there, patiently waiting to maul your ass when the time is right.

2015-08-24_spoos_LT_update

The situation this morning is fluid and things are looking very critical. We may be in crash territory here and I caution you all to abstain from taking positions.Don’t be stupid and step underneath a falling sword here – you have been warned. IF you are short here (I’m actually holding a few contracts as you recall) then bloody well hold them until you see some white candles on the hourly suggesting a temporary floor. There will be a snap back at some point but it’s way too early to even talk about that. I’ll be reviewing the situation as it unfolds and report back. The bear is back and boy is he in a foul mood!

The future is now – so don’t bring a knife to a raygun fight. If you are interested in becoming a Zero subscriber then don’t waste time and sign up here. A Zero subscription comes with full access to all Gold posts, so you actually get double the bang for your buck.

Cheers,

Long Term Support

Something rather interesting happened yesterday during the E-Mini session. Granted it was a bit subtle but perhaps some of you veteran subs picked it up as well:

2015-08-20_zero

More specifically it’s something I saw on the Zero Lite after I marked a pretty significant bullish signal divergence, meaning price was meandering down while selling pressure was abating. Our modus operandi when confronted with such a divergence is to start looking for price confirmation in order to take out a contrarian entry – in this case a long position. Only problem was – price never budget. Participation continued to contract and then completely flatlined with the tape dropping lower all the way into the close.

As you can see VWAP was never threatened and not even touched beyond the first third of the session. That ladies and leeches we call a consolidated sell off session and that’s been pretty damn rare over the past few years. Just yesterday I mentioned that the bears have been unable to inflict any significant damage all year and this is perhaps the first session where I saw significant selling pressure and even a bit of panic selling toward the end.

2015-08-21_spoos_LT

Which brings me to the big picture, because for the first time in a long while I see long term support levels being threatened. As you can see the weekly on the left shows us only a few handles away from the 100-week SMA. But much more significantly – the monthly panel on the right is currently in breach of a monthly NLSL at 2023. Now it’s only August 21st and a lot can happen in the next 11 days. My inkling here would be that we’ll revere this at some point and stab back higher. However, what happens afterward in the coming month or two will show us whether or not the bears are ready to put themselves into the driver’s seat.

2015-08-21_NQ_LT

This is actually quite exciting as we are seeing acceleration plus we have finally abandoned the dreaded range we have been gyrating in over most of the year. On the NQ we are actually accumulating quite a bit more context across the board and this is where I see the most salient entry opportunities going forward. Note how we are touching the lower 100-day, a weekly Net-Line Sell Level, and a monthly NLSL at the very same time. Clearly the 4330 – 4340 range has significance and what happens here today and next week will be crucial.

2015-08-21_NQ_briefing

When it comes to taking entries however I suggest that you keep an eye on the hourly panel. If you are a Zero sub then that’s clearly going to be helpful as well. Yesterday was a prime example how you always always want to wait for price confirmation, especially during strong sell sessions. If you do not see any divergences and if the signal accompanies price then simply go with the flow. Don’t over think this – especially during price corrections. Many of you may be a bit rusty trading trending tape like this after a year of sideways churn. So let this serve you as a reminder that price is always king – do not every attempt to step under a falling sword.

More specifically this means you want to see the following in place:

  • A bullish or bearish signal divergence on the Zero Lite. Make sure the large spikes of the signal ranges above the 1.0 mark – it’s easy to be deceived by pseudo-divergences when the signal range has been tiny for days.
  • Price confirmation. Wait for price to start moving in your direction – do not try to guess when the tide will turn. The more forceful the sell off (or ramp) the more conservative you want to be here.
  • Look for additional context. You can use whatever your heart desired – I personally rely on VWAP on the E-Mini (as shown on the Zero panel). You can use Bollingers, MAs, stochastics, it doesn’t matter. On VWAP for instance I look for attempts to breach it – if there hasn’t been a touch for a long time and we’re far away (like yesterday) then that means selling pressure is strong. So in that context you want to wait for price to give you a clear indication – spike lows or spike highs for instance are something to look out for.

Speaking of spike highs/lows – there is one in place on the NQ right now but it’s still a bit premature for me to jump in here willy nilly. So I’ll wait a bit more and perhaps take out a small long position if I see the lows being respected. If we breach the NLBL at 4364 then I may add 1/2R and build my way up. Yes we are sitting on LT support here but that doesn’t mean we won’t see another stab lower which may be bought back Monday. This should give you a general idea of how I approach things and how I (and some of the senior subs here) are playing the swings.

Finally, do not attempt to use LT charts for grabbing long positions here – you will be smashed to pieces. I hope I don’t have to explain this in further detail but let’s just say that too many retail rats utilize LT charts for ST trading decisions. It’s like taking the bicycle to the toilet – a bit overkill and you bound to bump into walls.

Quite a few setups today – please step into my lair:


More charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don't waste time and sign up here. And if you are a Zero subscriber you get free access to all Gold posts, which gives you double the bang for your buck!

Please login or subscribe here to see the remainder of this post.

Cheers,




    Zero Indicator


    Darth Mole Alerts

  1. poll

    • How many discretionary trades to you place per month?



      view results

      Loading ... Loading ...


  2. NinjaTrader
    Kinetick

    search warrant



  3. recent misdeeds

    1. Inside The Mind Of A Retail Rat
    2. Taking Profits
    3. Relive The Bounce
    4. Rammstein
    5. Sky Diving Elvis’
    6. Steadily – Consistently – Systematically
    7. The Tale Of The Big Bad Bear
    8. Long Term Support
    9. Medium Term Support
    10. FOMC Wednesday