How To Slow Grind

Just yesterday I talked about what I consider two dirty words in my trading vocabulary – overbought and oversold. A few people chimed in; Scott was among them and he pointed out that both concepts can be useful in sideways markets. I thought about that and on the surface it makes sense – after all I have written about various market periods extensively in my time. Sideways market behave differently than trending periods. However in the end I must still respectfully disagree as we would be comparing apples with oranges.

Clearly once a sideways market has been recognized few are going to point at a touch of the upper channel and say ‘boy oh boy – this market is overbought’. You play the swings – sure – forces are in equilibrium within a contained range. BTW, even in those situations people get screwed because quite often they expect more of the same and suddenly find themselves in a first rip of a rocket. Ooops…

In any case – the terms ‘overbought’ and ‘oversold’ are used over and over without care and for some reason you encounter them most often during strongly trending tape (i.e. short and long squeezes). Like some cat who showed up yesterday with his fancy RSI/stochastic/MACD combo chart which he thought was handed to him by the good Lord himself. Problem is – all these momo indicators can wind up embedded all the time. And poor retail schmucks find themselves trapped after attempting to trade against a strongly trending market. Don’t be that guy!


And almost as to prove my point the tape continues its slow grind higher, marking new highs on the way almost each session now. It may embark on a correction tomorrow or by next March – who knows?? What I do know is that my long campaign has now produced a stunning 13R and I’m starting to move my stop a big closer. That NLSL at 2,020.5 ought to do fine. If I get taken out there I don’t think they’ll find me calling the Spanish suicide watch hotline.


Update on yesterday’s USD/JPY campaign – that’s a good start and as we’ve touched 1R we’re now moving our stop to the break/even point. Nothing else to do right now.


New setup on EUR/CAD – I think a long above today’s high is permissible if it closes as a second hammer in a row. I plan to put my stop below that NLSL at 1.4058.

A few more goodies below the fold – please meet me in the lair:

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And if you’re not trading right now (which is the majority apparently judging by the comment stream) then you may as well learn something useful:

Now personally I’m more of a merengue person (and you can’t beat practicing with a hot latina). In any case I hope your partner is a little less bossy than this gal – daaammnn!!


Dirty Trading Words – Part 1

The late George Carlin used to have a great routine on the hypocrisy of the seven unspeakable dirty words not permitted on radio or television. We all know them and there’s no need to repeat them here. As I’ve had one crappy day today I’ve probably been using all of them several times over – but that’s a different story.

There are however is a list of dirty words I myself have been adding to my trading vocabulary over the years. All of them share a common theme – either they are essentially meaningless or they are aimed at manipulating retail traders into making bad trading decisions. And in that respect what we are dealing with is Neuro Linguistic Programming at its finest. Let’s cover two of them today – actually it’s really just one with a downside variation:

Overbought and it’s bearish cousin oversold.

Every time I hear or read either of those two words my brain lights up and I’m ready to tar and feather the culprit who uttered it. Yes, I have been guilty myself once in a while – here I’ll admit it. But to my defense it’s always been in the context of keeping you guys from picking tops or bottoms, e.g. this tape is overbought by any definition but don’t assume it can’t run even higher. But in the future I’ll make sure to add an appropriate disclaimer as I should not contribute to the propagation of harebrained definitions/concepts.


So what’s so bad about using these two words, you ask? What’s the harm? Because they have absolutely no meaning – that’s why. Just think about it: OVER BOUGHT. What does that mean? Too much has been bought and there are no buyers left? Fine – but if that’s the case when and how do short squeezes happen? That’s right – in so called ‘overbought’ conditions – that’s when. As a matter of fact buying high and selling low is a favorite past time of trend traders and although they are wrong most of the time – when they are right they are very very right and hell hath no fury like a short or long squeeze on steroids.

Just look at the current situation in equities? When exactly do you think the tape here was ‘overbought’? At 1950? At 1970? At 2000? Yes, yes, and yes. So we can derive the following – the word is meaningless as it offers absolutely no value to our trading activities. It’s a cognitive bias with the underlying assumption that buying can not continue just because a lot of buying has preceded it. There are no rules and there is no script as to how tape ‘is supposed to be’ behaving. As a matter of fact markets across the board have a knack for punishing the majority of participants every single day. And usually it’s the ones who share a common belief. Remember one of our prime directives – what everyone knows is not worth knowing.

So why are these two words continue to be used? Because just like any old superstition people have a tendency to believe in things that they have never spent one second investigating. Which is wonderful news for institutional traders as they always need more meat for the grinder – and guess what – you are it. So keep using these words and, despite all evidence to the contrary, keep believing in whatever you are being told about how the financial markets are ‘supposed to’ work. Because actually sitting down and collecting your own statistics would be hard work – and nobody really is interested in that part. I mean banking fortunes by trading the market should be easy right? I can just download some fancy trading app like TOS, open an account, and then let the fortunes flow in!

Moral of the story: Challenge everything you ever hear or read, especially when it comes to trading or making money.


USD/JPY – that hammer is looking pretty nice here and I am willing to enter at today’s highs (which may still change) in tomorrow’s session. Put your stop either below the NLSL or the low of the hammer.

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If you have collected your own list of dirty trading words then please submit them here. I’ll make sure to add them to mine and cover them all over the next few weeks. It should be fun and hopefully it’ll serve to prepare you once (and not if) you come across any of them the next time around.


Major Technical Damage

Wednesday near the close of the U.S. session I really thought the ole’ Yeller had us all by the balls. If there has ever been an opportunity to squeeze the bears into oblivion then this had to be it. In yesterday’s musings Scott confirmed my notion that the series of lower lows and lower highs was still intact (barely) and that the bearish case was on the edge of extinction but still had a small chance of resuming. The odds were pretty minuscule IMO and early yesterday I kept checking the tape waiting for the invariable second shoe to drop.

But then suddenly something very curious happened:

In the last 20 minutes, someone has placed/canceled a 666 contract order in eMini 26 times $ES_F

— Eric Scott Hunsader (@nanexllc) October 9, 2014

Someone at Nanex reported a surge of selling orders (yes, I did find it on ZeroEdge – bite me) and the tape suddenly caved in as all of the other bots followed suit. And the world for the bulls will not be the same again – at least for a while, most likely not for the remainder of this quarter.


Unless – yes unless we see an immediate surge right here TODAY the bulls will be toast for a while. I’m not saying we drop like a rock from here – there will be bounces. But in order to wipe a major stain off the bullish case immediate action is needed.


For we are about to paint an official double sell signal on the weekly E-Mini (and the SPX cash as well). We have a breach of the 25-week SMA as well as a breach of a weekly Net-Line Sell Level. That is bad medicine for the bears and today is the day to somehow make it all go away. In order to accomplish that feat a push above 1950 will be needed – 1960 would be better as that’s where we find the 100-day SMA right now. Bear in mind that both the 25-day and 100-day SMA held up for the fourth time now – that in itself is enough to cast some serious doubt as to whether the bulls are still in charge here.


Not to count out any last minute Fed-sponsored Hail Mary’s but market makers seem to be agreeing with me that trouble looms ahead. Here’s the VXV:VIX ratio and it’s pointing straight down. I would keep an eye on this one today for early signs of divergences – also mind the VIX:VXO chart on the short term side.


Our GBP/JPY equities correlation (based on carry trade activity) is also pointing in the same direction.


Now someone in the comment section pointed toward the final quarter as being a traditionally bullish period. And yes, he was absolutely spot on about that – that’s usually where the bulls rule the day.


And we may still see that happen but let’s look at October specifically. Contrary to common believe it’s actually a very bullish month – the numbers do not lie. But that’s not the whole picture – because it just so happens to have a little SKEW problem…

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!

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You have been briefed – now have fun but keep it frosty. See you guys later this afternoon.


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