Time To Pay Attention (Again)

Most market participants suffer from chronic recency bias in that they weigh recent data or experience more than earlier data or experience. In particular retail traders more often than not expect more of the same, which actually is correct most of the time. Except for when it matters the most. Come again?

2015-08-31_spoos_briefing

If you have come here for a while then you have seen me use the word ‘inflection point’ on various occasions. I use that term rather deliberately as it succinctly expresses a moment in time in which an equilibrium between potential outcomes can be shifted rapidly by comparatively small movements in price. Say again?

Back in my wave wanking days this is a typical situation I would refer to as the 1-2 conundrum. Meaning – do we push higher and then fall into our graves, or do we drop from here and then ramp higher and continue the long term bullish trend of the past few years. The implication of that would be that down actually would be short term bearish but long term bullish – whilst a move up would set up the bulls for an even bigger correction.

Since then I have come to accept that these are all valid scenarios but that there is quite a bit of a gray zone in between. And without boring you to tears let’s just jump to the conclusion which is that there is a myriad of ways this one could play out. But that is exactly the part we need to focus on. What matters the most right now is what happens in the coming days, starting today! If we push higher on quite a bit of participation (you are a Zero sub, right?) then the bulls have a good thing going and may be able to defend continued attempts to draw the tape down.

Interest hike be damned – whether or not it comes in September or next year or in 2020 – I suggest you watch the tape as it will give you all the information you need. But let me be crystal clear about one thing. If you are a bull then this is most likely the most important moment of the year. On the other hand if you are a bear then this is most likely the most important moment of the year. And if you are neutral – like me – then…. well, I guess you got the point.

By the way, in case you are curious. I am still holding the remainder of my long positions as I have not seen the need to pull them (i.e. my trail has not been touched). I have however advanced it to near the bullish Maginot Line, which in my mind is near 1940. If that one goes then we probably correct quite a bit lower.

2015-08-31_gold_briefing

Gold is actually in a similar spot and I just took a small long position here with a stop below 1127. However it could easily resolve the other way and drop quite a bit lower. The price pattern allows for either scenario which often annoys traders. In my book however this is where the benefit to risk ratio is the largest – in that I can apply deterministic rules within a small price range whilst expecting increasingly larger price moves the further we advance from said price range (up or down).

The majority of people feel uncomfortable embracing uncertainty and perhaps a long time I was one of them. One day however I realized that this is where the real opportunities are and it is probably the one take away I am still thankful for having studied Elliot Wave Theory. However when it comes to predicting future price movements EWT is absolutely useless. There is simply no predicting future price movements – many people smarter than you have tried and all of them have failed. What you can predict however (sort of) is volatility – but that is a topic for another day 😉

Alright, quite a few setups waiting below the fold – please join me in the lair…


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In case you guys need a good tune to get you in the spirit of things:

Alright, if nothing else this is what I need you to take away from this post.  Pay attention now and bank coin all the way into December/January. I mean it.

Cheers,

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 Story Of The Boiled Frog

Alright settle down children – it’s story telling time! I’m sure you all are familiar with the aphorism of the boiled frog. Anyone? Well, they say that if you put a frog into a pot of boiling water, it will leap out right away to escape the danger.

boiled_frogs

But, if you put a frog in a kettle that is filled with water that is cool and pleasant, and then you gradually heat the kettle until it starts boiling, then the frog will not become aware of the threat until it is too late and slowly boil to death.

Moral of the story. The frog’s survival instincts are geared towards detecting sudden changes but it ignores slow gradual changes at its detriment. And guess what – human beings are not too different although I must concede that I haven’t tried boiling anyone yet. But let me assure you that I have seen allegedly sophisticated market participants ignore blatant signs of danger many times over.

2015-08-10_NYSI

The NYSE Summation Index is a breadth indicator derived from the McClellan Oscillator, which is a breadth indicator based on Net Advances (advancing issues less declining issues). I hope you are familiar with the basic concept of market breadth, otherwise Google is your friend. No, there’s no floss for that one.

Clearly the NYSI has been dropping steadily all year despite very little response on the price side. One possible assumption here is that large institutional players are engaging in what’s called ‘distribution’. The process of distribution is much like pouring water on a campfire. Pour too slowly and the fire may burn itself out before the water is gone. Pour too quickly and the water may extinguish the fire. But pour at an optimal rate and it may be possible to use all the water while the fire continues to burn.

2015-08-10_distribution

This is a chart showing you the percentage of SPX stocks trading above their 200-day SMA. I actually looked at this one because my SPX200R/SPX50R ratio wasn’t showing much of a change. And this is why:


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.

Now given all the above – let me ask you this? What’s the difference between you and the average frog? Longer legs? 😉

Cheers,




    Zero Indicator


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  3. recent misdeeds

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