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When Not To Be Bearish
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When Not To Be Bearish

by The MoleFebruary 8, 2012

All our FX and commodities setups are pushing in the right direction and I hope some of you took entries when the pickings were good yesterday. I really don’t see any new compelling setups today and as the tape is churning sideways there’s nothing to add to the inflection points I presented in my previous posts.

So let’s take this day as an opportunity to talk a bit about trading psychology. As you may recall we’ve had a failed short setup last week, which was a lottery ticket trade that (as expected) got us stopped out. That particular trade was a rare short term opportunity and given identical condition I would give the very same recommendation. In general however, and in particular in recent months, we have been rather bullish here at Evil Speculator as we saw little reason not to be. Which brings me to today’s theme and one that should be taken to heart especially by retail traders: When not to be bearish.

  1. When the market is clearly in a medium to long term uptrend. I know this sounds rather trite and obvious but you would be surprised how many retail traders read bearish news on certain blogs that shall not be named and continue to step in front of a speeding train, with painful consequences. Of course short term opportunities to the downside always present themselves but in most cases profit potential is limited when trading against the trend and odds are clearly diminished – as evidenced by our lottery ticket setup last week.
  2. When the market is not giving you any reasons to be bearish. It’s one thing to try a few OTM puts near inflection points but it’s another to bet the farm on a market reversal on a whim. Do not short a bull market unless there are very very clear reasons to do so – and there a few and far in between. A VIX sell signal is one reason, an inside candle or RTV Sell another, and if possible a combination of several. And even then – even if all the stars align your trade may still fail – as again evidenced by last week’s stop out. Remember my post about the ‘weather’ and how the very same setups have varying odds in different market conditions?
  3. Because the market has been going up for too long now. This kind of relates to the previous point – just because the market just ran for a few hundred handles doesn’t mean it’s due for a correction, short or medium term. That is one of the rules trend traders live and die by. Remember their rule is to buy high and to sell low. And you realize how well that can work in markets like the one we’re experiencing right now. Overbought conditions are what short squeezes are made of.

February is supposed to be a very bearish month and although I do not rule out a meaningful correction near 1356.48 I would recommend that everyone take a hard look at the simple spoos chart below before taking out any long term short positions.

What’s particularly interesting about this is the fact that we have touched a Net-Lines Sell Level on the daily ES futures only once in the past 2.5 months. And that breach was reversed the very next day and then continued to bubble higher. And all that despite clear divergences on the momentum side, an ensuing VIX sell signal, and über-bearish news galore every time you turn on the TV. Clearly the market was not paying any attention to any of the aforementioned and merrily continued to bolt higher – despite and perhaps just because of it.

Once we reach SPX 1356.48 we will yet again have a small opportunity of a reversal and even if I take a out short position and the trade goes my way I would be very very quick to take profits. I simply do not see any compelling reasons to be short right now, at least not on the short to medium term side. As Jesse Livermore learned a long time before any of us were even born: When it comes to the trend – always follow the flow of least resistance.

For a more in-depth analysis of current market conditions I strongly recommend you read my weekend post as I provided ample evidence and correlations to prior comparable periods.

Short Term View:

On the chart above I have pointed out our current NLSL – and if we see a breach of that it could potentially lead us a little lower. As suggested above I would not let this run too long however and expect support kicking in near 1300. If we see acceleration my next target would be 1260 and if that fails 1240 is where the 100-day SMA would provide ample support. Of course all that is mental masturbation until we actually see a reason for a short trade. Until we breach a daily NLSL or get near SPX 1356.48 I see very little reason to look down.

Cheers,


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • Anonymous

     3 reasons – I am memorizing them right now…good stuff!

  • http://iberianviews.blogspot.com/ catracho

    Good post! Talking psychology also good to know what sentiment is like . If we get to 1450 (quite possible) and mainstream news and dare I say it Joe public has turned bullish then that would be a warning to get out and maybe even test the short side. If we get there and the herd are still incredulous about the rally we may see higher levels. Obviously not in a straight line. Until then BTFD’s!!

  • Anonymous

    Picked up NGSX again cheap:)

  • Anonymous

    good, smart post.

  • Anonymous

    If we tank 60 or 80 points tomorrow, this is going to be an historic post …

  • Anonymous

    Bull flag 5 min

  • Anonymous

    Still not stopped out of my shorts.  I’m hanging in there by the skin of my balls.   See no reason to bail now, it was always a low risk trade.

  • Anonymous

    1) One day the sun will not rise
    2) One day Prechter will be right

     (1) is likely to occur before (2), with probability p>1

  • Anonymous

    A lot can happen in 5 minutes
    Let see is there a dive at the finish line to make 1350+ spx
    Finger on ‘sell’ button come what may before close

  • Anonymous

    sold – do i need to leave a minute or two before close to allow broker time to sell

  • Anonymous

    Isn’t AAPL the little everready bunny out there motoring higher?  There were times in the past where I talked myself into shorting that little bugger based on “short term oversold” etc and had my head handed to me.  That is why I wholeheartedly concur with Mole’s sentiment:  we are certainly in a bull trend and standing in front of it is a good way to get run over.  

    I am seeing some signs that things are waning, but hardly enough to stake out a big position on.  In particular, AUD.JPY, GC, $VIX among others have not confirmed the direction reversal today with quite the strength or conviction that ES did after reversing around noon and crossing VWAP.  Once again, ES is starting to look tired (even if it did get up pretty close to high of day by the close).  That being said, it has looked tired but held its own all week.  I’m keeping my lottery ticket puts another day, but can’t let my eyes start seeing what should happen as opposed to what IS happening.   This market is still in bull mode and should be traded with that observation squarely in the fore until demonstrably wrong.  

  • Anonymous

    Heck, that’s not sticking your neck out much since the sun will rise in the West on December 23 after the Mayan apocalypse happens and the earth starts spinning in the opposite direction.  

  • Anonymous

    Time will tell if Mayans are right or were just Brazil nuts :-)

    anyway “Remember their rule is to buy high and to sell low” – surely Mole means opp.

  • http://evilspeculator.com molecool

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    D   A   I    L   Y      Z   E   R   O     H   A   S      B   E    E   N      U   P   D   A   T   E   D

    ????????????????????????????????­???????????????

  • http://evilspeculator.com molecool

    Yeah, that’s always possible. But thinking like this is what gets you killed mate.

  • Anonymous

     Yeah, but it would be IRONY CITY

  • Anonymous

    Mole
    Good post.  Since as you say we keep getting NLSL on the Daily and Weekly charts and the opening BB’s . If this initial trending action in eqiuities continues we need to be ready for it. Went back and read the trend trading posts because a few currencies are trending also, on a Daily basis at least. 
    Trend trading is also the hallmark of the DeMark indicators. So I plan to just be watching for any good trend entry/exits for now. No plans to enter immediately, we do have DeMark Sequential Sell Setups (trend ends) in place in the multi day, weekly and monthly charts. In one of those multi day charts a new uptrend HAS started, on 2/01, and in the Monthly it started in December of course. So if the others show new uptrends starting  then it could be a weeks or months in duration.

  • Anonymous

    Hey Rats. Quiet week for me as I pursue selectivity in the setups I take.  I had a standing order to get into GBP.JPY on a retrace of the hammer candle earlier in the week, but it didn’t fill.

    I did get a nice entry today in sugar.  I had a buy limit at .2428 right above static and dynamic support.  After a false break above yesterday’s high, price retreated hard, just triggered me in, and then bounced convincingly off support.  My stop today was below yesterday’s low; I’m moving it to a few ticks below today’s low – just below breakeven.  Target is at 3R.

    Comments and observations welcome.

  • Schwerepunkt

    that skin is mighty thin M8. 

  • Anonymous

    as far as /SB goes I was long for a few days but exited near yesterday’s high. 
    It did breach the weekly mid BB again. I am still a bit concerned because it closed above that 3 weeks ago, drawing in first wave of longs out of that 2 month base, then really dropping. 
    So I am looking for short term setups now and watching the closes the remainder of the week to see if the move up from the beginning of the month can stick.

  • http://practicalt.blogspot.com/ Darth_Gerb

    Reason #3 – Bravo.
    I knew about that one in 2009.
    I learned that lesson in 2010, branded scars upon my back.
    why just the other day I was thinking #3, SPY 129 put, it’s gotta turn.  today SPY 135!

    Did you ever learn a lesson at some cost.  and in hindsight, the cost was far far more valuable that you imagined?
    now that’s IRONY.
    Risk up some more today [BPSPX]
    http://stockcharts.com/h-sc/ui?s=$BPSPX&p=D&yr=0&mn=3&dy=0&id=p59189522863 
    -DG

  • http://mugabe.myopenid.com/ mugabe

    “On the chart above I have pointed out our current NLSL – and if we see a
    breach of that it could potentially lead us a little lower. As
    suggested above I would not let this run too long however and expect
    support kicking in near 1300. If we see acceleration my next target
    would be 1260 and if that fails 1240 is where the 100-day SMA would
    provide ample support.”

    I fear that waiting for a touch of the 100 day ma will be like waiting for Godot. Look at the market over the last 3 years:

    http://stockcharts.com/h-sc/ui?s=SPY&p=D&yr=3&mn=0&dy=0&id=p22964005404

    Once it gets going it never gets anywhere near the 100 day ma. You need to get in when it’s in the vicinity of the 20 day ma, or at most the 50, although that doesn’t happen v often, either. Again, see the chart.The main reason to be bullish medium term is on the weeklies:

    http://stockcharts.com/h-sc/ui?s=SPY&p=W&yr=3&mn=0&dy=0&id=p95218909719

    MACD aloping up steadily- not topping
    RSI nowhere near overbought
    30 week ma has barely started to go up.

  • http://evilspeculator.com molecool

    You obviously did not read my post properly. Please try again.

  • Anonymous

    Hum, things starting to heat up it seems. 

  • Anonymous

    USDJPY looking good. Going up on bad economic data.

  • Anonymous
  • Anonymous

    Time to come and play newbie:)

  • Anonymous

    Just shorted USDJPY:)

  • Anonymous

    just got home. what are you seeing?

  • Anonymous

    USDJPY failed new high on bed data, what do you think. Dropping like a rock.

  • Anonymous

    ? aud/jpy you mean?

  • Anonymous

    Long time lurker with my first post.

    Excellent post. I completely agree with you that there is not enough evidence to take on any short equities trade. Right now, it’s best to think of a short trade as the opposite of catching a falling knife in a bear market.

    As for commodities, a RTV Sell on Gold and Silver looks as if it’s about to be triggered. For those looking to short, I think this is a setup you should take. I know I am.

  • Anonymous

     Completely agree with you, good timing right now for a good ratio on a 78.6 retrace from 1765.8:)

  • Anonymous

    Ya, sorry:)

  • Anonymous

    Probably not, if you are trading /ES. I would caution you though. If you have stops set fairly tight, I’ve seen a pretty substantial stop run, both high and low, in the last 5 minute candle. I can’t remember exactly the date, but there was a Friday in the past few weeks where that happened. Perhaps due to opex?

  • Anonymous

    Nice candle on /HG:)

  • http://practicalt.blogspot.com/ Darth_Gerb

    some SPX envelopes.
    http://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=2&mn=0&dy=0&id=p03629737739 

    in March 2011, we hit a severe low.  FUKUSHIMA, remember?
    1360.  let’s wait and see.
    -DG

  • Joe_Jones

    definitively a possibility!

  • Joe_Jones

    I am taking this 60 min AUDJPY signal short. I am waiting for the 5min NLSL breach before going in.

  • http://evilspeculator.com molecool

    Gutsy 😉 Set a tight stop – remember that we just hit an hourly NLBL.

  • http://evilspeculator.com molecool

    Interesting – the timing could just work out based on longer term stuff I am looking at on my end.

  • http://evilspeculator.com molecool

    Oh, that’s what you mean – you’re waiting for a failure of the NLBL – got it and good idea.

  • Joe_Jones

    Oh Cool one more Xsig! :-)
    I am still out, waiting. Entry level set at confirmed 5min NLSL breach.

  • http://evilspeculator.com molecool

    Yes, that’s a good idea – the tape is thin overnight and the signals are not as hot early in the new session.

  • http://evilspeculator.com molecool

    Alright – I’m turning in. Good luck with that trade, JJ!

  • Anonymous

     No Mole is talking about trend trading so you go with the trend.  Looking at a long term up trend you will see new high after new high trend traders are happy to get on board if their indicators are in tune.

  • Anonymous

     or perhaps a course in reading comprehension.

  • Joe_Jones

    Thanks. The trade turned out to be a non event. Whipsaw galore.

  • Joe_Jones
  • Schwerepunkt

    I wonder how much “strategic voting” goes on with those sentiment polls? If I was Bearish, wouldn’t it be smart to vote bullish, for example?

  • Joe_Jones

    I take it with a grain of salt. Still the boat is heavily tilted to the bulls’ side.

  • http://practicalt.blogspot.com/ Darth_Gerb

    if you add the bulls & neutral percentages, it’s 79.84%
    the BPSPX is at 83.40%.
    a statistical average of 81.62 plus or minus 2.5 standard deviation.

    definitely correlated. definitely.
    http://www.schwabehaus.de/wp-content/uploads/2010/07/shk2010_rain_man.jpg 

  • Schwerepunkt

    U crack me up . . . fuzzball.

  • Schwerepunkt

    Draghi press conference jerking EUR up and down.

  • Anonymous

    Woow! How about that dollar today, going bonkers.

  • Anonymous

     As dollar falls the RSI continues to make higher lows
    Divergence . . . Last 14 trading days on the 2hour chart

    http://www.screencast.com/users/Innovisual/folders/Default/media/b884359c-b988-41cc-b418-5fed9e816f57

  • http://iberianviews.blogspot.com/ catracho
  • Anonymous

    “slight” ZL reaction right now

  • Joe_Jones

    wake me up when it’s below -1
    😉

  • Anonymous

    That is some serious bull:)

  • Joe_Jones

    Since the market has nothing to throw at us other than the same old BS, I thought to share with you rats some down under joke that I got this morning in my inbox:

    A bloke’s wife goes missing while diving off the West Australian Coast. He reports the event, searches fruitlessly and spends a terrible night wondering what could have happened to her. Next morning there’s a knock at the door and he is confronted by a couple of policemen, the old Sarge and a younger Constable. The Sarge says, “Mate, we have some news for you, unfortunately some really bad news, but some good news, and maybe some more good news”. “Well, says the bloke, I guess I’d better have the bad news first”.The Sarge says, “ I’m really sorry mate, but your wife is dead. Young Bill here found her lying at about five fathoms in a little cleft in the reef. He got a line around her and we pulled her up, but she was dead”.The bloke is naturally distressed to hear of this and has a bit of a turn. But after a few minutes he pulls himself together and asks what the good news is?The Sarge says, “Well when we got your wife up there were quite a few really good sized lobsters and a swag of nice crabs attached to her, so we’ve brought you your share”.He hands the bloke a bag with a couple of nice lobsters and four or five crabs in it.“Geez thanks. They’re bloody beauties. I guess it’s an ill wind and all that… So what’s the other possible good news”?“Well, the Sarge says, if you fancy a quick trip, me and young Bill here get off duty at around 11 o’clock and we’re gonna shoot over there and pull her up again”!

  • Schwerepunkt

    macabre.

  • http://practicalt.blogspot.com/ Darth_Gerb

    (chuckling)

  • Anonymous

    Looks like we penetrated that tredline on the hourly SPX.

  • Joe_Jones

    hehehe
    😉

  • Joe_Jones

    So far we only have a retest of the daily acceleration line
    http://stockcharts.com/h-sc/ui?s=$SPX&p=D&b=5&g=0&id=p64265813172

  • Anonymous

    Had to say if this one will be bought back, IMO not today.

  • Schwerepunkt

    Copper and crude and gold and Euro all up today. I would expect equities to follow, or at least not to dump.

  • http://practicalt.blogspot.com/ Darth_Gerb

    you should know a majority of AM penetrations are bull foreplay.

    [dump overpriced shares, buy at lower price, liquidate puts rest of day]
    SPX 1349.80

  • Anonymous

    TZA up today for some reason.

  • Anonymous

    Closed long USD/JPY at .55, should run into major resistance now.

  • Anonymous

    Coffee is on the move to the downside. Has broken several layers of support after being unable to overcome the resistance above.

  • Anonymous

    TZA is 3X inverse small cap ETF and Russell is down .74% so it should be up about 2%.

  • http://evilspeculator.com molecool

    Well, there’s support looming below so if you are short I would be taking profits soon.

  • Schwerepunkt

    SPX does seem to be having difficulty challenging, let alone surmounting, 1356.

  • Anonymous

    Yes, and tempting me to go short but every time I think about I look at AUD/JPY blasting higher…Thank you Mole for turning me on to that ‘canary in the coal mine’.

  • Anonymous

    Thanks, but I’m not in. Looked at the chart some hours ago and thought it looked suspicious but lacked any hard evidence. I was actually waiting for the hourly NLSL cluster to be broken before going in, but the move came too fast.
    Thinking about shorting on a pullback, though.

  • Anonymous

    Yes, a sign of market weakness possibly?

  • Anonymous

    Dollar still making lower lows while the RSI is making Higher Lows clear trend over a 3 week period.  Gold and Silver are attuned to it’s every move at this time . . . small up tick in dollar gets instant down move in Silver

    From this AM
    http://www.screencast.com/t/YH7dOKewxl

  • seek_truth

    /ES approaching day highs – FAZ no where near low of the day,  this usually reconciles by the end  of the day, experience tells me one of them is on the wrong track

  • Anonymous

    FWIW: Feb 17 expiration Option Max Pain: SPY 130, QQQ 60, IWM 80, DIA 125. Equates to a 3-4% move down….
    AAPL is 455.

  • Anonymous

    Gold has ben selling all day.

  • http://evilspeculator.com molecool

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    ¨°º¤ø„¸  N E W  „ø¤º°¨ 
    ¸„ø¤º°¨ P O S T “°º¤ø„¸
    ¸„ø¤º°¨¤ø„¸¸„ø¤º°º¤ø„¸

  • Schwerepunkt

    I know a sideways grind can be nice — ahem — depending on the circumstances, but this is ridiculous.

  • http://evilspeculator.com molecool

    Everyone – check your email – pronto!