Simplicity – The Art Of Complexity

Yes, I’m back – with a vengeance. Having barely looked at the tape for the last two weeks I return with a much better perspective of what’s important and what’s not. And what will be important to us going forward is an increased focus on simplicity – which is the art of defining complexity.

Remember when I told you that there would be no reversal ahead of the midterm elections? How did I know that? Quite simply the ‘path of least resistance’ was clearly to the upside, plus the charts quite obviously demonstrated that the slightest dip was immediately being bought.

Done.

See, most of us harbor an inherent conviction that more is better – meaning that the more information you look at the better you will be informed, and thus the better your decision making process will be. I bet that many of you spend several hours each day perusing financial news, differing market analysis, a collection of trading related blogs, trading chat rooms, you name it. Now multiply all those hours by 300 days (I assume you take a few days off each month) and you get to several weeks worth of collecting financial information which in the end proves to be absolutely and utterly useless.

Just think back – last month – can you remember all the opinion pieces you read on the Dollar, the Euro, Copper, equities, etc. – how many of that actually gave you an edge in the market? I bet you that most of them were either wrong and if they are right it was sheer coincidence, meaning that the same source probably was wrong in a majority of the cases before and will be so again in the future.

Look – I just spent two weeks away from the tape and when I bothered to take a peek nothing that had transpired surprised me the very least. So, as I am running a trading blog I am facing an inherent conflict. Many of you want me to post more and be more active – this way you feel like your subscription Dollar is truly ‘earned’. Well, I beg to differ: If I told you several weeks ago that we would not correct and that we would continue to either melt higher or at least hold current levels, wouldn’t that be worth something? Wouldn’t me telling you that in simple terms save you a lot of time and keep you from losing your shirt by trying to step in front of a speeding bus?

Oh wait – I DID!

That’s right – just look back – I was quite clear on the subject and rather insistent that there would be very little downside ahead of the midterm shellacking the Democrats were about to face. So, if you are upset about me leaving for a week or two – well, don’t! Because I did give you everything you needed to know. And if you listened to my musings your portfolio should be doing just fine today.

And that’s how I will keep it going forward. Frankly, I don’t care about Ben Bernanke, I don’t care about the Fed, I don’t care about POMO auctions (except that we don’t want to be short on those days), and I don’t care about the housing crisis, politics, or any rumors circling the blogosphere. All I are about are my charts and what I deem to be essential to planning my trades. Anything outside of that is nothing but mental masturbation.

So, what you have to ask yourself is this:

• Why are you here in the first place? To win and bank coin or to chit chat?
• Which sources/types of information are really useful to you?
• When you run into a piece of information – is it really pertinent? Does it give you an edge?
• Do you care to expose yourself to more information than you need to make an educated trading decision? If you do you are wasting your time.
• Are you doing this to make money or for entertainment? If it’s the latter I suggest Vegas as a preferred venue.

I know these are very basic questions – but as we are all human beings we are very easily drawn into the ‘social aspects’ of participating in the financial markets. The drama, the losers, the winners, the controversies, the bad, the good, and the ugly. Fade all that out and what’s left are the dry and boring facts. A lot less entertaining than Fox News or MSNBC – but in essence fact combined with reason translates into knowledge and thus furthers your decision making process.

Simplicity is the art of complexity. If you empty your mind and remove everything non-essential you will find how simple trading can really be. Listen, it’s not about being wrong or right – I make good calls and I make bad calls – perhaps the ratio is 60/40 – which is better than most. But what matters is what we do when we’re wrong (i.e. cutting our losers) – and of course when we’re right (i.e. riding our winners).

What else do we need to know? Nothing!

So, let’s try something else. Let’s pretend we all just came back from Asia after a two week break. Look at your charts – and try to not anticipate – just absorb what you see. Fade out all the crap – do something else instead – learn a new language or pick up a hobby. Limit yourself to posting your favorite charts here – make sure that your mom can understand them – because if she can’t then they are useless.

Alright – I have a few things worth looking at ahead of Monday – so, let’s take a look:

The Dollar has been kicked in the groin with Ben’s iron plated Doc Martens. During my absence the DXY dropped through a three year support line, despite heavily oversold conditions. Which is something I pointed out weeks ago in case you remember – extreme conditions in (manipulated) currencies and commodities can prevail for extended time periods.

It bounced back on Friday and the question now looms whether or not this was fake breach will hold or a real one which would imply that the current bounce is a last kiss goodbye ahead of a major drop. In my mind the 74.95 mark (i.e. 100% of wave A) will be key in painting a floor here. If we drop below that then 74.16 must not give – if it does you can kiss the Dollar goodbye and you better start swapping your saving account for Renmimbis.

On the long side I think that we need to see a bottoming pattern first before we may see a push to the upside. Again, something I have talked about for weeks now. A single green candle to the upside only serves to feed the shorts and unless a level can be held for a week or more a floor is not in place. I am fairly sure the sellers will soon stream in again and as long as the longs are unable to make a stand it’ll just get uglier and uglier for ole’ bucky.

What has happened on the Dollar side has of course benefited commodities. Crude oil has enjoyed a nice upward channel for over a year now and unless the Dollar finds strength we may be heading toward triple digits again. Now, I do see a bit of a divergence here and we may see a little drop but if we do the 75 mark should provide quite a bit of support.

Sugar continues to burn the shorts – you may remember my post on that a few weeks back. The stochastic has now painted a bounce level around the 65% mark which should be a good buying opportunity – until of course it doesn’t. Calling tops/bottoms in sugar is near impossible but as long as the Dollar is unable to paint a floor I expect this situation to prevail.

Copper has and continues to call the shots – a very easy chart, don’t you think? And unless we see a clear divergence I think the bullish party in equities will continue. It’s all about the Dollar after all. As a side note – I think that Yelnick may be rightly concerned about the risk of margin compression: the inputs rise, but prices of end products remain about the same, squeezing margins. A scary outlook indeed.

Just look at the gold/silver ratio which, like the Dollar, has pushed below a three year support line. The difference here is that it didn’t bounce back and if we push below 51 we may go all the way to 48. I find it almost mind boggling that we dropped from 68 to 52 less than one quarter – that’s a 25% change!

A lower gold/silver ratio means that either gold is getting cheaper versus silver or that silver is gaining on gold (since you are getting less gold for the same amount of silver). A current ratio means that 52 ounces of silver buy you one ounce of gold. Or in other words – the lower the gold/silver ratio drops the more silver is catching up with gold, i.e. a gold/silver ratio of 1 would mean that silver is worth the same as gold.

Traditionally a high silver price reflects strengthening economic conditions but I think that the recent surge has more to do with speculation and a destruction of the Dollar than a boost in the U.S. economy. If you disagree please post your evidence in the comment section and I will consider it.

The chart that rules them all – they daily Zero. It did paint a little drop in mid October but that one was corrected fairly quickly. And it clearly shows that the momentum is fully with the bulls – all I see on the raw panel (on the bottom) are spikes to the upside. Only a clear bearish divergence would led me to believe a meaningful correction is looming – but thus far I just don’t see that. And if we do see some downside look out for an accompanying bearish signal – if there is none then it probably means that any dips should be bought.

Bottom Line:

And that’s all I have for now – as long as the Dollar dies equities will either thrive or hold, and so will commodities. And that’s really all you need to know. Yes, equities are probably due for a correction – but when it happens I don’t think we’ll see very much downside unless we see the Dollar pushing hard and unmistakeably to the upside at the same time. We are now fast approaching the seasonal Santa Rally time cycle and although miracles do happen the next best opportunity for the bears on my calendar is in early January.

Until then the path of least resistance continues to the upside. With that said – I wouldn’t want to be long here – although I know that this trend has the means to prevail I don’t see a clear edge on being long here. Best to stay aside and to wait for a juicy selling opportunity. That doesn’t mean however you can’t devote a small portion of your assets to selected long positions – I’d love see more long symbols in the comment section. Any takers?

Cheers,

Mole