Darkest Before Dawn

Emotions are a very powerful force especially when paired with recency bias. Plus we are extremely good at worrying about things we have very little control over. If it rains a lot we worry about possible flooding – if there’s a long draught we worry about not having any rain. Very few folks think about the possibility of droughts during a wet winter (when you could prepare for it) – or floods during a dry one as the one some of you guys are experiencing in California right now. That’s how we’re wired and surprisingly it seems to works pretty well in the natural world – you really can’t argue the lessons of Darwinism.

When it comes to trading however all our basic instincts run orthogonal to what we should be doing. If you’re trapped long right now then all you can think of is about the possibility of a bounce. You want out out out – as soon as possible. Why is there no bounce? Will there be one soon? Finding ways to perhaps leverage the current move or objectively analyzing what may lay ahead based on the current odds and technical evidence is probably not on the forefront of your priorities. But that’s exactly what you should be doing. If you got trapped long then you lost – simple – it’s done. If you were clever then you got stopped out a long time ago – never ever let your losers run. And if you were really really smart then you listened to me three weeks ago and didn’t touch equities with a ten foot pole.

Once again I’m seeing a lot of high-fiving by a few folks who simply cannot help themselves but engage in making forward predictions. Yes, of course a big move was on the horizon after being trapped in a trading range for weeks on end. But that release could have gone either way and it could have happened last week or next week or perhaps in February. I know you just can’t help yourself – you really want to be able to predict the future and even if you try ten times and finally get it right the eleventh or fifteenth time it will only reinforce the illusion of your mental super powers.

This is all completely useless and you are wasting your time. If I come to you and say ‘we’re going to get a BIG move’ then the next thing I’m going to ask you is ‘when exactly and in what direction’. And where the frill is your compelling evidence. And finally – what is your track record making these predictions? Otherwise it’s absolutely negligible from a trading perspective. I’ve seen folks repeatedly trade themselves into ruin waiting for those big moves that they hope will double their accounts overnight. After having burned through their own assets several times over waiting for Godot.

But if there’s any prediction I am willing to offer then it’s that retail will never ever change – after all it’s what keeps feeding the big machine. I can try to keep some select out of trouble and sometimes I do succeed. But sadly most of you guys will read this, scratch your heads, and then continue to do the very same thing next Monday. Which is fine by me – we need suckers on the other side of our trades.

So let’s see where we are. In ugly central hitting every branch on the way down – that’s where. And I would not recommend attempting to be long here until we see some price action suggesting the possibility of a bounce. Until we have that we have no evidence and are operating in the dark. On the weekly panel the spoos will most likely close below a NLBL and that’s a reversal – so the bulls are officially on notice.

Even uglier picture over on the YM – the first support I see there is near the 100-day SMA or perhaps that weekly NLBL near 15610 – quite a few handles to go.

NYSE breadth thus far is also congruent – which means that this sell off is still real and has the potential to continue.

However there are two momo chart that suggests early signs of profit taking – please step into the lair:

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If you had a bad week then console yourself with the fact that it could have been a lot worse. That’s right – you could have been long the HKD expecting mean reversion. Keep this chart next time you expect platykurtosis (i.e. mean reversion) over in Forex. Just look at the second or third white candle after the breach and then ask yourself if you may have expected a reversal there. Funny how everything always makes so much sense in hindsight – isn’t it?

Ponder about that why you crack open a cold one. And then try to enjoy your weekend – life is short 😉