Mental Masturbation Mania

Let’s talk about information overload today. I see a lot of fledgling traders struggle with this issue and I start seeing it creep into some of the exchanges here on the blog. It’s a natural phenomenon in that many folks driven to trading the markets happen to rank in the upper percentage slots on the IQ scale. Their intellect often becomes their curse in that they overthink the situation, assuming that the more information and more analysis they consume the better their profits will turn out to be.

My favorite analogy is the nerdy kid who’s got a crush on the hot redhead in 4th grade and is trying to muster all his courage to chat her up. He’s planned his approach for weeks, has gone through all the scenarios, maybe even asked a friend or two for advice on what to do. The more he thinks about it the more he freezes up, unable to make a move. What if she sees that pimple that showed up last night? What if she give me the bounce and I look like an idiot? What if…. ?

Then, while he’s still tormenting himself with various scenarios, debating what approach will work best, suddenly some other kids walk in the room, smiles at the girl and asks her out for a soda pop. Done – no big deal.

Now, the message here is not that dumb jocks make good traders – the point I’m trying to make is that often less is more. And I’m also not saying that you shouldn’t be prepared – on the contrary. But the key lies in figuring out what works for you and then stick with that. Reading ten dissenting reports on whether or not Gold is going to but higher or drop off the plate is not going to help your case – it’s probably going to frustrate and confuse you. It all comes down to what I keep referring to as ‘noise’ – which is the bane to any trader’s existence.

What makes it even worse is that it makes you ‘feel’ better about whatever you wind up doing. Now you have ample ammunition to defend your winners and plenty of scapegoats to blame your losers on.

“I knew I shouldn’t have listened to that idiot – next time I know better.”

Yeah right – information overload paired with mental masturbation appears to be a national past time these days. People immersed in their crackberries even while on vacation, the volume of instant information we have access to has grown exponentially in the past decade.

Now I ask you this – had you not been able to watch CNBC, read Marketwatch or Bloomberg, listened to the radio, or had have any access to market analysts – if you had only access to your trading platforms and your charts – would you have made the same or different trading decisions? Would you maybe even have done better?

I cannot answer this question for you but I have for myself a long time ago. Which is another reason why I started this blog – to fade out the noise and the confusion. Just the charts – and just the info I know works and has produced results for me in the recent past. If for instance some market correlation breaks, then I ignore it until it works again. Have you guys heard me talk about the TNX/equities correlation as of late? Exactly – no, because it’s broken right now (for reasons I know but that really don’t matter).

Less is more people – let’s stop the mental masturbation right now. Debating why Kramer is an asshat or not, as much as it may be, is not going to lead to you banking any coin, probably on the contrary (maybe if you take the opposite side of his trades – LOL). Let’s focus on looking at what we know has worked for us: technical analysis, trend probabilities, the wave cycle, statistics (i.e. retracement levels). I know all those are debatable, but thus far they seem to have treated us nicely. Why bother listening to the pundits out there?

The wave count has not changed dramatically – the main difference being that I have kicked the triangle scenario to the curb as the difference between a triangle and a wave (5) count seem to be academic. Short term we are due for a bounce as equities are heavily oversold – not necessarily a large bounce but I think we’ll push higher either Monday morning or Tuesday after some sideways action.

There are now 2 1/2 scenarios on the table:

• Again, the green and orange lines now both depict the same wave count – we are in minor 3 of  intermediate (5) and are scheduled for a hard landing below the November 740 low (around the 9th). I wouldn’t give the green scenario much further than 850 to get back on track, which also appears to be a congestion zone for various Fibonacci lines.
• The orange line is a variation of the green scenario and has us push a bit higher – thus completing equality of an a/b/c. End result would be the same – we are taking the express elevator into the abyss, but only a week later (around the 16th).
• The blue scenario is still a contender as it’s not impossible to imagine some irrational exuberance to lure the perma-bulls out of hiding again – perhaps the ‘hope du jour’ in the form of a creation of a ‘bad bank’ (you couldn’t make this stuff up – I swear) would be the catalyst for a good old fashioned dip buying frenzy. Never never under estimate the mouth breathers…

I have not labeled this chart with action items as all of you guys know the drill by now. If not – just take a look at last Sunday’s update. In any case, I will obviously let you guys know when I take action – remember that I am still holding those March/June puts and covered them around 820 by selling puts against them. I might actually start loading up on more March puts if we reach 890 – 900. If that doesn’t happen I plan to leg out of the short side of my puts once we breach 800 (i.e. buy back the puts I sold to hedge myself).

Here’s another reason why I think that we’re do for a little bounce right now. We just closed down for the week four times in a row, which increases the probability for weekly gain. This would actually be the perfect scenario. Push up to relieve the oversold condition, reload, and then watch the market descend into the abyss. That would work fine for me, thank you very much. Whether or not we get such a treat remains to be seen.

Yet another reason why I think we’re due for a little bounce is that the spread between the 30-Year T-Bond yield and Moody’s BAA Corporate Yield has dropped from -4.9 to -4.3 as of January 28th. I am not putting a huge amount of weight on this spread right now due to the ongoing dislocation in the bond market but I wanted to throw it out there as it might feed into the blue scenario (i.e. flat ending around 1020 on the SPX).

BTW, in that context – bond traders did call Bernanke’s bluff as long term yields have actually shot up instead of dropping after he announced that the Fed would start buying the long end of the yield curve. And if you wonder what I mean about a ‘dislocation in the bond market’ take a look at this applet visualizing the yield curve changes since 2001.

You might have noticed that the Dow Jones closed at 8000.86 on Friday – after trading below that mark for quite a while. Some folks with Level II feeds reported that there was some monkey business going on (bids not being taken), and I’m not surprised as a close below 8000 would have looked even worse as a weekly or monthly candle. I think we’ll need a bit more ‘juice’ to breach through this level – right now we’re a bit too oversold (4 weekly closes to the downside). I’m not saying it’s impossible and maybe I’m in for a surprise in a few hours from now but look how often we’ve bounced off of this support shelf. This is a line the bulls intend to hold at all cost. If it breaches I would expect a lot of bots to kick into overdrive and initiate massive selling. So, keep your eyes on this level…

I never counted waves on the crack spread but is starting to look like a familiar pattern – so I can’t help myself. We even got that large drop I talked about about two weeks ago. Now it’s off to the races and I’m getting pretty antsy about shorting some of those refiners. I propose we correlate good old TA on our favorite victims with some weakness in the crack spread.

Gold has been utterly invulnerable to the voodoo curse I put on it last month but when it touched my last line of defense I couldn’t help but to grab a few more GLD puts. This will be pretty clear cut going forward I think – if it breaches this it’ll probably shoot towards 1000. The gold bears (i.e. bullion banks and the primary dealers in collaboration with the Feds) will most likely put up a fight at this line. Maybe they wait until we get closer to 1000 to lure in a few more gold bugs. But I don’t think they’ll let the shiny metal bust to the upside without a fight. There are a lot of TOMO/POMO funds that are dedicated to keep Gold from competing with the mighty buck.

Let me finish with pointing you to a fellow blogger who wrote a fine piece aptly titled ‘The Fraud of the Century‘.

Oh, and before I forget: GO STEELERS!!! 🙂

UPDATE: Thank you Harrison and Holmes! Congrats to all you Steelers fans!!

See guys – I don’t just call the market – I call Superbowl games now too 😛