Overstaying Your Welcome

I think nothing is more crucial for traders than developing a keen sense of when you are overstaying your welcome. Or to put it in more direct terms: When is your personal bias interfering with your trading?

I have been taking a bit of flak in the past two days as I have kept pointing to the new verified VIX Buy Signal as a warning shot across the bow of the bears. You all know by now that my long term disposition of this market is bearish, which is why I keep holding a nice collection of long term index puts (as insurance against days just like the 6th). But that doesn’t make me blind to what’s going on right now and right here. I don’t have the luxury to afford myself any bias when it comes to placing trades today unless I know something (yes, that would be illegal but it’s done all the time) or a technical setup screams at me.

I have a few simple charts for you and they are a continuation of the fractal work on the A/D ratio I have been undertaking lately. Before you look at them I want you to clear your mind and try to look at them as objectively as you can.

Exhibit A: The October 2008 spike. I don’t care why it happened – all I am looking at is the change in sentiment. We are seeing a huge candle up followed by a complete flatline the next day, followed by even lower sub zero readings as equities across the NYSE closed below the open of 10/13.

Exhibit B: The March 2009 spike – a.k.a. the onset of Primary {2}. Same game – big spike up – way outside the 2nd deviation – followed by a drop to 1.5. So far the pattern is the same. But then we see a another big reading the following day. The rest is history as they say.

Exhibit C: Back to the present. Big spike on Monday as markets worldwide celebrated EU-TARP. The expected deflating of the signal the day after, followed by an expanding signal today. Bear in mind that this is not a closing signal so the red box may change up or downward by the bell.

Obviously there are various interpretations we could apply here but this much is clear – an expanding signal is not what the bears want to see. Add to that the VIX Buy Signal yesterday and Soylent Green is rapidly gaining in probability. Again, and I have said this yesterday, I am not giving up on Soylent Blue and Orange – but the market needs to prove to me that Primary {3} is in the making. We are talking about an historic Intermediate (3) of Primary {3} wave – one that should completely annihilate the bulls. We are talking Sodom and Gomorrah – cats living with dogs –  mass hysteria. May 6th is supposed to be a walk in the park compared with this.

Thus far I don’t see that type of a market. What I see is a lot of tape banging – yes. I also see divergences up the ante – fine. But that’s nothing new, right? We have seen this over and over and over again for six months now. So, the message here is this: Don’t get caught up with your own emotions. Deep inside I myself want to see my Dec. puts explode again – the market deserves some serious carnage here for the incessant and boundless greed and manipulation attempts it engages in on a daily basis. But guess what – life ain’t fair – and the ‘bad guys’ (whoever you think that is) will get away with their games as they have in the past. They will drain tax payers for all they’re worth while they give the bears a run for the money by running stops with free money courtesy of the Fed sponsored cartel.

No, life ain’t fair. And trading what you want to happen will most likely result in you getting wiped out. So, let’s go back to what we were doing (and what I continued to be doing) before May 6th: Just trade the tape we see. If this market breaks to the downside it will be fast and none of us will see it coming. So, buy yourself some long term insurance just like I have. Maybe those puts will expire worthless – fine – I can live with that as vega was cheap when I got them. But I don’t want everyone to show up here again every morning with expectations of the big one. It will come, but not when you expect it – just like on May 6th.

Bottom line: The evidence above points towards the possibility (not the necessity) that we are looking at yet another bear squeeze from hell. The bearish scenarios are absolutely valid and remain so until we start breaching above the level I highlighted in yesterday’s post. We breach that line and Soylent Green becomes my top candidate. Trading can be very simple – it’s our hopes and biases that constantly get in the way.

I hope this little excerpt helps everyone keep their focus. It’s much more fun here when we can just focus on banking coin. There is money to be made all over the place, which is something I have in the past few weeks been working very hard on to make clear.

1:22pm EDT: A quick look at my EURUSD/ES chart is a bit scary:

Very interesting as it puts Tyler’s comment early in the morning into context:

Equities now officially have an active memory of about 24 hours. The biggest market drop in history is now long forgotten, and the only consolation to investors is that SEC is actively fixing the problem even though it has no idea what the problem is. Overnight, futures went up by 20 handles in the span of 4 hours as the invisible bid appeared yet again, afraid of what would happen if the immediate drop in ES was not breached.

Anyway, I try not to read ZH during trading hours as it’s a bit counter productive. But the ‘invisible hand’ is quite clear here. But what’s also clear is that equities seem to be exponentially more exuberant – responding wildly to any upside in the Euro and completely fading any downside.

Copper however continues to disagree with the entire affair in equities. I’m not going to jump in short with two feet but it’s a sliver of hope that this thing may turn before we reach the Soylent Green zone.

As for now the short term trend appears to be up. Long term we may be rolling over here but this thing is a lot longer than I would expect – in particular in the context of Orange and Blue. However, we shan’t not forget one thing: If Soylent Blue is in the works then we are in an Intermediate degree correction – and those can last a long time – weeks and sometimes months. Considering this you may appreciate the conflict I am dealing with in offering usable analysis here. On one hand we may be on the brink of a catastrophic drop – on the other hand it may happen tomorrow or in June/July. Everyone who comes here has a different trading window and I need to be careful in what I present as some things mean different things to many.

If copper and the Euro keep fading equities like they have in the past few days the long term trend will continue down. But short term it is very much possible the bears will get burned again. How the fractal analysis above fits into the entire picture is not clear to me yet. We will have to wait and see – thus far the market is very contradicting and I reserve my final judgment until I see things fall into sync.

1:55pm EDT: When I said contradicting and confusing I was not exaggerating:

For some reason the stop run of the past two days has been accompanied by more put buying – not good. We are now at readings which usually occur at major market lows – not market highs.

Caveat ursi indeed.

After reviewing all the above I have to admit that I am very uneasy about trading this market. And when I feel this way I usually reduce my exposure and wait on the sidelines. I will continue to throw out trades and setups but be aware that I am taking very small unit sizes. I suggest you do the same until this market falls back into sync.

Cheers,

Mole