Weekly S&P Chart

I see quite a bit of doom and gloom and I suspect quite a few who may have taken the weekly Bollinger Band trade have already bailed on the position. Take a good hard look at that chart. The S&P is down .25% so far this week. What could anyone possibly find in the chart action so far to think that this trade is going to end unprofitable. Heck so far it looks like the market is wanting to rally. As far as I can see there's just as much chance that the market works its way up that long tail as falls rapidly. All I'm saying is if you have a system that produces a win 93% of the time and so far your draw down is .25% I would be inclined to let it work at this point.

The Silver Road to Riches

As many of you know by now I'm just a wee bit bullish on silver. I'm going to point out something that probably most everyone knows but very few people can act on. The really great investors like Buffett, Rogers, Greenblatt, Templeton, etc. didn't acquire their fortunes by trying to time every little daily and weekly wiggle in the stock market. No matter how good you are you're probably never going to become a billionaire by trying to "time" the markets. These investors became wealthy because they understood one important fact and that is the markets are not always rational, as a matter of fact most of the time they are irrational. What these investors look for is opportunities to buy an asset cheap when Mr. Market does something stupid and puts it on sale for a ridiculous price. When they see this kind of opportunity arise they ignore the rest of the sheep and make their own decisions. Buying great companies at the bottom of the devastating 74 bear market made Buffett a billionaire. Buying pathetically undervalued commodities in 99 has made Jim Rogers a many fold return on his investment. Today the most glaring bargain available is precious metals especially silver. To me it is just mind boggling how cheap silver is right now and nobody can seem to see it. Well I for one see it. I don't give a damn if silver drops $2-3 tomorrow. All that means is its more of a bargain. BTW if Mr. Market were to do something stupid like that I would probably liquidate some of my stock portfolio to buy more silver. As I've said many times in the past. All this COT, VTO and Bollinger band stuff is going to be child's play when compared to what silver is going to do in the coming years.

Weighing the COT

I get the feeling that quite a few investors have the wrong idea of how the COT report works. I see posts that the smart money such as GS, JPM, LEH, etc are taking a beating and so the COT doesn't work. Let me remind everyone that there are always some commercials on the long side and some on the short side. Its not an all or nothing type of tool. Like the scale above when one side gets a little heavy the scale (or odds in our case) start to favor that side. At the moment the COT scale is still tipped towards the long side. The weekly Bollinger band signal is also tipped toward the long side this week. So the correct bet to make is long this week. What I would like to see is a V bounce back to the old highs and the commercials flip to short. That of course would fit in nicely with my 5th year decline theory. All we can do at the moment is wait and see what unfolds.

Weekly Bollinger Band Crash Trade

Quite often you can apply the rules of a daily trade to the weekly charts. We got a great example at the close today. The Bollinger Band crash trade can also be taken as a weekly signal. You apply the same rules as for the daily charts only use them on the weekly charts. Here are the rules for a weekly signal. Buy on the open Monday whenever the SPX closes below the lower 10 week Bollinger Band. Sell on any Friday close that's profitable or after three weeks which ever comes first. Over the last 27 years the trade has been profitable 93.7% of the time if you eliminate the 2001 and 2002 bear market years when the 200 DMA was declining. The trade sets up rarely. When it does its typically a sign of an extremely oversold market. BTW I'm inclined to believe you could also apply the VTO rules to the weekly charts in which case we also have a weekly VTO trade. After a quick look the weekly VTO has roughly the same winning % as the weekly Bollinger Band. The profits are much larger of course but the trade off is you have to hold much longer. Sometimes up to 4 months.

I tested the weekly Bollinger band system and it appears that closing at the end of the second week is the better play than waiting one more week for a profitable close. There were two winners and two losers in the third week. Basically a coin flip. No odds in that.

COT Report

The commercials are still long. They don't seem to be worried to much about this correction. They must know more than I do so I'll just trust that they know what they're doing

Precious Metal Bull Market

I'm going to show you what tends to happen in secular bull markets. Notice the oil and copper long term charts. Once the market was able to break above the all time highs there is basically a vacuum above. Prices tend to explode once they enter this vacuum zone. The average gain once the all time high is broken is roughly 140%. As you can see, oil was a bit below that on its initial breakout leg with 100%. Copper on the other hand just demolished the average with a 290% gain. Now lets look at the PM. Notice so far the strong sister has been Platinum. It has exceeded the old highs of 1045. I would say that's a pretty good sign that the rest of the PM are going to follow. At the moment gold still has about 30% to go to break the old highs. Silver on the other hand has almost 300% to go before it breaks out. Now do you see why I say silver is just ridiculously cheap. The only thing cheaper than silver is sugar. Sugar has over 600% to go. If sugar decides to get it's butt in gear my IPSU position should do wonderful.

Trading the COT reports.

Has anyone noticed how hard it is to trade the COT reports? This is one of the strongest bull markets in many a year and I'm guessing very few have been able to hold on to longs during the current COT long signal. You see why I don't worry about the market discounting the COT reports. The COT's typically change trend at times when emotions very strongly disagree with the signal. Ah ...the never ending battle in the investing game of fighting your emotions. The current signal is a classic example. The commercials are screaming buy but emotions are screaming the market is overbought, subprime is a landmine, inflation is out of control, The bull is historically very old, we haven't had a 10% correction in 5 years, etc., etc. Sometimes I wish I were Spock ;).

90% Down Days

This article on Minyanville would suggest that the VTO trade is the correct thing to be doing right now.

The Wall of Worry

James Altucher gives 7 reasons for why the bull isn't done yet here. This is one very smart guy. I tend to agree with all of his reasons and so does the big money for that matter.

Breadth charts

I've posted several breadth charts so everyone can get an idea just how oversold this market is and in less than a week. We are rapidly approaching levels last seen after the 8 month decline in 04. This is not the time to press the short side. Expect a violent reaction in the not too distant future.

To buy or to sell that is the question.

Remember how the other day I told you that as long as you live every pullback will look like a selling opportunity. Well obviously we are in that situation right now. However look at the next chart and you can see what the outcome of taking advantage of these irrational moves has been. Both the VTO and Bollinger Band Crash trade have produced winning trade after winning trade. The odds are way more in your favor to buy this decline than to try and pick another top.

A Different View

Sometimes we get so caught up in the daily action and TA indicators that we can't see what's actually unfolding right in front of us. When I find myself getting caught in this vicious loop I eliminate all the indicators and moving averages etc., etc. Take a look at these three charts and you tell me what direction the markets are moving. Sometimes you can't see the forest for all the trees.

Gaps

Notice the gaps on GOOG, CAT and INTC. These gaps normally get filled especially in a bull market. Take a look at the CSCO chart. Sometimes they take a bit but they almost always get filled. I'm wondering how we could put together a profitable trading system around these gaps. Let me do some thinking on that one. If anyone already has a proven system feel free to post. I already know of one very profitable system that buys whenever a stock drops 10% or more. Those occurrences are rare though and usually take a while to fill. I'm guessing we could put together something to take advantage of these little earnings miss drops. Especially when the miss has nothing really to do with the overall viability of the company.

Here is your bear market.

This is for all the bears out there. I'm going to show you where the bear market is. A few days ago a subscriber asked me if I keep track of money supply. He was wondering if the Fed was printing money. I said heck I don't need to find money supply figures all I have to do is look at a chart of the US Dollar. At the end of 01 it became very apparent that the bubble had burst. Normally after a bubble of this magnitude bursts many bad things are going to happen. However the Fed had no intention of letting that happen without putting up a fight. So what did they do? Well obviously they started cranking up the printing press. As you can see they've been going pretty much full blast ever since. So far this bear has unfolded just about how most bear markets unfold. The first leg down usually lasts about 2 1/2 years. This one was a little long at 3 years. Then the counter trend rally over the last 2 years. We should be set up for another leg down now. Notice what happened though. As the Fed cranked up the money supply the stock market decline was halted and the recession in 01 was very mild. The Fed just decided to sacrifice the dollar to keep the economy rolling and to halt the blood letting in the markets. Low and behold its worked...so far. Like I've said many times before though all this excess money will eventually find its way into undervalued assets. That means commodities. This is one of the reasons we have $75 oil and almost $4.00 copper. This is why the nickel in a nickel is worth more than 5 cents. There is no free lunch in this world. Sooner or later the quick fix the fed instigated is going to come back to bite them in the ass. It's going to start IMO with an oil spike. That will set the stage for the first of probably several recessions. For now though the COT says keep riding the money train.

Buying Opportunity or Selling Opportunity

When is a pullback a buying opportunity and when is a rally a selling opportunity? I've got news for you, as long as you live every pullback is going to look like a sell signal at the time and every rally is going to look like a buy signal. That's just the way human nature works. We require positive feedback and we are very short term oriented. Look at the first chart. The market is obviously topped out and heading down right? Well look at the second chart for your answer. This decline was a buying opportunity. Now look at the 3rd chart. The bottom is in and the market is moving on to new highs. Well not so fast look what followed. This is a case of the rally being a selling opportunity. So how do we know when a decline is a buy and a rally is a sell. TA is not much better than flipping a coin IMO. For me the COT tells me whether the big money is buying or selling. If they are buying then I want to buy the dips and if they are selling I want to short the rallies. The COT has produced much, much better results over the last 20+ years than TA alone.

How many of us started out investing and were soon churning our accounts and gradually giving all our hard earned cash to the pros or to the brokerage firms in the form of commissions? I'm going to guess a very large percentage. Granted there are some who manage to survive the learning process and can be profitable short term trading even after you factor in heavy yearly fees. Sadly most of us won't. Quite a few will just continue to day trade to satisfy their desire for excitement. All the while refusing to accept the fact that their trading habits are costing them money. They rationalize that they will soon get in a groove and make it all back. I've got news for you until you change something don't expect any different results. Let me point out the cold hard facts. If you are stuck in this vicious circle you are in fact not investing you are gambling. On top of that you are gambling against people that are much smarter, better capitalized and more disciplined than you. Basically you are easy pickins for them. The only way you are going to beat these people is to use a system that gives you an edge in the market and then have the discipline to stick with it. Otherwise these sharks are going to eventually get all of your money. At some point you have to decide whether it is more important to be excited or whether it is more important to make money, hopefully before you've lost all your capital.

COT report for July 20th

Still bullish. Even more than last week. The big boys believe in this rally even if nobody else does. So far they've been on the right side of the trade.

DOW:Gold Ratio

I'm going to show everyone what I consider the most important chart in the world. The ratio of gold to the Dow. A little history lesson. This ratio runs in very long cycles. In 2001 it took roughly 42 oz. of gold to purchase one share of the Dow. Even though the stock market has been in a 5 year bull market and is at new all time highs it now only takes about 20 oz. of gold to buy one share of the Dow. The take away is that gold (real stuff) has been vastly outperforming the Dow (paper assets). You would have been vastly better off to have owned gold than stocks over the last 6 years. This cycle normally runs until the ratio gets to or very close to 1:1. It briefly touched 1:1 in 1980. What I'm trying to say is that in inflation adjusted terms the Dow is a long way from making new highs. Does that mean one should short the market? Of course not. It just means we are in a secular period where real stuff is going to tremendously outperform paper assets. BTW you will get this same looking chart if you compare the Dow to oil, copper, nickel, zinc, cotton, soybeans, etc. You get the picture. This is what happens when the fed embarks on a money printing binge trying to inflate away unpayable debts and pay for expensive wars. Now do you see why I buy silver? I don't want the Fed to inflate away my purchasing power.

At some point in the future we will see a 1:1 ratio again. I have no idea if that will be at 36,000 or 3,000 but I guarantee we will see it because politicians will always opt for the easy way out. What they never seem to learn is that there is no easy way out.

Leverage

This is going to tie in with the position sizing post the other day. I see this quite often on the blogs how such and such has increased their portfolio 100% in the last month or they added 20% a one day. Sounds impressive...unless you're an experienced trader. If you've been around for a while you know that when you hear someone bragging about those kind of gains you will in the not to distant future hear them say they blew out their account or probably you just won't hear from them any more. Let me say right up front that every system will have periods when it incurs multiple losses in a row. Let me show you what happens to a portfolio when someone is playing with options and leveraging up only 5:1. Lets say you start with $100,000. Now lets assume you give the underlying asset a 2% move before you're stopped out. I'll quickly add that a 2% stop is going to mean you will most probably get stopped out quite often. You're not giving your position enough room to work. Back to the example. Your first losing trade costs you $10,000 ( 2% x 5 = 10%) Now you've just reduced your overall portfolio to $90,000. Not the end of the world by any means and definitely recoverable. However now you take another trade using the same leverage and you lose again. Now your portfolio is down to $89,000. Your down almost 20% with only 2 losing trades. 20% is starting to get serious. The next trade if its another loss brings you down to 72,900. Next $65610 and then $59049. Its not hard to have five losing trades in a row. If you hit that kind of losing streak while using 5:1 leverage you will cut your account almost in half. Now you are in the position of having to make almost 100% on the remaining capital just to get back to even. Now let me give you the sequence at 10x leverage, which by the way is what the more conservative Bear Stearns fund was trading. $100,000-$80,000-$64,000-$51,200-$40,960-$32768. By using 10x leverage 5 losses will cost you 2/3 of your portfolio. But here is the real pitfall. If you get lucky and score a winning trade on your first try then most likely human nature takes over and you say to hell with 5 or 10x leverage I'm going all in, this is easy. 1 loss at 20x leverage will cost you almost half your account. Holy s**t that wasn't supposed to happen. Now I'm down big so I guess I better go all in again and make it back quick. So you take another 20:1 trade again with a 2% stop which already most likely reduces your odds of a winning trade to under 50:50. That means you are staking the remaining $60,000 on less than a coin flip. End result of two losing trades at 20:1 leverage, $36,000. You've lost twice and cut your account by 2/3. Now you have to make almost 300% to get back to even. Do you see now why it is so important not to lose money. If you do lose it better be small. The way to do this is obviously keep your position sizes small enough so that you don't get hurt when you lose.

Gold

Take a close look at this chart of gold. Notice the arrows. It almost looks like I arbitrarily picked the best entry points doesn't it. However these aren't my entry points these are times when the commercials had extreme bullish net positions in the futures market. When the commercials aggressively cover their shorts the gold market tends to go up. We had more than a year of consolidation since the peak last May. Look what happened to gold after the last large consolidation in 05.

Position Sizing

I want to talk about position sizing this morning. Not only is position sizing the key to making money in the markets I have a feeling its what is causing these violent swings we've been watching since Mar. I have a feeling that not only the bears but many of the bulls are taking on too much risk. When the markets move very much in one direction all these investors with too much leverage can't hold on to their positions and we get a lot of people bailing out of positions all at once. The Feb. 27th decline was a good example. In the last month and a half we've had 3 days where the SPY has traded over 200 million shares on one down day. That's over 30 billion dollars changing hands. I don't see any reason why a mere 3% drop in the market should cause such widespread exiting of perfectly good stocks. Well actually I do see a good reason for it. I think way too many people are leveraged maybe 2:1 with SSO or more likely with options. If your leveraged with a double fund like SSO or QLD then a 3% move in the market will cost you 6%. Not the end of the world but not a pretty sight on the old account balance. However I think it may be even worse than that for many investors especially novice investors. With the explosion in derivatives I believe too many novices are playing with fire and have absolutely no clue the danger they are in. Lets say you are leveraged 5:1 with options. Well that meager 3% move just cost you 15% of your total portfolio. Now that one hurts! That's like stubbing your toe on the way to the bathroom in the middle of the night. There's a good chance that other people in the house are going to hear about it. I suspect quite a few are leveraged more like 15:1. At that kind of leverage you just watched as half your portfolio evaporated in 3 days. It works the same way on the short side I suspect that way too many people were not only betting on the market correcting Thursday but were also leveraged pretty heavily under the rational that well if the market broke out to new highs then it wouldn't be by much so they would get out with a small loss if they were wrong. Well the market didn't just break through resistance, which in itself started the short covering but it just kept going. All that leverage caused extreme pain for the leveraged shorts so more and more investors couldn't hold on through the pain as the day wore on. The end result is the strongest one day gain in years. Now I could have had my whole account short on Thursday and only lost a little over 2%. Definitely not the end of the world.
This is the thought process that goes through my mind every time I take a COT trade. Hmm... I know the COT produces a winning trade 3 out of 4 times and I know it averages much larger winning trades than losing trades but I just know this is going to be that one trade that ends up being a loser. So if you know that you are going to lose what's the rational thing to do. Bet small of course! That way if you are right and this is the 1 in 4 losing trades you won't do much damage to your account. However if the odds come to your rescue then congratulations you just made money. So what if you didn't get rich in one month you also didn't get poor either. Getting poor is the more important consideration don't you think?

Those Deceptive Patterns

Bear with me on this one. Since I'm not a big "chart pattern" fan I may not draw these patterns completely correct but you'll get the idea. In the first chart we see some of the reasons given for why this market was topping out, at least short term. The S&P was at the top of the trend channel and had obviously failed and was now regressing back to the middle or lower end of the channel. Momentum and daily money flows had deteriorated seriously. Volume was enemic. Sounds reasonable even I could buy it. However for any bearish pattern some one else can find a bullish pattern out of the same charts. I'm just the someone to do that. Let's look at the next chart shall we. The Nasdaq 100 (Q's) are not confirming the weakness in the rest of the market. It should be leading the decline not showing relative strength. Next the NYA has completed the 1-2-3 reversal by closing above the initial reaction and as a matter of fact it like the Q's are already at new highs. Now lets take a look at those pesky trend lines that everyone likes to use as resistance and support. Well low and behold the trend lines have already been broken twice. I've got news for you that's what happens in bull markets. They go up and they don't give a d**n about lines on a chart. When we look at volume over a longer time frame we see it has been expanding as this bull progresses. Isn't that what's supposed to happen? Now in the final chart we see the 2b reversal to which I called attention too when it happened. Always a good sign that the selling has dried up and we see the result of all this. The bullish patterns proved to be the correct patterns to pay attention to. So how you ask do we know whether to pay attention to the bullish patterns or the bearish patterns. Well if you must try and make sense of patterns then I suggest you let the COT report tell you what kind of patterns to look for. The Cot has been saying look for bullish patterns since early Mar.

COT report for July 13

COT still bullish.

Conversations With a Bear

Today I thought I would post a conversation I recently had with a subscriber.

You need a system that wins more times than it loses and wins bigger than the losses. As easy as that sounds I've only found 3 that do that (although I'm sure there are more). The COT, the VTO and the Bollinger band crash trade. If you are going to use leverage you NEVER EVER trade against the trend and the big money. If you are down to your last straw and have no choice but to take large risk then you buy deep in the money call options on the Q's. The big money is on your side and the overall trend is on your side. All intermediate rallies have lasted a minimum of 21 weeks and a maximum of 32 weeks so far in this bull. So you will have to buy at least the Dec. options. Shorting is what got you in this mess and if you keep doing it then shorting will eventually bankrupt you. Shorting is very dangerous and should only be done when you have all the odds in your favor. Right now you have none of the odds in your favor. You
need to stay away from the blogs. It's easy to listen to what the morons (and I do mean morons) are spouting especially if you already have a negative bias. But when you let these fools make your decisions for you then you lose money. How much have they cost you now? At what point do you quit listening to these idiots and make your own decisions or better yet let the big money make the decision for you. Sorry I'm so critical of the bears but these are obviously novice traders that have no idea what they're doing and they are posting these bearish opinions because they are trying to bolster their confidence that they are doing the right thing. No professional in the world tries to pick tops. It can't be done. The best you can do is get lucky once or twice in your life. Do you really want to bet your financial future on luck? If I catch you reading any more of that crap I'm going to come over and knock you in the head.
Capiche LOL

Basically I'm just trying to get the point across to this fella that he is letting his bearish bias be reinforced by frequenting the bearish blogs. He needs to get off there if he is ever going to make money in this bull.

Short term/day trading

Here's my problem with trying to profit from TA. I've tried to keep an open mind but I just can't see how an average investor can profit from trading short term "patterns". Lets face it the vast majority of us are going to fall somewhere under the exceptional level. History has shown time and again that only exceptional traders can make enough money to cover expenses by short term/day trading. First off I'm not sure what a bearish technical pattern is. I have no idea what my entry and exit points would be going into the trade. I do however understand when the COT goes long . It's pretty simple, to me anyway, it's saying buy until otherwise notified. When the VTO or Bollinger band crash trade signal I know when to enter and I know when to exit. Nothing changes the next morning. Just to use an example on Tuesday morning TA says sell then on Wednesday morning it says cover but on Wednesday night it says sell again. The excuse that I always hear is that TA and patterns are constantly changing. hmm...ya think? How does an average investor manage to negotiate all these changing signals? More importantly how does one build a profitable system around something that is constantly changing? I don't deny that there are investors who can master this kind of investing. However I can guarantee that there will be very few investors that will be able to do it with any degree of success. I'm sure that everyone thinks they are one of the 10% (and I'm being generous here, its probably closer to 1%) that can invest this way but the reality is that 90% will be fooling themselves. Let me state the obvious. In order to be profitable in the market you have to do one of two things. You either have to win more times than you lose and the winning trades have to be at least on average the same size as your losing trades, unless the trade is extremely profitable like the Bollinger band crash trade (98% profitable) OR if you lose more times than you win then your winning trades must be larger than your losing trades. The COT not only wins more times than it loses, it wins a lot more than it loses (75%) AND on average the winners are much larger than the losers. That is the definition of an exceptional system. As a matter of fact I defy anyone to show me a mechanical system that is better. The VTO is very close to the COT producing a winning trade 70% of the time and if you stick to bull markets closer to 85-90% of the time and the winners are twice as big as the losers. Again an exceptional system. For the average investor you are just never going to approach those kind of returns using TA. As a matter of fact for anything other than an exceptional trader you aren't going to produce any returns at all using short term TA.

And yes I know this is going open a can of worms but history and statistics are going to back me up on this one.

Riding the Bull

I want to make a few comments tonight on bull markets. Has anyone else noticed how hard it is to stay on board in a bull market? As we all know bull markets climb a wall of worry. We constantly wonder if the bull is over and the bear is ready to wake up. This constant anxiety is why bull markets go up different than bear markets go down. Bulls tend to have quick severe pullbacks which when added to the anxeity already present tend to produce many bear calls on the way up. Bear markets on the other hand tend to have sudden violent rallies as markets get too oversold. I'm fully aware of all the reasons for why the market should be going down, housing collapse, sub prime woes, economy slowing, earnings slowing, high energy prices, etc., etc. However let me point out that every bull market in history has had similar worries. We are just never going to get the perfect investing environment. So how do we know when the fundamentals are finally going to matter. The answer of course is that no one knows. There is a way to know what the big money in the market thinks though. By watching the COT we have an idea when the large commercial players are nervous and aggressively hedging their positions. If they are hedging heavily then it makes sense to me that they are not going to be big buyers. Without their buying I believe its going to be very hard for the markets to continue to rally. On the other hand if they are not hedging then it makes sense to me that they are probably buying stocks. When we get one of these pullbacks I've got to think these players will be using it as an opportunity to buy stocks at cheaper prices. Right now the commercials have the largest net long position in history, the obvious longer term trend is up and Dow theory confirms the trend is up. Robert L posted that bull markets don't top until a period of extreme optimism has been reached. I believe that is correct and I don't feel like we've reached that level yet. I've not heard anybody talking about the stock market except on financial blogs. I remember in 87 there was enough public interest in the stock market for me to put some money in a mutual fund even though I really had no idea what a stock was. Of course this was a top right before the crash. I'm not really seeing that kind of behavior yet. I think no matter how hard it is to do, that one should probably try and stay on the bull. Of course that's just my opinion. This is my blog though so I'm allowed to state my opinion. LOL

Technical analysis Vs. the COT

Sounds like a battle of the titans doesn't it. LOL First off let me say that I do use TA to help me time entries and exits so I'm not anti TA by any means.

Here's my problem with TA. OK Tom's call yesterday was correct but what do you do today. Yesterday I posed the question to an investor how do you know when to cover your shorts? Today we are getting a lesson in answering that question. Should you have covered last night? As of the close if you shorted the Q's you have lost almost all your profits (in the after hours you are currently underwater). What do you do? What's a legitimate signal to cover? Lets say TA told you to sell Monday morning. Yes you were a winner but what if Bernanke had decided to say something very positive yesterday. I find it highly likely the market would have used it as an excuse to become even more overbought. How can TA know what the Fed Chairman is going to say? I see people getting constantly getting whipped back and forth by this market. There is just too much leverage being used in the market today. When we go down we go down big because people have big positions on and can't hold on thru any kind of volatility. These big moves make one think the end is near. But then the big money who are smart enough not to use leverage just come back in and buy the dip. So I'll ask again according to TA what do you do today? Do you cover quickly before you lose all your profits? Of course that would just accelerate the upside or do you hold on and risk losing on the short side again for the umpteenth time? The easy way to avoid whipsawing back and forth is of course to use a system that keeps you on the larger long term trend.

Point & Figure Charts

We've had one down day and apparently the sky is falling again. LOL So lets get rid of the noise and see whats really going on by looking at the point and figure charts. We can see in the first two charts the Dow & S&P appear to be consolidating the big gains is all. For some reason the BKX seems to be very important to a lot of people so lets take a look at that one too. Still in a very solid uptrend and it appears to be consolidating in a triangle pattern with higher lows. Very bullish action. Now how about the Q's. Heck they still can't even put in a three box reversal. I'm not sure if I want to call the end of the world just yet.

What a difference a week makes

I've gone over this before and I'll say it again TA can tell you with 20/20 vision what has happened in the past but it can't predict the future. Take a look at the first chart. It is pretty obvious the momentum is fading fast. This rally is just about over. The MACD histograms are contracting to 0 in preparation for the coming correction...right? Well lets take a look at the second chart :0 Wow who knew the Q's would surge upward again busting out above the upper bollinger band and momentum would start to accelerate all over again. The answer of course is nobody knew because nobody has a crystal ball.

I'm going to tell you right here right now how to write a very popular blog. #1 It has to be bearish. People like to hear bad news. Don't ask me why. I have no idea why we are hardwired to stop and look at the accident on the highway I just know we all do it. #2 You need to make predictions and if they are bearish predictions even better. Here's what happens to all of us and I've been just as guilty as anyone. We have a bias so we search out a blog or website that confirms our bias. Being able to see it right in front of us makes us feel more confident that we have made the right investing decision. Someone else thinks exactly like we do so that makes it right. The next thing that happens especially if you are a novice is we look at that prediction and we immediately start calculating our profits. Here's how it works. Well if such an such says the S&P is going down to 1400 and if I buy 20 puts on the SPY then I should make $$$... yeah that sounds about right. Wait a minute though if I were to buy 100 puts since I know I'm right and such and such is an experienced investor and its very unlikely he will be wrong then I will make $$$$$ instead of $$$. Alright now we're talking. I know damn well that exact thought process has gone through every ones mind before. I know it still happens to me and when I catch myself starting to think like that I calmly walk over to the wall and beat my head against it until I get that thought the hell out of there. Let me tell you what you should be thinking. Hmm...such an such is predicting the S&P will fall to 1400... Who the hell does he think he is? Jack off, nobody can predict the market. I'll buy 1 put just in case he might get lucky and if he's wrong which he most likely will be I won't lose very much of my hard earned cash. My suggestion is you view all these predictions and claims to be able to call market turns with a high degree of accuracy for what they really are...entertainment.

COT report July 9

Rarely am I surprised by the market anymore but I must say I am surprised by the COT today. I was expecting the commercials to start reducing their long position. Shows you what I know. They increased their long position by a huge amount. Nothing to do but keep holding those longs. I think I will start switching out a little of my Q position to QLD on any pullbacks.

Gaps

I'm going to let you be privy to an argument that I've been having with myself all weekend. Whether or not I should trim my long position on a gap up at the open. I would put the position back on when the Q's filled the gap. Looking at the daily chart the 5 day RSI is getting very overbought and the Q's are up 6 out of the last 7 days. That alone is normally a sign for at least some kind of pullback. However I don't think this is a normal market. So I decided to take a look at the last abnormal market. Oct. 99 to Mar 00. I quickly noticed that overbought stayed overbought for a long time. Then I noticed there were 3 times where gaps never got filled and 4 times when it took a week or more to fill a gap. I don't think I could keep from chasing if it takes more than a week to fill the gap. I've decided that even though the market is ripe for at least a down day or two it's just not "safe" to be out of the market.

Spotting tops

First off let me say right up front that accurately calling tops is a fools game. It can't be done with any consistency. Ahh how many bears just keep getting this lesson taught to them over and over. However there are a few things to look for when we do get the odds in our favor. By in our favor I mean the COT is extremely short. First off as I've mentioned before I want to see divergences on the weekly charts. If the COT is short and we're getting divergences then we can zoom in to the daily charts. Victor Sperandeos sited the 4 day rule. This works equally good for tops and bottoms and all it says is after a long intermediate move 4 days in the opposite direction often signals a trend change. He also points out a similar signal which he calls the 4 day corollary. This rule states that after a long intermediate move and the market has 4 or more days in the direction of the trend then the first day in the opposite direction can often signal a trend change. Both of these rules make sense when you think about them. When you get 4 or more days in the direction of the trend at the end of a long move this often signifies the bullish or bearish sentiment has reached an extreme level. The first day in the opposite direction is a sign that the move has exhausted itself. The same rational works for the 4 day rule. After a long move if you can't even get one day back in the direction of the trend after 3 counter move days it's a pretty good sign the trend is over. Let me emphasize the word LONG intermediate move. Don't try to apply these rules when a trend has only begun. They won't work. As a matter of fact neither one of these rules are by themselves very good at spotting tops. When we combine them with the COT and divergences though we at least have a fighting chance of getting close to the top.

COT report

Because of the holiday the Cot report won't be out till Monday.

He who hesitates is lost

When the markets decide to move it's usually a good idea to be in early and hold on as the initial rise is typically fairly powerful and then is followed by sideways consolidation or a corrective move. Normally its not a great idea to sit around and watch these moves as they can leave you behind quickly and then your stuck entering during the consolidation or correction phase. We appear to be entering this initial upwards move. Especially in the Q's which have been very strong while the rest of the market corrected.

Riding the Bull

I've made this point in the past but I don't think it will hurt to bring it up again. There is a quote in the Jesse Livermore biography about an old trader who was advised by a young trader that the markets were severely overbought and that he should sell his position and wait for the market to pullback so he could buy in cheaper. The old salt calmly agreed with the youngster but refused to sell any of his position. When the newbie asked him why he wouldn't sell his reply was "I would lose my position and it is a bull market after all" Look what would have happened if you sold waiting for a pullback in either one of the two uplegs so far in the last year. We didn't get much of a pullback and if you were out you risked getting quickly left behind. Now notice that the Feb. correction was only 2/3 the % of the June/July correction and about 1/3 the time. The most recent correction was half of the Feb. correction. The corrections are getting smaller and smaller. The short interest just keeps getting larger as more and more investors try to pick the top. AKA we have a lot of fuel for the fire. Losing your position now could be very costly. At some point this bull is going to pull in the retail money again like it did in 2000. Maybe not to the extent that it did in the bubble years but they will start to chase this market. We need that to happen before this bull can die. Nobody ever said riding the bull was easy.

Another failed pattern

Here is the latest pattern from the TA crowd. Apparently since the Q's didn't reach the upper trend line before starting to decline this was confirmation that the pattern was going to break to the down side. Well if that is the case how come the Q's are at new highs. Just another example of how unreliable these patterns are. The markets are people buying and selling stocks. Buying doesn't stop just because two lines on a chart do or don't touch. As long as the big money is buying these bearish patterns are going to keep failing. I would be very hesitant to put much faith in patterns when investing unless they confirm what the big money is doing. How many think that Buffett would be worth 40 billion today if he had been trying to trade patterns for the last 40 years? The only thing these patterns can predict with any accuracy is the past and even that is questionable in my mind.

Is the bull back?

I noted last week to subscribers that the Dow appeared to be coiling for a powerful move. Of course we never know whether the move will be up or down. I speculated that the move would have better odds of being up since the COT reports have been so bullish lately. Well we got the answer to our question today. Up it is. If the markets can close above the reaction high then we will complete the 1-2-3 correction and have confirmation that the trend hasn't changed. The double top theory is starting to look a bit shaky. I noted last month that the double top theory didn't really fit the norm for this bull.

Buying opportunity or bear market?

I want to point out something that probably everybody knows but that very few can act on. Every pullback when it is happening looks like a selling opportunity and every rally when it is happening looks like a buying opportunity. That is just the way the human mind and emotions are programed to work. We seek positive reinforcement. Take a look at the charts from every correction so far in this bull and tell me at the bottom if you weren't inclined to sell instead of buy. My guess is about 90% of you wanted to sell aggressively at market bottoms. It is very hard to control our emotions and do the opposite of what the mind wants us to do. So how do we know if a pullback is just a pullback and should be bought or if it's the start of a bear market and should be sold. Well the only reliable method I've found is to watch the COT reports to find out what the smart money is doing. If they are buying at these bottoms the odds greatly favor that it is a normal correction in a bull market. If they are selling heavily like they were in 2000-2003 then it's probably a bear market.