A financial blog on investing in stocks, commodities and the gold bull market.
Saturday, August 18, 2007
First off let me point out the 4 day corollary signal that was given by the Dow on Friday. For any who are new to the site here is a post with explanations on the 4 day rules. Also take a look at the long tail in both charts. Normally a strong sign of a bottom. On top of that we had a 90% up day the very next day. Many intermediate declines end on a 90% up day.
Now let's move on to the next chart of the S&P. For all the people who missed the original long signal back in Mar. well you just got a do over. As of Friday the S&P is right back at the level where the Mar. signal was given. Now let me make a few things clear. First off your odds on any COT signal producing a winning trade over the last 21 years are about 3 to 1. If you were to just take long trades they would be better than 3 to 1. Next and I've repeatedly called attention to this the commercials are not just long they are at massively historic long positions. The little guy is at almost historic short positions. Insiders are buying like there's no tomorrow and there's only one reason for insiders to buy. Now lets throw out a few more statistics. Breadth extremes like we've seen over the last week or two have only occurred four times in the last 40 years or so. Every one of them was followed by extremely powerful rallies.
I've said this many times before that if you can get the odds in your favor then just like a casino you will make money in the long run. Having said all that and shown you that the odds are very heavily weighted to the long side and the technicals are also suggesting a bottom how many of you after all the volatility last week have the balls to pull the trigger? Let me point something else out. Your stop would be a break below the recent lows. The four times in history where we saw these kind of conditions the panic lows where not violated. So to make it simple your maximum loss if you put your intire account (which I better not catch anyone doing after all my rants about position sizing) is 5.5%. Your potential gain if we just go back and match the highs is 6.8%. Of course if the market rallies powerfully as has been the case after such extreme oversold levels then your potential gain could be much more than 6.8%.
So the odds are in your favor and the risk reward is in your favor. It doesn't get any better than this in the markets. So I'll ask again how many when presented with all these factors in your favor have the courage to buy here? My guess is few and here's why. Too many investors are more concerned with being right than making money. I've just explained to you that if you consistently trade with the odds in your favor you will make money in the markets. Not you might make money in the markets. You will make money (well as long as your position size is sane). That doesn't mean that you won't lose from time to time. You will. This could be one of those times even with everything in your favor. My guess is the extreme volatility we've just experienced and the fear of losing will prevent all but the most experienced and disciplined investors from buying here.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.