Emotions. We humans are blessed with them. Of course on the flip side we investors are cursed with them. Fear and greed. The two emotions that make the markets go round. Emotions were put on full display week before last, at least the fear emotion. This week the greed emotion started to come back or maybe it was just his younger brother Hope.
Ever notice how easily these two can change places in your brain? Heck sometimes they can flip flop back and forth several times a day. Now look back at some of your past trades and notice how many times these two emotions made you take the wrong trade. I've said several times over the last week that we should be getting a pullback. So far it hasn't happened, but it will since nothing goes straight up. Right now greed is feeling pretty good but I guarantee that as soon as we have one down day fear is going to jump right back on your head and greed and hope will go right out the window.
So how do we control these little devils that make us act irrationally? In case anyone hasn't noticed irrational behavior isn't real good for your portfolio.
There are a couple of ways. First and foremost we trade with correct position size and we expect the worst. That way if a trade does go against us we don't have so much at risk that if it hits our stops it will do serious damage. If you know ahead of time that even if the worst happens you're not going to lose most of your life savings then it is much easier to keep your head when everyone else is losing theirs. (I got news for you when everybody else is losing their cool that just means they're going to do something stupid and hell if they're going to do something stupid you might as well profit from it) However if you are one of the sheep running with the herd then you're not in any position to take advantage of anything. As a matter of fact your probably to busy getting fleeced.
The second thing we can do is learn discipline. That means when you've got the odds in your favor then play them. Ever heard a pit boss at a casino ask a blackjack player to leave the table just because he's on a lucky streak? Hell no. In fact what happens is that player will start getting all kinds of comps. Now why would the casino do that you ask. He's taking their money. Well obviously the casino knows that the odds are in their favor so all they have to do is keep that player there and eventually the odds will "fix" that little winning streak. It's exactly the same with investing. As long as you trade with the odds in your favor they will eventually "fix" any losing streak. That is as long as you believe me about rule #1.
Now trading with the odds can mean many different things. There are probably 1000's of ways to make money in the markets. I've posted the three that I've found work the best COT,
VTO and
Bollinger Band crash trade. All three have a positive expectancy and if consistently traded with discipline and correct position size will produce a long term gain for your portfolio. That's not to say there aren't other systems that will do as good or better. I'm all ears if anyone wants to post their systems BTW. However for these systems to work you've got to take the trades when they setup. You've got to have the discipline to stick with them and you've got to be willing to take a loss since no one knows before hand whether a trade will be a winner or a loser. If you're not willing to let the trade work then you will cut your profits short. All trades have some BIG winners. If you are nervous and take your profits too soon then you will never allow a trade to produce a big winner. By so doing you usually change a positive expectancy into a negative one.
I will be watching the close on the NYSE today. If it can close above 9600 it will have completed a trend reversal according to Victor Sperandeos 1-2-3 reversal rules. If so the test of the lows at #2 was very weak. If that's all the test we're going to get out of this correction then this is one very powerful bull market IMO. We'll have to see how the market closes.
Money is again rapidly flowing into the 3 month T-bill. As we can see in the past this has been followed by a cycle of Fed rate cuts. The last week this strong flow of money into T-bills was a sign of fear as investors wanted out of riskier assets and into safety. The last 2 days so far the market has been strong so I'm of the opinion that the market is seeing a rate cutting cycle ahead. Apparently the market thinks this will be a positive for the economy and stocks. Well either that or the credit markets are bracing for another round of selling and the stock market doesn't know what it's doing.
OK here's my pitiful attempt at a pattern analysis. It looks like we may be forming an inverse head & shoulders pattern. LOL Actually what I'm looking at is a potential 1-2-3 reversal with the big key reversal day and a very weak test of the lows. If the S&P can close above the reaction high then it will have completed the trend change back to the long side. Does this guarantee the market is going back up? Of course not there are no guarantees in the stock market but it does skew the odds a little more in favor of the bulls. Also yesterdays 90+% down volume day was the worst in 10 years. The last four times we saw anything similar in the last decade it has been followed by an average weekly gain of 4.9% and a monthly gain of 6.2%. 4 out of 4, that's pretty good odds. Combine that with the COT at historic long positions, insiders backing up the truck and short interest at record levels and those are the kind of odds I refuse to pass up.
I'm going to point out just how unusual the breadth extremes were the week before last. The only time in the last 10 years that have seen new lows on the NYSE spike higher was the bottom of the 98 decline. On Thursday Aug. 16th the new lows hit 1132. There are 3453 stocks traded on the NYSE. That means 1/3 of all stocks on the NYSE hit new lows on Aug. 16th. That is a sign of extreme panic. I think we've all learned by now that panic is almost always an opportunity. We all know that the market reversed big time on that day and then rallied big the next day. As a matter of fact the next day was a 90% up volume day. Most intermediate rallies start with a 90% day. I strongly believe we saw the internal low for the decline on Aug. 16th. As of today the new lows have totally collapsed back down to 16. We may very well see the market drop again and new lows may move even higher than 1132 but let's just say I have strong doubts as to that happening. If the market holds here then we should have hit such an oversold level that the ensuing rally could be quite impressive and that's exactly what the historical precedents would suggest.
I've had a few requests to do a post on how I use TA. Here goes. First off let me say to a great extent I look for TA that will confirm the COT position. So yes I have a bias. Don't we all? Mostly I'm looking for reversals that signify that the selling or buying has dried up. I have a strong preference for the 2b reversal. I also look for the 4 day rule and 4 day corollary after long intermediate moves. Mostly I'm looking for levels of supply and demand. I will use indicators such as RSI, MACD and Stochastics as a secondary indicator if they confirm the COT position but definitely not as a reason to trade against the big boys. I almost never pay any attention to patterns personally such as head and shoulders or bear flags (whatever the hell that is). I particularly like the point and figure charts because they take out everything but the price action and levels of support and resistance are pretty obvious. I try to keep it as simple as possible and not overthink my trades. If the COT is long I look at the indicators to confirm that position. If it's short I look for indicators that would suggest that the market is or has turned down. Pretty basic stuff really.
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