I’ve discovered the secret to prosperity in trading this market: drugs. I’m serious. Medicate heavily and medicate often. The early death these vices hasten you towards is irrelevant because trading will take those years off of your life anyway. If you don’t believe that, it’s likely that I got started in this business when your drug of choice was breast milk. Doc being stingy with the prescription pad? Just tell him you’re a trader. He’s been invested this year too. He’ll understand. Ink will fly. I recommend amphetamine salts, but ask for them by the Brand Name, or you’ll get weird looks from the folks in the lobby.
Seriously, though, if you’re trading any higher time frame than a tick chart, this market is loopy. It certainly has the feel of coming apart at the seams, at least on the surface. That said, I’ve never been more certain that this market resolves to the upside.
Beneath the opaque surface of jittery indices is the largest abundance of individual setups I’ve seen for more than a year. Sentiment continues to be dismal, contributing to the uber-bid that waits for bears just beneath the last low. There are no signs that, using the categories created by Charles Dow, ‘Public Participation’ has become ‘Excess.’ It has been, and continues to be, a perfect storm of sentiment, fundamentals, and timing. The year 2013 lulled ‘early responder’ traders into a false sense of security. That year was marvelously simple to trade; monstrously lucrative for many of us. What’s amazing is how effective the market is at sensing that thing are too easy. When it does, it spends time putting participants under grievous duress by reversing all the rules and throwing out the roadmap. A couple years like 2014 go by and folks declare that there is no roadmap. Then it gets easy again. The ‘rhythm of facility,’ if you will. In an easy market, even witless participants find it easy to make money. In a hard market, even brilliant participants find it hard.
Could we correct before we auction higher? Of course we could. As I’ve maintained, corrections are random, by definition. But a correction will only set up the next psychotic leg higher. There is no possibility of a true bear market here, yet. Bear markets are not just the OPPOSITE of excessive markets, they are the BY-PRODUCT of excessive markets. The relationship is causal, not just counter-weighted. No excess: no bear.
So here we are. The indices are shaky and many participants are wondering where we go next. But if you’re one of those taking blood pressure medication, you’re popping the wrong pills. If you just look a little closer, you will see an elegant choreography of rotation playing out. The market is only coming apart at the “seems.”
Being in touch with these nuances in the auction is only half the battle, though. Jokes aside, the real secret to prosperity in trading is just this: know yourself. The thing that makes trading so difficult isn’t the wide array of errors it is possible to make. The thing that makes trading so difficult is the one or two errors that YOU have a predisposition to make over and over again. Your ‘demons,’ your ‘Achilles heel.’ A Jewish iconoclast once said, “Your sin will find you out.” I prefer, “Your RISK will find you out.”
Trade well and good fortune.
- Natural Gas: I’m short Nattie as a responsive seller against the range/contraction high and the 61.8% retracement. Sentiment is VERY chirpy with this instrument and many participants stalking a bottom preemptively declared a breakout earlier this week. And it may yet break out. For now, though, this instrument is still in BALANCE and CONVICTION ON ALL TIME FRAMES IS DOWN. I love entries like this and so should you. Not only do I have a fantastic reference point and am able to move risk to break-even, I have a chance of being in for the INITIATIVE move if these responsive sellers decide they want more. Make sense?
- The Nikkei: with the theme of macro bullishness, the Nikkei looks unbelievably constructive. She is consolidating gains from the breakout of her second very mature balance over the last six years. High, tight, and straight sideways is NOT how markets top. This is how markets rest. Could she lead us forward?
- Crude oil and the Canadian Dollar: I rarely try to catch bottoms, because the Three Questions make it difficult to justify a trade (why trade against conviction?). I am, however, stalking Crude Oil very closely for a trade. In my first post I talked about how I use “Correlation and Reflectiveness” to look for clues in a given instrument, through “divergences, causal relationships, or simply as a form of confirmation and symmetry.” Just as the Australian Dollar and Gold are very correlated (and each is used by traders of the other to provide extra information), Crude is very correlated with the Canadian Dollar. The CAD is trading near several key reference areas that could clue us in to a reversal in crude. The USD/CAD cross is particularly compelling, since because Crude and the Dollar are inversely correlated, it’s possible that a ‘perfect storm’ trade could set up: dollar down, CAD up, crude up. The most recent reference point for USD/CAD was the fib cluster where the most recent move up terminated (a 200% extension and a 141% retracement confluence):
The trade idea here would be to short pops within the rotation of this move down from the reversal spot, with risk against the high. Just above that level, however, we have an even more significant reference point in the Dollar/CAD cross…
… although other crosses have triggered here, confirming the lower time frame setup to some extent. GBP/CAD also has a structural confluence from a previous balance…
…. and the Euro/CAD cross has the mother of all nested 61.8% retracements:
- GOGO: Retest properties, and a falling wedge with its apex at composite VPOC and primary trend and the 61.8. Cycles saying, “Not yet.”
- Coffee: you can trade this commodity with the futures product /KC or the equity ETF JO. I am watching for continuation of this falling wedge breakout. These reversals are highly significant and their resulting trends can and do last ages.
- CYBR: In balance, and respecting a well-defined channel. I will stalk entries within lower time frame balances. One can easily imagine a contraction starting to emerge here: squint and imagine a symmetrical wedge with its apex at VPOC. See it?
- LULU: Balance so well defined you could almost say it’s see-thru. Staying elevated and consolidating gains from a monster trend. On watch for a lower time-frame setup I recognize.
- China: continuing to watch for signs that this much-antagonized selloff is just a retest. Lots of stabilization in individual names. Shanghai:
- Taiwan: at retest reference area, composite VPOC (balance of demand) and primary trend support. Everyone bearish yet?
- BZH: I’ve been stalking this laggard for a while. I’m anticipating a bullish resolution, but bears are in control until proven otherwise: Part of the reason this idea resonates with me so much is the tremendous leadership in the sector:This is the way the risk cycle works. When the Big Boys take profits from components of the sector that are working, where do they deploy that money? The components that aren’t (yet). Rinse and repeat until pigs fly, and then start over.
- SCTY: still my favorite setup. Bears had a big crack at this over the last two weeks, and found determined responsive demand. If buyers are strong enough to battle this issue back into balance, could they be strong enough to jumpstart an initiative move out and up? Remember, just as initiative participants become responsive ones (RETESTS!), responsive participants are often willing to become initiative ones (“The biggest moves in ONE direction are often caused by an initiative move in the OTHER direction that is met with a much more powerful responsive effort” as I said here).
- WDAY: gorgeous setup. Flagging above composite VPOC and a nested Fibonacci retracement level. If she breaks up–and the market cooperates–new highs cometh. Exaggeration? Don’t judge the potential of a trend move by the properties of range moves.
- CRM: The next move up would be to one hunnit: Remember me saying that Fibonacci applications can help us answer Question #2–whether price is in BALANCE or TREND? Because a balance is “characterized by directional moves that are being repeatedly and deeply retraced?” And a trend by “directional moves that are being only shallowly retraced before being continued?” Look at the 78.6% levels firing off left and right on CRM’s lower time frame (confluent with structure):
- FSLR: quietly consolidating its breakout on the daily time frame: Very tradeable lower time frame balance:
- Z: this pattern WILL matter. They can take forever, but they always matter. LVN rejected. Cycle analysis giving some insight too. Can it be that easy?
- Going forward I’m going to try and post bi-weekly. The first post of the week will be my venue to wax poetic about macro themes, events, trade psychology, anecdotes, or observations. The second will be devoted entirely to charts and setups.