Not Letting In Dip Buyers

This stock market is amazing.  The strongest stock market I have ever seen, on a risk adjusted basis.  That includes the 1996 to 2000 period where the market went parabolic.  Back then, the VIX was regularly in the 20s, even in an uptrend, and there were quite a few sharp swift pullbacks.

Since we bottomed 3 weeks ago, the market has really only had one down day, and that was less than 1%.  It has not let in the dip buyers, only those buying on strength and ignoring the naysayers have made money.  Those shorting got to pay another tuition fee.  I am disappointed that I couldn't get in yesterday, because I could feel the bullishness, I was just trying to be too perfect with long entries.  Forgetting that this is the most forgiving environment for US stock investors that they will ever see.

Eventually the crowd will get on board, reach saturation, and then we'll pullback.  But that feels like an April problem, not a March problem.  Before then, I may have to hold my nose and buy this thing at these levels, to pick up small gains, in a financial market lacking good opportunities right now.

Buy at ES 1833

A strong market doesn't often give you a chance to get in when the coast is clear.  It takes price confirmation and a strong bottom to signal near term safety.  The market has given us clues to where it wants to go, by going in that direction in an aggressive manner.   What is more bullish is the bounce in the Russell 2000, which has outperformed the S&P 500 this year.  There is a demand for US-centric companies, and small caps have much less international exposure than big caps.  It is a good sign of demand for US equities when the small caps outperform.

It is the US and maybe Europe and nothing else market.  Japan is no longer in favor, because the USDJPY really can't go up more unless the US economy actually shows enough strength to justify it.  And I doubt that happens.  As for emerging markets, if you mention anything positive about emerging markets, you will be shot down in the meetings, and be branded a contrarian knucklehead.  Being contrarian by being bullish emerging markets doesn't mean you are clever.  It just means you are dumb, and an outcast.  It is akin to being bullish Europe in 2010 because it was cheaper than everything else and the news was bad, only to see 2011 force Europe to its knees.

By the way, TSLA is now over 260, with another gap up.  If I didn't have a better trade lined up, which is to buy the general market, I would consider getting short TSLA for a swing trade.

I didn't have orders in overnight, otherwise that ES 1833 buy would have triggered.  I am hoping for another test of 1833, and a slight break, perhaps down to 1830, to buy stocks.   If I can get long today, I plan to hold through the nonfarm payrolls released next Friday.

Asset Price Inflation

The last time we were at 1850 in the S&P, on January 22, the 10 year Treasury yield was 2.86%, gold was at 1240, and WTI crude was at 97.  In one month, with the same S&P, the 10 year Treasury is at 2.70%, gold is at 1332, and WTI is over 102.  It has been a rising tide for everything, except maybe emerging market and Japanese stocks.

This makes it difficult to short, because of the global money pump.  It makes me want to get bearish not by shorting US equities, but by getting long bonds or shorting USDJPY.  I still strongly believe that the last man standing will be the S&P 500.  In other words, I don't see USDJPY making new highs, or 10 Year Treasury yields breaking 3%, even if the S&P goes to 1900.

It is much safer to get long bonds than to short stocks in this environment if you are bearish.  I am not bearish yet, but if I do get bearish, it will not be to short the S&P, it will be to get long bonds or short the USDJPY.

Relentless Bull Market

A new all time high, less than 3 weeks after a huge 110 point down move in S&P.  That is major league strength, the underlying buying power is tremendous.  Every little dip we've had since we bottomed has been bought aggressively.  The best times to buy the dips have been in the overnight market.  By the time the US regular hours start trading, we've bottomed for the day.  

I am not going to do anything here, we should get to 1880 by nonfarm payrolls in less than 2 weeks.  Way too early to try to pick a top, and I am not really interested in the long side, after such a huge move, although I think it goes higher eventually.

Commodities Short Squeezes

The commodities space has been the hot sector, with gold rallying big from the beginning of the year, crude oil also very strong lately, and of course monster short squeezes in natural gas and coffee.

Instead of natural gas, I actually believe coffee is the best short out there in the commodity space.  Natural gas inventories by end of March are going to be lowest since 2003, so it will prevent any sharp drops after winter is over.

For coffee, world acreage has increased every year, inventories are not tight.  The super spike in coffee in 2011 encouraged farmers to plant coffee trees anywhere they had empty space over the last 3 years.  The drought in Brazil will reduce yields, but the sheer amount of acreage devoted to coffee is being forgotten.  These prices are an overshoot, as coffee is a fairly thin market, and speculators can drive moves in the short term above and beyond fundamentals.

It is one giant short squeeze, with commercials and counter trend traders getting margin calls from their short NG, CL, and KC positions. While hedge funds and CTAs pile on the long side.  This week feels like the apex of the move, with traders suddenly falling in love with commodities again, but the fundamentals just don't back the moves.

Close to a Buy

We need one more down day and we have a sweet buying opportunity.  The Chinese PMI numbers came in weaker than expected, thus the sharp down move in the overnight market.  I am looking to buy the ES around 1810, looking for a move to 1880 within 3 weeks.  In any case, you can buy around these levels and make gains in March.  We may have weakness into early next week due to options expiration, and also the closing of the Verizon/Vodafone deal, which will supply about $60B in new equity into the marketplace.

So looking for a little more weakness, and I will snap up equity futures for the grind higher.  Don't fight the upmove yet, we still have a ways to go.

Consolidation

After a huge rally over the past 7 trading days, we are near the all time highs, with plenty of resistance between 1840 and 1850.  This is a natural resting spot to consolidate the strong move, and then blast higher again to new all time highs.  So the plan is to buy dips this week, with the plan to sell a new all time high next week or the first week of March.  With China stabilizing, and the BOJ willing to do more QE, the coast is clear for the next few weeks.

In other markets, natural gas is squeezing again, and if it can get to $6, it will be tempting to short for a trade.

As Old as the Hills

"Another lesson I learned early is that there is nothing new in Wall Street.  There can't be because speculation is as old as the hills." - Jesse Livermore 


The market is filled with patterns.  Most of them I don't even know, and will never know.  But you don't need to know much in order to make money trading.

When I began, I didn't even consider myself a trader.  I considered myself an investor, someone looking to buy stocks for the long term.  Like many beginners, I started in stocks, and believed in the myth that investing in the stock market was the road to riches.  So I just bought some small cap stocks, and waited for them to go up.

I read magazines like Fortune and Kiplinger's to get advice about stocks.  I believed in the words of the writers and fund managers like it was Bible.  I looked at price/book, price/earnings ratios, and revenue growth.  I tried to find value.  Instead, I lost my ass.

The turning point came when after a year of investing, I was down 50%, felt like crap, and I threw everything I read out the window.  It wasn't working.

There had to be another way.  I observed what was going on, it wasn't random, but I had to look in the right places.  I tried to absorb the action.   I watched the market everyday. I stopped investing.  I wanted to make my money back quickly.  So I focused on shorter time frames.   Began to notice some patterns in actively traded stocks: daytrader favorites, stocks up a lot or down a lot.  These active stocks had certain tendencies.  Things like gapping up, flush out bottoms on heavy volume, volume spin after a strong uptrend leading to a reversal.  I backed my observations with money.  These were new methods, an experiment with real money.  I never did paper trading, because I am an action junkie, paper trading didn't interest me.

I started being right more often than wrong, and made some money.  It wasn't a smooth ride, as I was addicted to the action, and often traded too aggressively, resulting in a few blows up along the journey.

I learned some important lessons.  I realized trading is not about analyzing a company's financials, finding value, figuring out what the economy will do, or being good at interpreting the news.  It is not about being good at technical analysis or charting.  I don't know anybody who makes money from looking at charts.

I learned to recognize patterns and find trading opportunities where you can be right more often than wrong.  And patterns repeat because traders and investors have biases.  Like wanting to go to cash before a big report.  Wanting to be long instead of short.  And feeling fear more strongly than greed.  I learned from my mistakes last July, shorting a market that bottomed, going up every day, thinking it has gone too far, too fast, fighting it on the way up.  It was a costly lesson, and I did not repeat that mistake again, like I could have last October, or last week.

Blog Break

The trade is boring again.  Very little opportunity, 3 day President's Day weekend coming up, it will be slow.  I will be back after the long weekend.

We Bottomed

The correction is over.  The market keeps going up, and there is still the wall of worry.  It is a continuation of the 2013 market, quick dips, and then another grind higher.  This pattern will be hard to break, until we get to some really overvalued levels.  Despite the overvaluation, I will be looking to make small buys if we get down to 1780-1785.  Expecting new highs by March.  

If we are back to the grind higher, it is going to be slow trading, and I will be trading mostly individual stocks.

Back to Neutral

After thinking about the price action and the movements in the market over the weekend, I can no longer be bearish as I was on Friday.  It feels like a coin flip at the moment, it could stall out here and go back down, or it could take a rest for a few days and blast higher to 1840.

I like to watch CNBC Fast Money, just to see what the investing public is thinking.  After a V reversal, I expected to see a mix of bulls and bears.  It was all bears.  Not one was forecasting the market to V bottom and go straight higher.  Most were leaning bearish, looking for another pullback.  Brian Kelly is still short, and it makes me uncomfortable to have the same position as him.

Although I would like to see more volatility, and see the market go back down to 1740, it just doesn't feel like it will happen.  The market was just too strong on Friday, on a bad jobs number, the kind of reaction that surprised almost everybody.  From experience, when the market is surprised by such a move, it has a tendency to go in that same direction in the coming weeks.

So I have closed out all positions, and now looking for individual stocks to trade, looking for small opportunities.  I will go back to futures trading when I have more conviction on market direction.  Right now, I am neutral.

22 Day Pullback

I laid out two possible scenarios for this pullback, a 13 day pullback that ends either today or next Monday, or a 22 day pullback that ends at the options expiration, on February 22.  I am putting my money down for the 22 day pullback, because we never got the flush out and panicky bottom that makes for a sustainable rally.  That means we are very close to the top of this bounce, because in order for there to be a sustained pullback with lower lows, we cannot go up for more than 3 straight days.  3 Days is the maximum number of up days allowed for this pullback.  If we have 4 straight up days, or break ES 1795, that invalidates the short signal.

Since this looks like a 22 day pullback, the downside targets will be lowered, I am expecting a test of 1700 within 2 weeks.  The catalyst is probably another China mini financial panic, but that is just a guess.

Squeezing Shorts

That was quite the short squeeze yesterday and in premarket.  With traders feeling invincible in the face of any kind of nonfarm payrolls number, we got another drift higher ahead of the jobs number in the premarket.  This is something that has repeated many times, and is something worth betting on in the future.

Although I started a short equity futures position yesterday, and underwater, the long bond position has offset most of the losses.  I have lightened both positions after the jobs number.  But with traders conditioned to believe all dips are buying opportunities, this market will not go down easily.

It may sound ridiculous in the face of a big gap up on a bad jobs number, but I think we will still break SPX 1740 with authority next week.  I will look to add to shorts around ES 1785, which is an area of heavy resistance from last week.

Weak Bounces

After the big drop on Monday, at current price of ES 1745, we've retraced about 1/4 of the 45 point drop from 1778 to 1733.  That is a very weak bounce.  I am still getting the sense that there are weak hands on the long side hoping for a quick rebound like 2013 to bail them out.  Not so sure the market will be so compliant with that hope.

I want to emphasize that we haven't seen such a speedy drop since November of 2012.  Back then, there were fears of the fiscal cliff, and traders definitely were more bearish back then.  I looked at the equity put/call ratio for Wednesday found in the OCC website, and was surprised to see just a 0.77 p/c ratio, indicating a lot of equity call volume.  This for a such a weak bounce day.

It looks like more pain ahead for bulls.  I am in cash, and will probably not get a chance to short a bounce today, which was the original plan.  I expect a flush out either today or Friday, easily breaking yesterday's lows.

Another Selloff Nears

A plunge like Monday's usually gets us oversold enough to prevent further damage for at least 2 trading days.  Beyond that, in a strong pullback like we are in right now, with the amount of technical damage done, you can have another selloff continue after just a 2 day respite.  Which means trading long is probably safe today, but beyond today, you are playing with fire on the long side till we get the puke out move lower to ES 1720.

From a daytrader's perspective, today you have to buy the gap down open to sell at the European close, but I would not hold longs after today.  Thursday is lining up for another down day going into the nonfarm payrolls number on Friday.

Crack City

The market broke last week's lows with vicious force.  We have now gone down 100 S&P points in 8 trading days, the quickest 100 point drop since the Eurozone crisis in fall of 2011.  Yes, we are at higher levels now so 100 points at current levels is a smaller move than 100 points in 2011 or 2012.

I am leaning towards the 22 day pullback. I've noticed that 22 day pullbacks are usually preceded by a blowoff top like we saw in April 2010, late April 2011, September 2012, and May 2013.  It could be argued that we had that blowoff top at the end of 2013 after the FOMC meeting.

The importance of timing the length of these pullbacks is to avoid getting short squeezed on the strong bounce higher after the pullback is done, and to avoid getting long too early and having the market go down further day after day.  It is not an exact science, just an observation of the price action over the last 5 years.  Looking back at 2006 and 2007, patterns were similar, although the 2007 top was quite sloppy and volatile, so the timing was a bit different.

By the way, these are bull market patterns that I have observed, in a bear market, the timing mechanisms are totally different, as the primary trend is down, not up.

After a big down day like yesterday, I will be looking for a place to get long, slightly below yesterday's lows, around ES 1730, playing for an intraday bounce.  Although I expect there to be a lower low intraday, I don't want to short today, because I anticipate a fast and furious bounce.

Pullback Cycles

Doing a very basic review of all the pullbacks since we bottomed in March 2009, they generally fall into 3 categories.  They are divided by the length of time.

1.  The 5 day pullback.  This is a quick flush out of excess and provides little predictive powers for future pullbacks.  If a pullback can go beyond the 5-6 trading day period, it has enough strength to go on for 13 trading days.  Examples:  May 2009, late Aug 2009, July 2011, November 2011, June 2012, July 2012, December 2012, February 2013, April 2013

2.  The 13 day pullback.  There were not many pullbacks between 7 and 11 trading days in length.  It is almost a quantum division of pullbacks, short, quick ones that last 5 days, intermediate ones that last 13 days.  By the way, these numbers are +/- 1 day.  So 4-6 day short pullbacks, or 12-14 day intermediate pullback.  Examples: October 2009, January 2010, June 2010, August 2010, November 2010, March 2011, April 2012, August 2013, Sep-Oct 2013, 

3.  The 22 day pullback.  The last group is the deep pullback, which is less common, and last usually around 21-23 trading days.  Examples, July 2009, May 2010, May-June 2011 (hybrid of 2 and 3), late July - October 2011(two consecutive 22 day pullbacks), May 2012, October 2012, May-June 2013.

One would figure there would be a lot more 5 day pullbacks and 13 day pullbacks than 22 day pullbacks, but there isn't a big difference.  

Right now, it looks like we are either in the 13 day or 22 day pullback, because this one has gone beyond 6 days.  That means we should see another selloff this week.  I will be looking to short any bounces this week.  But I will not be doing any shorting beyond this week.