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.  

BOTBB

BTFD meets BOTBB.  Bring out the body bags.  The long equity, short bond bus had a lot of passengers on board, and it is approaching the edge of the cliff.  The bus was cruising right along since the 2nd half of 2013, and then we hit a bump in the road.  That bump is fundamentals.  Despite all the hope and talk about growth reaching escape velocity, without fiscal stimulus, the economy doesn't have the fuel.  There is no secular growth.  It can only be boosted by artificial means, monetary or fiscal.  Unless the Fed wants to make a mockery of the Treasury and MBS market by cornering it, they can't buy much more.

Yesterday, the big gap up was a warning sign that staying short throughout yesterday was going to be painful, so I waited till the afternoon to put on shorts.  I have lightened up into the red futures but I will probably put the shorts right back on after the first hour of trading.  The margined out bulls will be seriously tested today, and I don't think too many want to hold long over the weekend.  Expecting the typical morning buying on the big gap down, which should provide a chance to reestablish shorts.

Bounce will Have to Wait

Unless one has been trading intensively intraday, it has been hard to make money going long this week.  Most of the big up moves have been happening in the overnight market.  

Yesterday's weakness after the FOMC meeting makes it tougher now.  I had a scenario where a small rebound yesterday would have provided a short opportunity before we went back down.  Well, the market didn't give the sellers any time to sell, except overnight.  If we can keep this gap up, ES 1779 is a good spot to sell short and I would be a buyer if we got down closer to ES 1765.  

I do not expect a trend down day, so we should be able to catch a decent bounce intraday if we get down low enough.  The first two hours of the day should see strong selling if we open around here, 1777.

Overnight Fakeout

It was mind boggling to see the ES up 12 handles on a Turkey rate hike, so I figured there were some shorts trapped, but I see that reality is setting in again, as the Turkish ETF, TUR, is back down after the AH spike up.  I have never seen a sustained up move in a market where a country needed to raise its interest rates to 12% in order to keep the hounds at bay.

But that is besides the point, the market wants to go lower, because we are topping out here, the bounce yesterday was not convincing, and a 25 point down move from high to low overnight smells of extreme weakness.  Any rallies are being used as selling opportunities now.

Despite the big gap down today, I don't expect much damage because its FOMC day.  But Thursday and Friday should be total bloodbaths.  Staying in cash and waiting for panic to set it before I buy any dips.  Or better yet, if the market can rally from the open today, I will be shorting anywhere close to ES 1787.

VIP Market

It's a VIP market.  A Volatility Increases Predictability market.  During a bad trading market, back in early May 2013, I made this post about making hay when the sun shines.  It reminds me of the importance of knowing when to get greedy and when to relax and play small ball.

My foot was off the gas, at that time, because it was a poor trading market.  Now, with this increase in volatility, I am pushing the accelerator, because I am seeing more predictable intraday and overnight moves.  Volatility not only increases the speed of moves, but it also increases their predictability.  Patterns from the past repeat, because when you inject fear into the picture, the trading becomes less random.  Oddly enough, counter trend trading becomes more effective in a panicky market.  But risk management becomes more important because moves will go beyond where they normally do because of increased volatility.

For example, Intraday reversals like yesterday off deep oversold levels is one such pattern that only happens in a nervous market.  And you will only get those gut wrenching closing selloffs into the 4:15 PM ET futures close (Friday AND Monday) in a nervous market.

As for today, even with a bad AAPL earnings miss, the futures are up solidly.  Ahead of the FOMC tomorrow, expect a grind higher after making a mini panic low yesterday.

Look for Spots to Buy

Last week removed a lot of the froth from the market, and investors are no longer complacent.  Fast Money team were all bearish for Monday.  So we gap up, the market's way of saying FU to market timers.

I scooped up some stock futures into the close Friday, and will unload them Tuesday or Wednesday.  It is just a quick trade, I do expect another down move after the bounce early this week.  The next down move will be the one where we can target a bigger bounce, perhaps 60 points.

Also looking for a possible reversal play by getting short NG, only if we see $5.80 to $6.00.  Right now, we're trading $5.27.