The Day of Reckoning

Folks we have the ‘Day of Reckoning’ in the US interest rate market.

The swing chart below shows:  For yesterday, a daily range (including Globex) of 3.42. To place the range into perspective, the current weekly range is around 2.9 with a standard deviation of around 0.90.

In short, in one day we saw a daily range that mirrored the upper boundaries of a normal 5-day range!

US Bonds (CFDs) Daily 18-day and 5-day Swing

What caused the volatility?

The tanking of US stocks. Traders were covering shorts and going long. Are they betting the FED will cut rates? Recent FED history suggests that if we see a downdraft in the stock market, the FED will come to its rescue.

The problem for the FED is it has little room to move. In its view, the economy is picking up steam, and it still has all those reserves sitting in the St. Louis Fed.

Asset Monetary Base https://fred.stlouisfed.org/series/BASE

Notice that before QE (2008), the deposits grew at a steady rate. After QE, deposits rose parabolically. At some point, they’ll need to repatriated or moved into Main Street. The FED needs to do this release gradually enough to hit its inflation target without causing hyperinflation.

My belief is it will do nothing – at least for the moment. It may delay the expected rate rise in March – that’s about three weeks away, so we’ll see. But, it’s unlikely will see a rate easing before then.

So, what we have is the US Bond market in an 18-day downtrend AND incredibly overbought. If the FED does not intervene, we should see a test of the lows – even if the downtrend is to abort. Great place for a short – which I effected just before the last night’s close.

The 290-min chart shows the ideal stop (CFDs) would be above 150.36; that’s too big a risk for me. So, I have lowered them to above 148.90. I also have a ‘soft’ stop – a stop based on what I don’t want to see if my scenario is incorrect.

US Bonds (CFDs) 290-min

My target is 142 (H&S target on the 18-day).

I may exit part of the position at yesterday’s low. I’ll do this if the Linear Regression Band shows momentum divergence on the 60-minute or 290-minute.

And oh….I almost forgot – I’ll talk about US Stocks tomorrow.

Buy on the Dip or Sell on the Rally?

Key question for US stocks: did we see a selling climax on Friday, Feb 2?

Friday saw the largest day down in the S&P cash (49 points) since June 24, 2016 (on that day, we saw a 71 point range down). Friday’s volume was also at extremes levels.  See chart below.

S& Daily; NB the range and volume

So, on that point, we might say that we have seen a climax. Also as Tom McClelland points out in this week’s Chart in Focus

VIX Spike Takes it Above All of its Futures

in the current S&P context, the fact that the Vix Index went above all its futures suggests a short-term bottom.

If this view is correct, a bullish conviction bar up on at least 15-20 points and average volume could be expected today. The price action would mark the beginning of the ‘automatic reaction’.

In the Wyckoff model, a selling climax is followed by an ‘automatic reaction’ and ‘secondary test’. If this picture unfolds, I’d be looking for sideways activity until Feb 23 to Feb 27 when the uptrend resumes.

But, it’s not the only view to keep in mind.

If we see another day down of at least 15-20 points on average volume,  then I’d consider we are seeing a correction of the swing from the March 11, 2016, low. This would call for a down move to at least 2724 to 2423, and probably the 2669 to 2624 zone (basis cash).

S&P Daily Yearly Quarterly and Monthly Trends

In the chart above, the green line shows the yearly swing, the black lines the quarterly trend and the red lines, the monthly trend. It shows how I derive the levels above.

Note that a move to 2669 to 2624, in this context, throws up an amber light on the uptrend. We’d need to focus on the subsequent rally to ensure that we see a healthy range, volume and momentum.

The final alternative is, we see on Monday, a small range day followed by ‘backing and filling’ price action for the rest of the week. Then, the indices may have one more shallow leg down followed that is followed by more congestion until Feb 23 to 27.

How do I determine the Feb dates? I have mentioned that I subscribe to The Market Timing Report. I find its cycle work useful in my trading.

A more important question is: as an 18-day swing trader (monthly trend), how would I trade the indices in Feb?

For now, I’d stand aside; at least until the most likely of the three options shows its hand; that may occur as early as in today’s trading, or it may take all week.

Let’s see what happens.

How to Turn Knowledge into a Skill?

Over 500 students and only around 50% get to the finish line!

Last November, I enrolled in a course that had an intake of over 500. We are now at the business end of the program and only around half have implemented. Amazing, isn’t it? We spend our hard-earned but fail to follow through – it’s as if the spending alone will attain our objectives.

Have you had a similar experience? Do you want to know a way to get things done?

My report,

“The Single Most Important Reason Keeping You Among the Losing 90%, and it’s not Mind, Money or Method.”

provides a detailed, practical way to acquire trading knowledge and associated skills. In this piece, I’d like to suggest a strategic process to help you attain your objectives.

I am forever grateful to K Anders Ericsson for introducing me to the idea of Deliberative Practice. We know that to acquire any skill we need to practice, that’s a given. What Ericsson brought to the table is the idea that to become an expert we need a special kind of practice, Deliberative Practice.

Recently, I came across another complimentary system that adds to Ericsson’s ideas: the Feynman Technique.

The model applies at the knowledge acquisition phase.  Feynman’s approach to learning ensured he understood something better than anyone else.

The key to his method?  Distinguish between knowing the name of something and knowing something. Knowing the name ‘Head and Shoulder’ is not the same as being able to recognise the pattern when it appears.

For example, did you see the integrated Head and Shoulders on the quarterly and monthly charts in the 30-Year Bonds?

Next week, I’ll consider the steps to applying both Deliberative Practice and the Feynman Technique.


A reminder: On Thursdays, I look to find ideas that help us on our quest for trading success rather write about topics on trading or make market commentaries.

 

Do You What It Takes to Succeed? The Mindset of a Winner?

 

You did the hard work last week; today, you begin to reap the rewards!

Let’s start with a quick recap:

  1. To be a successful trader, you know that the mind you need to trading is not the mind you bring to the commercial world. Why? Because……
  2. Trading is a probability game and on a trade-by-trade process produces a random result. You can do everything right and lose money on the next trade; you can do everything wrong and make a squillion dollars on the next trade. I call this the ‘the nature of markets’.
  3. The nature of markets goes against our brain’s hard wiring. It seeks certainty and control of outcomes.

Today, we’ll look at how our the brain’s responses plonk us into the losing 10%; next week, we’ll consider what we can do to solve the problem.

The key to understanding our brain’s response is to be aware that it’s designed to serve us by moving towards pleasure and away from pain.  Also, it tends to view losses as painful and profits as pleasure.

So when it’s unable to control a random process, it’s first responses are denial and suppression.

We take a loss. Rather than look at the circumstances giving rise to the loss, we deny it even took place. This fact was brought home to me when a coachee said:

I know I ought to keep a journal! Hey, it’s easy when I’m making money. The journals make me feel fantastic! But, who wants to feel even lousier by recording and analysing losses.?

But, denial and suppression have an even more insidious effect. Research has now shown that if you deny and suppress negative emotions long enough, they’ll eventually rear up and ‘bite you in the bum’! For traders, this usually means an exceptionally large loss.

The other subconscious way our brain ‘protects’ us is to ‘pretend we are profitable traders’. As Rande Howell says:

“…traders want to project a sense of I’m looking good rather than learning to be good”.

You don’t believe me? It’s easy to show…..just drop into any chat room and listen to all ‘fabulous’ trades. Whenever I’ve done this, I’ve counted the winning and losing comments – the former outnumber the latter by over 92%!!! And yet, the reality is losers outnumber winners by that margin.

The effect of the brain’s protection is to substitute an illusion for reality. The problem is in so doing, we effectively give up on our dreams. Today that may not be a problem for you. But, it will be in the twilight of your years. The biggest single human regret is this:

I wish I’d had the courage to live a life true to myself…” (5 Things People Regret on Their Deathbed)

And, I believe, that this regret acts under the radar to lure us into taking trades we otherwise would not.

Don’t miss next week! We’ll be examining a process that allows us to make an ally of our brain in our quest for success.

Relative Rotation Graphs?

Relative Rotation Graphs? What are they?

They’re the brainchild of Julius de Kempenaer. For an introduction to their use go to Relative Rotation Graphs.

In this post, I’ll be discussing how I use them for identifying the FX pairs I select for trading.

My Trader’s Timeframe is the 18-day Swing. What this means is I am trading the monthly trend. So, my first port of call in my analysis is the monthly RRG with the USD as the base currency.

RRG (USD)

 

Here’s a brief description of the quadrants:

  1. The top right-hand quadrant is one signifying strength.
  2. The bottom left-hand quadrant is one signifying weakness.
  3. The bottom right-hand quadrant is one signifying the transition from strength to weakness.
  4. The top left-hand quadrant is one signifying the transition from weakness to strength.

So, in the RRG chart above, the USD is weak against the CAD, AUD and EUR. The GBP may be ready to make a move against the USD. The NZD and JPY are weakening against the USD.

The chart also provides a perspective for the crosses.  I’d consider buying the CAD, AUD and EUR against the NZD and JPY.

I stress the RRG is merely the first step of the analysis. But, it is an important one because it fines down the analysis horizon.

 

 

 

Gold Shines?

Will Gold breakout and head north?

The chart below shows that since the 2015 low at 1085.50 (nearest futures month, CSI-data), Gold has been bounded by 1412.50 and 1149.00. Are we likely to see a breakout and head higher?

Gold 12-month Swing Nearest Futures Month

The case for a downside breakout lies with the deep retracement from the 1988.8 high; we saw a retracement, on close, below the 67% level. This usually means we’ll see a pullback to at least the 78.6% and more likely the 87.5%.

Occasionally, the deep retracement means we see the start of a 5-wave structure that exhibits a strong third wave up.

The Bull case is made by the 13-week (chart below).

Gold 13-week Swing Nearest Futures Month

We have a sideways pattern bounded by 1438.7 and 1085.5. The most recent swing down produced what I call a “Death Zone” buy signal. The rejection off the 78.6% ought to have seen a move to at least 1161.08; instead, we see a close above the top of value at 1336.27.

The buy signal suggests a breach of 1438.70.

Do the daily’s support an upside breakout? Let’s see:

Gold 18-day and 5-day Swing Nearest Futures Month

The first thing I notice is the increase in volume and range as Gold moves into the 1412.5 resistance. This indicated that we’re more likely to see an upside breakout rather than a failure at 1372.0. Instead, on Friday, we saw an open-gap down that closed as a ‘neutral day’. The neutral day suggests a balanced structure that provides no clue about the direction for day’s trading.

Gold 18-day and 5-day Swing Nearest Futures Month

For me, what Gold does today will be important:

  1. Acceptance above Friday’s high will probably see a successful challenge of Thursday’s high and breach of 1372.0. We’ll then see an attempt at 1412.50
  2. Acceptance below Thursday’s low means a move down to the 18-day swing low at 1240.0
  3. If we an outside day (breach of Friday’s high and low), the close will be important. A close in the top 25% of the range will mean a test of 1372.0 and close in the bottom 25%, more a test of 1240.0

 

What is the Trading Paradox?

Let me ask you a question: do you believe I could predict with certainty the price the S&P will close at today?

No?

Well then, let me ask you this: do you believe that I can tell you with certainty whether the S&P will close up or down today?

No?

Then how is it that I can be consistently profitable in my trading?

If you can answer this question, you’ll have avoided one of the major hurdles to consistent profitability.  Ready for the answer? Here it is:

on a trade by trade basis, the market movement is uncertain and random. But, over a large sample size, market movement is relatively certain and predictable. 

It’s as simple as that.  Anyone that tells you he’ll teach you how to have a 100% trading record is scamming you or delusional. Losses are part of the game. The ‘secret’ is to ensure that

your average dollar loss x loss rate is less than 

your average dollar x win rate.

The major hurdle to success? The refusal to take losses. We do this even though we know better. Why? Because of the fear that after our exit, the trade will turn out to be a humongously profitable – and we won’t be aboard!

By the way, if you want to know how to overcome this hurdle – read the current the Wednesday series.

Your Mind – Needed for Trading!

Mind – the Mind we need for trading succe$$; it’s not the mind that brings us success in the world outside trading.

To understand why we need to consider two factors. But, before we get into that, an apology and a red flag. This post may prove to be a hard read – but persevere. The context it provides is necessary for the goodies that will follow!

I was saying we need to understand two factors:

  1. The nature of trading and
  2. Our human brain

The markets operate in an uncertain and random environment. On a trade-by-trade basis, no one can forecast what the market will do.  The longer the timeframe, the lower the probability we can accurately forecast the market’s next move.  For example, it may be possible with 90% accuracy what the next print will be. But, the probability of the forecasting the next day’s close will be considerably less than 90%. And, if we were to extend out to the weekly close, the probs would drop even more.

Let’s now turn to the human brain.

The conscious mind represents about 10% of brain capacity; the unconscious mind accounts for about 50% to 60%; finally, the unconscious mind accounts for the remaining 30% to 40%.

Think of the conscious mind as the driver of the car, the subconscious as the engine & car chassis, and the unconscious as the fuel.  The three parts have to work together to get us from point A (our current reality) to point B (our desired outcome).

The conscious mind drives our logical thoughts and communicates to both our inner and the outer world. It does this through speech, pictures writing etc.  Also, it directs focus and can imagine that which is not real.

The subconscious takes care of our recent memories and connects to the unconscious mind. It ensures that we have all we need for quick recall and access to memories when we need it.  Here, I’m talking about things like:

  • Memories: how to place a trade
  • Automatic recognition of chart patterns, etc.
  • Current programs: habits, moods, behaviours.
  • Filters: (beliefs and values)
  • Sensory data: what we feel, see, touch, hear. tats

The subconscious filters out all unnecessary information. It does this in a way that encourages excellent performance – by delivering only seven bits of information at any one time.  And, it does this ‘behind the scenes’ – just outside the reach of conscious awareness.

The unconscious mind keeps all memories and past experiences. From these memories and experiences, our beliefs, habits and behaviours are formed.  Sounds like the unconscious, doesn’t it? There is a major difference: unlike the subconscious, the conscious mind has no access to the unconscious.

For traders there are two critical points:

  1. As a rule, our decisions are made at the unconscious-subconscious level; they are then rationalised by our conscious mind.
  2. The other critical point…….

The function of the subconscious and unconscious is to keep us safe. They greatly favour the routine. Their biggest enemy is uncertainty.

With these ideas in hand, we are ready to consider what mindset a trader need for success. Congrats on arriving at this point. I promise next week will be full of fun and will bursting with goodies!

Bitcoin and the Trader

Personally, I wouldn’t trade Bitcoin if you paid me. My first rule of trading is the ‘preservation of my capital’. I am willing to risk provided I can make a reasonable assessment of the risk, and I am happy I can psychologically handle the volatility.  Neither is possible, for me, with Bitcoin.

Firstly, it has all of Minsky’s elements for a bubble (For Minsky’s five steps see ‘5 Steps to a Bubble.’). And secondly, the biggest risk will take place when the bubble bursts, few will take the other side.  This means, of course, you are likely to get locked in without any avenue for to exit. Finally, a burst bubble tends to return to its starting point. If we view that in this leg up, the starting point was its breakout, you’re talking about the 1,200 zone.

Long from 10,000 and locked into a price drop to 1,200? Too rich for my blood!

Turning to how I’d have viewed the ‘Inverted Head & Shoulders’ in last week’s post……

Figure 1 shows a daily Bitcoin chart from June 2010.  We see:

  1. Three impulsive legs up that had momentum above the 4×1.
  2. Each break did not see a change in trend pattern in the 18-day swing. The break of the 4×1 was the only warning you would have had of the shift in sentiment.
  3. In April 2017, we see the current swing. Notice that this time, prices hugged 1×1 (green fan line)

Figure 2 zooms on the current swing with prices ending on Jan 15. What I was seeing was a potential 5-period swing Normal Change in Trend. Acceptance below 10,875.71 would confirm the move down.

Figure 3 shows current prices.

Acceptance above 13.327.37 calls for a retest of the 19,800 zone; acceptance below 10,875.10 calls for a move to the 5,500.00 to 8,000 levels.

Good luck if you are engaged in this asset class. Don’t be left holding the bag when the bubble bursts!

Figure 1 Bitcoin 2010
Figure 2 Bitcoin to 2018-01-15
Figure 3 Bitcoin Current

Shutdown! S&P Up? Down?

A bullish or bearish impact? That is the question.

A first glance at the stats, suggests a bullish impact.

For example, in the Market Watch study above ‘This Is What Happens in the Stock Market….‘, it concluded:

the impact was bearish 55.6% of the time with an average impact of -0.6%.

But, as with all things in trading, we need to have a deeper look.

The key to assessing the impact is ‘uncertainty’.  We all know that markets tend to head south in uncertain environments. So, I had a look at the shutdowns and concluded:

only shutdowns that extended beyond three days created the uncertainty necessary to worry the stock market. 

So, if we eliminate all shutdowns that are three days or less, what does that give us? Allowing for outliers, the impact was:

  • Mean: -1.79% with a standard deviation of 1.99
  • Median: -2.00%

What does this all mean for traders?

Applying basic stats, there is a 67% probability if the shutdown extends beyond five days, we’ll see the stock market move from 0.2% to -3.78%

However, because the sample is not a Normal Distribution, I prefer to use the method Pete Steidlmayer taught me. Yes, I know maths purists will have a fit; but, the bottom line: the approach makes me money.

Pete’s approach says that if we see a shutdown that goes more than five days, we’ll see a drop of 2% to 3%.

I then looked at the impact of the shutdown the day after the announcement. Allowing for outliers:

  • There is more than a 95% probability we’ll see a one ATR move south in today’s trading (around 15 points down from Friday’s close)
  • UNLESS the shutdown is resolved before the market close today (EST).

How would I apply the impact to my trading?

  • Assuming the shutdown lasts more than five days, and since stocks are still in a strong uptrend, I’d wait for the shutdown to end – then look to be a buyer.
  • If the shutdown lasts less than five days, I’ll assess the S&P picture then; I’ll probably be looking to buy, but we’ll see at the time.  I’ll revisit the S&P and blog with my entry and trade management details.
  • If the shutdown ends today, and we see a breakout to the upside, I’ll probably look to buy the breakout with initial stops below the day’s lows.