Thursday, February 23, 2017
It goes without saying that markets are out of our direct personal control. Our only way to profit from them is thus to determine which direction they're going (or about to go, if nearing a reversal) and align ourselves with that. In a way, our trading success can be a direct reflection of our ability to "go with the flow."
This may be one reason that bears have such a hard time accepting bull markets. I believe that bears, by nature, are rebels. After all, they've rejected the "everything is awesome" paradigm and the basic Keynesian ideal that consumption is the American Way, so they're already further out to the fringes than the average American (many of whom don't even know what short-selling is, much less attempt it).
Bears realize they're not part of the majority, and I think they like it that way -- but the emotional attachment to being, as Yogi Bear would say, "smarter than the average bull" can cause them to instinctively want to buck any popular trend that isn't "down." The problem is that emotional attachments, especially to things like our fundamental belief systems, get taken up and carried by the ego. And that can lead to a sort of dogmatic approach to things. Basically, once the ego gets involved in anything, there's going to be trouble. At least, that's my belief. The ego is unavoidably responsible for mediating certain things in this life, but it's often a horrible manager and, if unchecked, it quickly turns into a brutal and tyrannical dictator.
So, if you're of the bearish persuasion and have struggled with this rally, then it might be worth examining whether you've been taking action based on the market's prevailing trend, or on some need to be smarter than the market and, in a way, attempting to beat the odds. If it is the latter, then that will not be readily apparent to you. That's how the ego gets away with stuff -- since it manages our perceptions, it is fully capable of hiding whatever it wants, including our true motivations, for long periods of time.
And of course even CONSIDERING such a thought as the one posted above will be heartily distasteful to the ego, so the knee-jerk reaction will be, "No way! Not me. Not at all! Definitely not." And then, even if it ultimately convicts itself, the ego will immediately begin searching for someone or something else to blame. If the ego is allowed to get away with such tactics, we'll learn absolutely nothing from our mistakes and will keep repeating them, literally for the rest of our lives -- until such a time as we do finally learn. Nobody said life was easy.
Don't know if that's of any value to anyone -- just a few random thoughts I had today.
So, on the bright side for bears, the Dow's recent streak of 9 record closes can be viewed as training in "going with the flow," since we've known (or believed we knew, anyway) for some time that the larger trend would remain up for the foreseeable future. That certainly hasn't stopped people from bucking the trend and attempting to short against it, myself included (though mercifully only once in the past couple weeks, and with a very tight stop of about 2 ES points).
Near-term, we appear to have at least one more leg up to unwind (possibly more, if this wave subdivides):
RUT is also closing in on its upside target from mid-November:
In conclusion, SPX and RUT are both within spitting distance of their November targets, at which point things may actually get a bit more difficult for a while. Trade safe.
Posted by PretzelLogic at 4:27 AM
Tuesday, February 21, 2017
I started writing a somewhat detailed economic article this weekend, which I believe makes an important point -- and I had hoped to have it ready for today, but it's going to take more than a few sittings to finish it... but keep an eye out for it over the upcoming days.
Accordingly, much like a wooden pencil that's been sharpened too often, today's article will be short and to the point. (Or: "much like an overly-blunt Hobbit..." -- ?)
The big picture is still unchanged, of course:
Regarding the near-term, last update's chart showed that a retest of 2338 was expected to be bought, and then followed by a rally to at least 2449-51, which could represent a b-wave or, alternately, part of wave 5. There were some questions from readers as to how to play that, and from my perspective, the opening low on Friday was a clear buy. Here's why: If the b-wave rally was correct, then buying near 2339 represented a trade with roughly 1:10 risk/reward ratio (approximately 1 point of risk vs. an expectation of 10 points of profit), which is a no-brainer in my book. If the alternate count was correct, then buying 2339 was essentially buying only a point off the bottom of wave 4. Either play is a winner, and I would have had to have both the preferred AND the alternate counts wrong for the trade to be a loser -- and, at that, it would have only lost about a point.
As I said, that type of trade is basically "automatic" to my way of thinking. But of course, that's NOT trading advice, and before even looking at the market, you should consult your broker, your Magic 8 Ball, and your Uncle Stan. If you do not have an Uncle Stan, then you should rent or borrow one or more.
In conclusion, the intermediate and long-term trends both remain up for the time being. Near-term, the market has left its options open, as discussed above. Trade safe.
Posted by PretzelLogic at 4:03 AM
Friday, February 17, 2017
SPX is getting closer to the 2400 target, but may take a breather here. On the intermediate-term chart, we can see SPX just broke above its trend channel, so this may lead to a rubber-band snap-back to at least test the channel from above. If it falls back in and fails to reclaim it, then bears may get a larger reprieve, but right now, this is looking like a fourth wave correction (see 1-minute chart).
Below is the 2-hour SPX chart:
On the 1-minute chart, we can see the potential for some fourth wave shenanigans:
I also found the following chart interesting. This is the NFIB small business optimism index, and it spiked enormously on Trump's election. If this breakout sticks, it could translate into a positive impact on the real economy (remember the real economy? I think it's still out there somewhere, buried underneath a printing press and a bunch of Bernanke's beard clippings.)
Below is a breakdown with more detailed numbers:
So small businesses are more optimistic than they've been at any point over the past 12 years, and the 38% jump in businesses who "expect the economy to improve" under Trump (vs. how they felt in August under Obama/Clinton) is quite significant. Just as for individuals, positive expectations among businesses can become a self-fulfilling prophecy.
In conclusion, SPX may be due for a breather, but thus far the bigger picture still remains bullish for now. Traders who are wondering where fuel and sentiment for a continued intermediate rally could come from might take note of the NFIB survey. Trade safe.
Posted by PretzelLogic at 4:23 AM
Wednesday, February 15, 2017
Janet Yellen recently gave testimony to Congress in her annual semi-annual biannual perennial softball session, during which she attempted to teach remedial math to Congress. At least, that's what she appeared to be doing when she stated, and I quote: "2%, which is a very low number." I didn't pay much attention to the rest, because all I was thinking at that point was: "Take THAT, stupid Congresspeople! The only positive integer lower than 2 is 1!"
Then I thought that the next time we hear some politician yammering on about winning by 2% (or less) of the popular vote, and/or acting like a 2% victory constitutes a huge "mandate" -- well, we'll just have to remind them that "2% is a very low number according to Janet Yellen." And also that the term "mandate" is sexist. (Can't we just call them "dates" without needing to qualify the date's gender?)
Beyond that, I haven't bothered to do any actual research about whether or not Yellen's numbers are correct, because Dodd-Frankly, I don't really care. I'm just glad we cleared up the confusion surrounding positive integers and dating.
Anyway, SPX has been rallying pretty relentlessly for the past few sessions, probably because investors now realize that even if it rallies 2% a week forever, that would still constitute "a very low number." (Hmm... the Fed's obliviousness to financial bubbles is starting to make more sense now!)
On a more serious note, I do hope that for the past few months, bears have been heeding the warnings to stand aside on breakouts.
BKX has now captured its first blue V target:
Meanwhile, RUT is in the early stages of its attempted breakout. I mean, sure, technically bears could turn this into an expanded flat, for a decent near-term correction (which would then remain intermediate bullish), but I still have no interest in fighting this market after consolidation breakouts. The last few patterns have all suggested bears needed to stand aside if the market broke-out, and that continues to hold true here. There are times you get good signals for a countertrend play (and even THOSE can be blown up during a strong trend) and if you take a shot and miss, well hey, that's just how the cookie crumbles, and you fought the good fight. But then there are times you're only throwing your money away even attempting countertrend plays (presumably on the reasoning that "hey, technically, a countertrend move could theoretically happen!"). This would qualify as the latter.
If there's going to be a reversal, there will likely at least be a leading pattern to short against (which will then blow up anyway, if recent history is our guide!). But the point is: There's just no reason to front-run these types of breakouts blind.
In conclusion, SPX is testing channel resistance, RUT is about to, and BKX is testing a very old resistance level, so we could very well see some sort of reaction in the form of a correction or sideways grind -- but right now, there's nothing in the charts that says such a correction has actually begun. To the contrary, the "standard" pattern here would continue to run for a while with only small corrections, despite resistance.
So again, the point is: with the strength this rally has shown to date and the patterns that it's breaking out of, front-running in the "hopes" of a countertrend move could be dangerous. That could all change tomorrow, of course, depending on what the market does next -- but even if we see a small impulsive decline, at best, bears' hopes would only be for a short-term reprieve, as the bigger picture remains bullish. Trade safe.
Posted by PretzelLogic at 3:52 AM
Monday, February 13, 2017
Before I get into the charts, I had a few people ask me for some follow-up thoughts on my "Why Do We Trade?" article. One of the questions that was asked was basically, "How do I stop myself from trading for the wrong emotional reasons?" I've addressed this before, but it's been a few years, so I'll revisit the topic. Who knows, maybe I'll even have some new thoughts on the matter, a few years older.
In my opinion, when our emotions seem to be dragging us in directions we don't want to go, we have two choices:
1. We can learn to control that raw emotional energy (which requires a ton of self-examination).
2. We can attach our emotional "payoff" to something more constructive.
Let's address each of these in turn.
First off, when it comes to negative emotions, one thing that never works is to "fight" the emotion. To tell ourselves some variation of "I shouldn't be feeling this, I need to feel something else," etc.. When we attempt to fight our emotions through direct conflict, we launch ourselves into a state of inner turmoil. We are attempting to beat down at least one portion of ourselves -- and it's simply not possible to feel good while we're attacking ourselves. So, instead of calming us and allowing us more positive focus (which is ultimately what we're trying to accomplish by eliminating a negative emotion), we actually create more strife and distractions by fighting to eliminate that negative emotion.
Not to sound too "zen," but think in terms of "inner peace." Ideally, that's the state of mind from which we want to be placing trades (or doing anything else that requires concentration, really).
And really, isn't inner peace the honest-to-goodness end goal of everything we strive for in life? We trade to make money; we desire money because it provides security; we desire security because it gives us peace of mind. We seek a good mate because it fills a void in our hearts; we seek to fill that void because it makes us feel complete; we seek to feel complete because it gives us a sense of peace. And on and on. At the end of the day, if you trace all your desires and motivations as far as they can go backwards, and as far as they can go forward to their logical conclusions, you'll find that virtually all of them are looking for the same thing: Peace, in one form or another.
The irony of it all is that we can't achieve our very highest potentials without inner peace -- but as long as we think peace and happiness can be found in something "out there," then we can't actually find inner peace, and thus we cannot achieve our highest potentials in order to reach our goals in the first place.
In other words: Any emotional struggle to achieve our goals actually hampers our abilities, and makes us weaker and less equipped to achieve our goals.
I don't know if I'm saying what I want to say here, but the bottom line I want to get to is this: Why not eliminate the middle-man? Instead of giving ourselves away to something "out there," giving away our efficacy and our sense of security, why not just allow ourselves to feel peaceful for the sake of feeling peaceful? With no conditions. No "gotta have this or that, THEN I'll be happy and feel secure."
Because the fact is, even when we get what we're striving for, we're still not happy and secure. Oh sure, we might feel elated for a while after getting what we wanted, but that fades soon enough. Because then we shift our focus from "getting" to "protecting/maintaining," and we're right back on the hamster wheel of strife and unhappiness.
All of it, everything, follows the same pattern. It goes something like this: "Oh, if I could just get a beautiful, intelligent wife [or whatever, the pattern is the same for all of it], then I'd be SO HAPPY."
"Guess what, Joe? My intelligent beautiful girlfriend and I are getting married tomorrow! I'm SO HAPPY." And they lived happily ever after, right?
Ha ha ha. Yeah, right. In reality, the "SO HAPPY" thing only lasts for a while -- long enough that it's become cliché to eventually say, "The honeymoon is over."
So we shift from "getting" ("I'll be happy IF/WHEN...") to
"Got it! Yay, I'm so happy" (the fleeting moment) to
"Protecting/maintaining" it ("I'll be happy IF/WHEN...")
At "protecting/maintaining," we're right back to being stressed. Because now, instead of searching for a beautiful intelligent wife, we're busy trying to make sure our beautiful wife doesn't cheat on us... or, depending on our definition of "beautiful," we're busy worrying that she'll gain 400 pounds... or depending on how important the "intelligent" condition was, we're busy getting annoyed that she doesn't seem to recognize just how blindingly brilliant WE are. And so on.
But wait, we got what we wanted -- why aren't we HAPPY FOREVER? You already know the answer: Because nothing "out there" can bring us true joy.
So, after all that -- after all that struggle! -- we're right back where we started: At war, with life and with ourselves.
The point being, all this fighting we do to try and control our negative emotions is stupid on several levels, the aforementioned being one. This next statement being another -- and this sounds so self-explanatory that you'd think we'd never forget it, but we do: Inner peace can never be achieved by waging inner war.
We cannot achieve a relaxed state by force. So fighting our emotions will never, ever take us where we want to go. In fact, it will take us in the exact opposite direction: It will only stress us out even more. Even if we manage to gain the upper hand on a negative emotion by using a "brute force" method, we have simply suppressed the negative emotion temporarily, and it will continue to return again and again. We have placed ourselves in a position where we're subject to an unwinnable, never-ending conflict.
So, what is the answer to dealing with negative emotions? Well, first off, we have to recognize what that negative emotion truly desires -- because it doesn't desire what it thinks it does. It doesn't desire alcohol, it desires calm. It doesn't desire to gamble on a high-risk trade, it desires security. It doesn't desire sex, it desires intimacy. And so on. We have to look past the surface desire and figure out what we're actually trying to gain.
Then we have to look a step past that, and see what lies at the very root of all of it.
Because at the root of all of it is the quest for inner peace. The money, the mate, the house, the car, the career, the whatever. We strive for all of it in an attempt to fill the exact same void.
So we repeatedly fail to overcome our negative emotions permanently, because we're just too busy looking in the wrong places.
That got a bit heavier than I intended, so I'll leave it at that for now. Anyway, what do I know -- not like I have this stuff all figured out yet either. Food for thought.
In the meantime, what I actually started off intending to write was a bit simpler: Don't fight the negative emotion (since we know direct conflict will fail), replace it. For example, change the "emotional payoffs" in your trading. Instead of feeling good about winning trades, choose to feel good about trading correctly, win or lose. That payoff shift will take you out of the high-risk excitement trades, because those trades only pay if "feeling good about big winners" is a payoff for you. High-risk trades do NOT pay emotionally if "trading correctly" is the payoff for you. Make sense?
Also -- don't confuse "high risk" with "high risk." Sometimes I'll take a trade that 99% of the population would consider a ludicrously high-risk trade, but I "know" what the market is going to do with almost complete certainty, and I know the trade is good. That's not the type of trade I'm talking about. Those can be some of the lowest-risk trades out there.
Anyway, let's look at just the SPX big picture chart today, since even near-term patterns that look like they'll lead to very minor corrections have been ignored by the market:
In conclusion, there's no change to the big picture yet. But I do feel like I should throw another sentence down here, just to have two sentences. Or three (incomplete sentences count!). Trade safe.
Posted by PretzelLogic at 4:15 AM
Friday, February 10, 2017
What a frustrating move this has been. I'm longer-term bullish, and believe I've made that plain for several months, but I got suckered into thinking a short-term bearish correction was underway. That near-term pattern as suggested has now been busted. I had noted a price zone in the prior update where "if bulls are gonna mount a turnaround and bust the bear count, they'll probably try to do so from here" -- and do so they did.
This market continues to remind me of 2012, which was a great time to just close your eyes, hold your nose, and buy every dip, no matter how it looked or how many indicators warned you not to. I think this is the characteristic of bull markets that causes bears to hate them so deeply -- and which has also led to famous quotes such as: "Don't confuse brains with a bull market." In fact, at times, bull markets actually require one to set their brain to "off."
I can see a few bear options in the present pattern, but given how things have gone, it's probably foolhardy to do much more than be aware of them, at least until the market gives a strong sell signal.
The big picture chart has remained materially unchanged for several months:
Very short-term... I almost don't even want to say this... but very short-term, it's hard to see the end-of-day decline as anything other than a small impulse down. Whether that impulse is just wave A of an inconsequential ABC -- or the start of something more consequential -- remains to be seen.
RUT appears to be at an inflection point, and if bears can't make a stand here, then bulls will likely be rewarded with some renewed rally strength.
In conclusion, bulls once again joined hands and sang a rousing chorus of Starship's Nothing's Gonna Stop Us Now while busting a near-term bear count. Meanwhile, bears are busy replacing their computer monitors, many of which were broken in various unfortunate "accidents," which bears state they don't wanna talk about. ("You mean to say you 'accidentally' shot your monitor? NINE TIMES?") Other than that, the charts and commentary above pretty much say it all. Trade safe and have a good weekend!
Posted by PretzelLogic at 4:14 AM
Wednesday, February 8, 2017
Why do we trade? Asks the headline. Well, in my experience, there are two main forces that motivate us to trade, and they can be summed up as follows:
1. We trade for a profit, and all the things that go with that. (A better life for our family; financial independence; etc.)
2. We trade for excitement, and the thrill of the hunt.
Anybody read that and say, "Whoa, whoa, whoa... stop right there!" If you did, then good. If you didn't, then consider that of those two (main) reasons we trade, only one of them is consistently profitable.
Here's the thing: Trading for excitement and thrill is pure emotion. Pure emotion pushes us in directions we don't want to go. It invariably leads to bad decisions. And bad decisions lead to lost capital. When we trade for the "thrill," then we're feeding a desire from a part of ourselves that really isn't too concerned about profit. Oh sure, the greatest thrill is a big profit. But ultimately, once that emotion takes over, it doesn't really care about profit anymore. It just cares about the POSSIBILITY of a profit, so trades will be entered just to prevent boredom, just to "keep us in the action," just to have a shot, etc..
"Every breaking wave, on the shore,
tells the next one there'll be one more,
And every gambler knows... that to lose...
is what you're really there for.
In summer, I was fearless.
Now I speak into an answer-phone.
Like every fallen leaf on the breeze,
Winter wouldn't leave it alone.
If you go... if you go your way and I go mine,
are we so... are we so helpless against the tide?
Baby every dog on the street,
knows that we're in love with defeat,
Are we ready to be swept off our feet?
And stop chasing... every breaking wave."
-- U2, Every Breaking Wave
In order to write those lyrics and know that we can gamble even for the thrill of losing, and that we need to "stop chasing every breaking wave," clearly Bono has experienced "trading for the thrill" (or something akin to it), which is simply a more socially-acceptable term for gambling. Now, one can argue that gambling is a part of life. We gamble when we cross the street, or when we buy a new house, or when we get married. But there's a difference between taking a calculated risk (which is what almost everything in life is), and true gambling. The underlying motivation is what separates the two. "Gambling," as it's commonly used, defines a risk taken at least partially or wholly for the thrill of it.
And that's where traders go broke. If you're chasing thrill, you're going to take the wrong trades for the wrong reasons, and then you'll stay in the wrong trades too long. (And even a trade that was initially entered for the RIGHT reasons can turn into a gamble excitement-trade down the road!)
But never fear: You WILL ultimately end up with the thrill of your life... when your account goes to zero and you have to start all over. The ultimate rush!
Now, can you imagine approaching one of the other above-mentioned "calculated risk" activities like a gamble? For example: "Hey, I'm just going to buy a random house sight-unseen, because, you know, MAYBE it will end up being a great house that I can flip for a profit! Woo hoo, this is gonna be so exciting!"
Sounds a bit ridiculous when put into those terms, doesn't it? But now review last year's trades to see just how many were taken with essentially that exact same mindset. Unless you're Mr. Spock, or lack the capacity for truly objective self-honesty, I can just about guarantee that the answer will be: "At least a few." Maybe more than a few. I know this because I regularly do this review on myself. And the answer is almost always: "At least a few."
So -- my advice is: Check yourself constantly. Police your deepest motivations. Before you enter a trade, and while you're in a trade, ask yourself: WHY am I trading this? And don't accept the first answer you get carte blanche, because we are all masters of BSing ourselves. Dig around a bit, and find out for CERTAIN if you're trying to make a profit in a rational, controlled way, or if you're just chasing the excitement that comes if/when you win, or if/when you lose (because we'll sometimes do that, too -- essentially: we'll beat our heads against a wall for a while just because it feels so good when we finally stop).
But if you can locate and root out those non-profitable internal motivations, then at the end of the year, I guarantee your account, and your self-respect, will both thank you.
We really only need one chart today, because the big picture is unchanged. What we're watching for now is a near-term declining corrective wave. As we see below, SPX did indeed get that "last spike to 2299/2300."
In conclusion, bulls ran it up as high as they could, but bears held the levels they needed to. The recent bounce does have a corrective appearance, so for now, the near-term preferred bear count remains preferred. Trade safe.
Posted by PretzelLogic at 4:28 AM