Monday, September 26, 2016

SPX Intermediate Term Update

Last update focused on the short term, and gave targets of 2170 and 2163 for SPX, both of which were captured, and both of which generated reactions from the market.  The third near-term target of 2156 could be reached at today's open. 

We're also going to look at some intermediate options today.

First is the updated near-term chart.  A new low at today's open will give this decline a reasonably-impulsive appearance, which would suggest at least a near-term trend change. 

Intermediate-term, I haven't written off the idea that the rally from 1991 SPX has all been part of a larger, ongoing corrective wave.  But this is pretty far ahead of the game -- heck, maybe the recent lows will hold and we'll rally straight on to new highs from here.  Needless to say (or: as said in depth last update), bears should be very cautious if SPX makes a new all-time high.

Finally, a few caveats for bears:

In conclusion, a new low at today's open will give the decline from 2179.99 a reasonably impulsive appearance, and suggest that the decline from said level will be at least two legs.  It also makes me even more inclined to believe that the bounce from 2119 was corrective (thus not the start of anything meaningful, and destined to be broken).  The bull option is that the bounce from 2119 is corrective, but is part of a triangle or similar.  Nevertheless, unless and until SPX claims at least 2180 (for the cautious) and the all-time-high (for the less cautious), I'm inclined to believe bounces should continue to be sold, and inclined to believe there could be a decent decline pending.  Trade safe.

Friday, September 23, 2016

SPX and NYA Updates, and the Hidden Psychological Pressures That Can Destroy Our Trades

We're going to get right into the charts, but a bit later in this article, I'll share some thoughts regarding certain hidden psychological pressures that can absolutely devastate our trading ability.

Yesterday saw SPX capture my near-term breakout target, and that target has, so far, stalled the rally:

Near-term, a decline south of 2172 appears likely:

Looking at things in a more bullish light, bears do have to continue to respect the successful back-test of support, which I discussed last Monday:

From an intermediate perspective, one thing is clear:  If SPX can sustain a breakout over the all-time-high, then bears may need to stand aside and wait for greener pastures.  Could a breakout be a head-fake and whipsaw directly?  Absolutely.  But there are good opportunities, and there are "got lucky" opportunities (defined as: "any trade we enter based on hope and not discipline.").  If we risk too much capital on the "got lucky" opportunities, we may hit some winners here and there, but we'll ultimately lose more than we win.  And then we'll have minimal capital left over to take advantage of  high-probability opportunities where the market is all but screaming its next move in advance.

An old adage in trading is "you can't go broke taking a profit" -- to which I'd add another seemingly-obvious statement:  "You can't go broke protecting your capital."  Always remember that you don't need to be in a trade.  Over-trading leads to more over-trading, and it can quickly spiral out of control, due to human nature.  It can start with just few "hope" trades that turn into losers.  Taking "hope" trades already shows your emotions were in the wrong place -- and losing pushes your emotions even further out of whack.  Think of it this way:  If you were lacking discipline when you had MORE capital, your discipline will be even worse when you're trying to regain that lost capital and get back to even. 

Before you know it, you're throwing money around the market like a madman, chasing every move as if your life depended on it.  And then one day you wake up and your money is gone.  Wait, how did that happen so fast?  And you scratch your head and look back at your insanity, and wonder who the heck was trading that money -- couldn't have been YOU, right?  After all, you're not that irrational.  Are you?

Yes, you are.  We all have that in us, unfortunately.  Fortunes have been lost this way, and will be lost again.  And it all starts with a few, seemingly innocuous, temptations to abandon discipline. 

If any of this resonates, and you've been trading without discipline for even a short time (like almost all vices, it usually starts small -- it's the "I'll just have one cigarette" syndrome; before you know it, you're chain-smoking two packs a day), then my advice is:  Put the computer down.  Back away slowly.  And go get your head right before it's too late. 

"But I can't," you say, "I've got to get my money back first!"  Right there, that thinking tells you something extremely important:  It tells you that you haven't accepted your losses at an emotional level yet.  And if you haven't emotionally accepted your losses, you are NOT thinking clearly.  You're not operating from a rational framework, or from any basis in reality.  Your decision-making process has been sabotaged by your emotions; and we simply cannot trade well in such a frame of mind.

I speak from personal experience, of course.  I imagine most traders have been there, at one time or another (although I also imagine that not all will admit it openly).

I got off on a tangent here, but my point, and my advice, is two-fold: 

1.  Learn how to accept a loss.  I mean REALLY accept it.  Let it go, and move on to the next trade with a clean slate.  I believe this is more important than is usually talked about, because unaccepted losses create psychological pressures that operate outside our sphere of awareness, and that makes those psychological forces exceptionally dangerous to us.  We can't fight what we can't see.  Essentially, when we don't "accept" a loss, we are denying reality.  The resultant unconscious psychological pressure comes from trying to reconcile the reality that we pretend exists with reality as it actually is -- and we thus begin seeking ways to reconcile the two realities and bring them into alignment.  Obviously, this means we begin trying to manipulate actual reality to come into line with our pretend reality (never the other way around -- if we preferred objective reality, we'd have no reason to pretend it was otherwise in the first place!). 

So, denial of even the smallest loss causes us to lose at least some amount of touch with reality; and how can we possibly make rational decisions when we're not operating from a basis in reality?  Worse, the hidden agenda in denial causes us to attempt to impose our subjective wills upon an entity that does not change one iota in respond to willpower (that entity being the market). 

So, without being consciously aware of what we're doing, we begin operating from a framework that guarantees our destruction.  The unseen and irrational internal pressures of denial cause us to do things such as hold onto our losers too long, and to jump compulsively into high-risk trades.  Before we know it, the small losses turn into big losses.  And if you couldn't emotionally accept the small loss, how on earth are you going to come to terms with a bigger loss?  Obviously, you probably won't.  So, in the long run, the emotional fallout of denial will actually turn small losses into total losses when taken to its logical conclusion -- which the market will always force us to do, eventually.  At that point, finally, when the money's all gone, there is no room left for denial.  Reality forces its way through in the end.  The moral being:  We are always, inevitably, left with no choice but to accept our losses, one way or another.  Why not accept them early, and come to terms with them while the losses are still manageable?  Denying you have a broken arm doesn't make the broken arm go away, it just delays the amount of time it takes you to see a doctor -- and the consequences of that delay can be severe.

2.  The preceding death spiral starts with a few small undisciplined trades.  If not corrected IMMEDIATELY, lack of discipline begets more lack of discipline.  Like that "just one cigarette" after you've quit... it leads to another, then another... until finally, you completely lose sight of what you were trying to accomplish.  You no longer fight the urge.  And when you no longer even bother fighting the individual wars, can losing the entire battle be far behind?

Anyway, in conclusion, I don't think the importance of learning the skill of emotional acceptance in trading is discussed often enough.  In my opinion, it may be one of the most important distinctions between a winning trading career and a losing trading career.  Trade safe.      

Wednesday, September 21, 2016

Fed Friday to Continue to Be Held on Wednesdays

Yesterday, despite rising inflation pressures, Janet Yellen shattered expectations and announced that the infamous Fed Fridays will "hold steady" and continue to be conducted on alternate Wednesdays during months ending with the letters "r" or "y."  Plus any other letters of the alphabet, with the notable exception of "epsilon." 

"Fed Fridays have been a long-standing tradition of this Fed," Mrs./Ms./Mr. Yellen was quoted as saying, "and after reviewing the data, we believe that 'Fed Friday Wednesday' best embraces the dual mandate of the Fed to hold conferences on both Friday and Wednesday."  Reporters left scratching their heads, while Mr./Ms./Dr. Yellen the III, PhD. could later be seen chuckling to him or herself. 

Thus the Fed will still announce what it plans to do about global warming (or whatever) later this afternoon, assuring that today is destined to go down in history as "the day the Fed announced something, and the market was thrilled or disappointed, depending on who (or possibly 'whom') you ask."  

*Disclaimer:  Sleep deprivation has become a way of life for me lately, so I cannot be held accountable for any of the preceding paragraphs. 

Moving on to the charts, bulls and bears both refused to do much of anything for the past couple days, due to mounting confusion over what day actually constitutes Fed Friday.  This created a trading range, because, as numerous talking heads are fond of saying: "the market hates uncertainty."   And we know that must be true, because the market declines, trades sideways, and/or rallies during times of uncertainty, which basically constitute every minute of every day of every year.  When's the last time anything was certain? 

I'm going off on a complete tangent here, but stupid anecdotal statements like "the market hates uncertainty" only seem true because we focus on the "uncertainty" when the market's declining, and we ignore it when the market is rallying.  It's one of those "you find what you're looking for" sort of things.  It's like when you start considering buying a particular car model, and all the sudden you notice there are DOZENS of people driving that particular model around town -- of course, we realize it's not that suddenly more people driving that particular car, we're simply noticing all of them now because we're paying attention to something we weren't paying attention to before. 

Start paying attention to how often the market rallies during times of uncertainty, and you'll see what I mean about "the market hates uncertainty" being one of those statements that sounds smart, but kind of isn't.  It's something talking heads say because it sounds more professional than saying, "I have no clue why the market went down today, Neil.  Maybe due to solar flares?"

Anyway, in other news, CarMax dropped nearly 6% in the premarket today, after their CEO announced to disappointed investors that the famous lip balm company is actually called Carmex, and to please stop asking.

And in still other news, clearly I need to lay off the coffee tonight.

Alright, enough tomfoolery, let's look at a chart! 

As we can see on the chart above, clearly the Fed needs to address the Selfie Epidemic before it worries too much about interest rates. I'll be waiting with baited breath to see how they plan to handle this.  There does at least seem to be a consensus in the investing community, as I've recently learned that 9 out of 10 pundits recommend Trident.

Looking at a chart of SPX (finally, sheesh, thought he'd never shut up), we can see that SPX very briefly broke above 2152, but was unable to sustain the breakout -- thus essentially leaving everything unchanged from Monday's update.  (See, in all that preceding silliness, I was trying to give you added value in the form of a chuckle and/or a grimace, since there really wasn't much to say about the market today.)

And finally, today's Photo of the Day (because: why not).  I shot this yesterday morning at sunrise, in what is essentially an extension of my yard at the new house:

In conclusion, there's really nothing to add to Monday's update, except to note that with the combination of the Fed announcement today and the existing coiling pattern, things could get even whippier and harder to trade, and an initial fake-out move from this pattern might even fit the bill.  I'm still inclined to think that bounces should be sold against key levels unless and until the market shows it can sustain a break over the near-term resistance at and around those levels.  Trade safe.

Monday, September 19, 2016

SPX, NYA, BKX: NYA Finally Tests Support, and...

Okay, Friday's action was pretty boring, so let's start out with one of the charts I would have uploaded on Friday had Stork Chorts been working properly.  The chart below is NYA, and I haven't updated it in more than a month.  It's interesting to see how the market has behaved relative to the red trend line I spoke about back in July and August:

Now, when I look at a chart like that, I'm a bit torn.  My Elliott Wave nature makes me want to short any bounces here (because of a suspected larger bearish pattern), while my classic TA eye says that a bounce here (from a back-test of support) has to be respected.  So what's a guy to do?  Well, I think you just have to choose entries carefully at times like this.  If you're inclined to short and aren't holding from higher prices, then you probably either wait for a decent rally back towards the recent highs, which provides a low-risk entry, or you wait for a breakdown of support.  What you DON'T do is short randomly because you're anxious about "missing a big move."  There could very well be a big move pending, and a decent decline is quite possible -- but we can't trade "possible" as if it's a sure thing... well, we can't unless we wish to ultimately end up searching underneath the couch cushions for "spare" change, if you catch my drift.

Let's look at the levels that may act as warning signals (for bears) in SPX:

Finally, BKX, which also makes me think that the odds at least slightly favor bounces as short ops:

In conclusion, the market has recently tested support, and so far that test has held.  That has to be respected and kept in mind.  Despite that, I am slightly more inclined to believe that bounces should be sold until proven otherwise -- but due to the nature of this pattern, which is not crystal clear, I would highly suggest that bears make every effort to keep their risks manageable and stay nimble.  Bulls, of course, are simply watching support now.  Trade safe.

Friday, September 16, 2016

ES Update in Leui of SPX

Well, I've been having a lot of trouble with Stockcharts tonight, although it's entirely possible that's the fault of my connection.  And/or it could be due to the recent thunderstorms, sunspots, or gremlins (yes, these are "recent" gremlins, which are much more mischievous than late gremlins).  No matter!  As they say at the Post Office:  Neither snow, nor rain, nor heat of night, nor gloom and doom, nor Janet Yellen, nor moving to a different island, nor crummy internet connections -- whichever is greater -- will stay these updates from their appointed times!  Or something like that.

Anyway, since I can't seem to get Stork Chorts working properly (in fact, "storkchorts.com" returns a "URL not found"!  For some reason.), and many of my annotated charts have ended up looking like this:

I'm going to be a little light on charts today.  There's not really much to update on the cash charts since Wednesday anyway, since we've pretty much traded range-bound since then (please refer back to Wednesday's charts if needed).  What I will add is the same sentiment I posted to our private forum before the close on Wednesday, when I mentioned that a decent rally on Thursday looked reasonably likely (which we got), but that I'd be surprised if it stuck.

If we take a look at the current ES (the E-mini S&P futures) chart, we see something resembling a triangle.  Although this does not appear to be a true Elliott Wave triangle, it does have the requisite four alternating highs/lows to qualify as a classic TA triangle, which suggests a compression pattern:

I'd be surprised if the low near 2110 doesn't ultimately fail (which would equate to a new low in SPX cash), the question is whether the current bounce is done yet or not -- and in that regard, bears do have to be careful if there's a sustained breakout from the triangle. 

In conclusion, to simplify this as much as possible (given that this pattern doesn't really lend itself to simplicity):  If we see a sustained breakout over 2145 ES, then things get a little iffy for bears, but it's not the end of the world.  If we see a sustained breakout above 2156, then ES will probably take aim at 2165-70 next, and the whole pattern gets a bit ambiguous, and possibly dangerous (since "ambiguous" means a high-probability pattern has morphed into questionable territory), for bears. 

The underlying assumption here of course, is that, presuming the noted levels hold, then we remain in dangerous territory for bulls.

On a completely different note, on Thursday night, we had the most violent electrical storm I've ever seen in Hawaii, with several ground strikes in my neighborhood.  As the storm was approaching, I captured a photo of some of the lightning (below), which I think lends itself to being titled Paradise Lost:

Storms and iffy internet connections aside, I do hope everyone has a pleasant weekend.  Trade safe.

Wednesday, September 14, 2016

SPX and INDU Updates, and Random Thoughts on the Cycles of Change

In dealing with my internet connection tonight, I had some thoughts about the market and life in general.  Let me explain.

At one point, my connection was stuck at download speeds near the .04 Mb/s range, which is effectively dial-up speeds.  Later, though, it improved to a blazing 9.8 Mb/s for an hour or so, then dropped down to about 1.3 Mb/s, where it still sat last I checked.  This rollercoaster connection reminds me of both the market and of life.

The oldest book in existence is the I Ching, or Book of Changes.  The I Ching formed the early foundation of the philosophy that later came to be known as Taoism, and one of the principle lessons of the I Ching is that it is the nature of things to undergo constant change.  The moment something reaches its pinnacle, it begin to decay; the moment something reaches complete destruction, new growth begins.  (It also attempts to quantify all the stages in-between.)  The lesson being that the raw nature of things is to change, not to stay constant.  One could call the I Ching the earliest study of the fundamental cycles which underpin reality, which is one of the reasons I've always found it fascinating.

And isn't it so true?  Have you ever noticed that the moment we achieve a seemingly-perfect stability in one aspect of our lives, another aspect suddenly needs attention and repair?  As we work on that damaged aspect, the "perfect" aspect tends to begin to decay -- so by the time we've brought the area that needed repair up to par, the area that was "perfect" is now in need of additional attention... and in the meantime, maybe something else is beginning to unravel (whether we've noticed yet or not).  This seems to go on forever, with only fleeting respites where "everything is awesome." 

The only constant is change.  To the degree we ignore that, rail against it, or wish it to be otherwise (and who doesn't get stressed near the bottom of those cycles, when we forget that even the worst things are only fleeting and temporary?  In reality, we have only to wait for the pendulum to swing the other way.), we create needless struggle in our lives.

Likewise with the market.  Perma-bulls and perma-bears are born from those whom do not understand, or do not accept as true, the idea of the cyclical nature of reality.  No sooner does the market seem that it's "going up forever!" than a correction looms near; and no sooner does it appear that civilization is ending than an upswing awaits.  The seeds of the market's destruction are planted while it rallies; and the sprouts of a new bull market begin breaking through the soil even as it declines. 

Such is the nature of all things.

It was not so long ago that everyone was talking about "the new bear market" that began in 2015, and making preparations for the end of the world -- at least until a blistering rally emerged and made new all-time-highs.  At which point, everyone began talking about how the market was headed to infinity and beyond, of course.  Because we have short memories.  And we're kind of stupid, in a stubborn sort of way.  We know cycles are real, and we observe them every single day of the year, as the sun rises, peaks, sets... yet we still believe that "this time is different," so the sun will never set on THIS bull market.  (Or it will never rise, if we're in a bear market.)

Why do we do this?  Why is it human nature to reject the nature of reality, choosing instead to favor our desires, hopes, and/or fears that things will never change?  We want security (often equated with "constancy") and we fear the unknown, and the perceived instability, that comes with change.

Yet growth finds its home in the tension that develops between the known and the unknown -- in the shadow world that lies at the edge of change.  This tension creates the fertile ground which gives birth to new inventions, to new methods, to new businesses, to new governments -- and to our own greatest moments of personal development.

So we can fight change, or we can embrace it.  Either way, it's always inevitable.  The energy we waste struggling can be put to better use -- such as toward preparation and adaptation.  To struggle is as pointless as walking around in shorts and a t-shirt in the middle of a bitter winter, simply because we refuse to acknowledge the change of season and "wish it was still summer!"  Better to just put on warmer clothes; the season will change again soon enough.

Anyway, not sure if I actually said what I was trying to say, but that's what my up-and-down, endlessly-changing internet connection had me thinking about this evening (it's still evening here in Hawaii!). 

Moving to the charts, SPX rallied like crazy on Monday, leading bulls and bears to buy near the top, then dropped like a rock on Tuesday.  A few markets, such as NYA, actually made new lows on Tuesday.  INDU and SPX have barely clung to their lows, so far anyway.  INDU:


In conclusion, the intermediate term pattern remains up for grabs, but keep in mind that a test of the 2016 lows is still on the table as a potential -- so if one is bullishly-inclined, choose entries cautiously, preferably against zones where the market has shown there is active support.  Trade safe.


Monday, September 12, 2016

SPX Update: Short It 'Twas

My connection remains as unstable as the banking system, but in the prior update, I promised a photo I took in-between hurricanes Madeline and Lester, while we were getting 25' waves on the eastern shore.  This was taken on the same street where I live, and the power of these waves was pretty mind-blowing.  The ground, and my house along with it, were literally shaking every time a big breaker pounded the shore (roughly every few minutes).  In fact, several large chunks of the nearby coast broke free from the cliffs (two sections that were maybe 10'x6') and fell into the ocean during the storm.

In the end, the storm never hit us directly, and turned out to "just be a little" wind and rain here -- but the ocean waves told the story of the storm's true power, had it hit us instead of veering away.

So here's the photo... This was taken at dusk, as the last of the sun's light faded from the sky; and a slightly-long exposure smoothes (or "smooths," depending on which grammarian you ask) some of the ocean's chaos, creating almost a sense of tranquility:

Moving on to the market, last update stated that "the only way I can view a pattern like this is as a potential short op," and predicted that the market's next move was more likely to be a decline to 2157 (and perhaps beyond) than a rally through resistance. 

Before I go further:  I've recently learned that there was some confusion from a small minority of readers over my use of the word "before" in the update.  What I said was: 

"It's more probable that 2157 will be retested and/or fail before the market can break out over resistance." 

Apparently a handful of readers took that statement to mean:

"We'll decline to 2157 -- or some presently unknown price that could be much lower than 2157 -- and that unknown and unstated price point will be a buy opportunity, so you should go long on the predicted drop.  Because THEN we'll rally straight back up through resistance."

Suffice to say that interpretation simply never occurred to me, since, for one thing, I made absolutely no mention of the current pattern as a long opportunity.  To the contrary, I stated plainly that I could only view it as a short opportunity.  If the entire annotation is viewed in context, it seems self-evident (to me, anyway) that my use of "before" was another way to say "a decline to 2157 happening first is more likely than a breakout happening first."  In the same way one might say, "I'll bet we see 2000 SPX before we see 2500 SPX" -- the only way one could take a statement like that as bullish is if one was already biased that way (consciously or otherwise), and simply hearing what they want to (or fear to) hear.

I am aware of this tendency in human nature, but have not found a way around it.  More than once, I have had a bull tell me that my "bullish" update (which I thought was a "bearish" update) was exactly what they thought too -- or had a bear tell me that my "bearish" update (which I thought was "bullish") was exactly what they thought too!  It's like the scene in Dumb and Dumber where the girl tells him his chances with her are one in a million, and he replies, "So you're telling me there's a chance!"

Anyway, for future reference, if I'm trying to call the market two moves in advance, I usually make that pretty plain; typically by saying something along the lines of: "It looks like we'll decline to 2157, then rally back up to new highs."  Or "any pending decline should probably be viewed as a buy op."  Or any number of things.

Now, all that said, although my focus last update was only short, I'd be remiss not to mention now that it IS very possible this decline will ultimately turn out to be a buy op.  The thing is, given the strength of Friday's decline, there are probably a lot of trapped longs.  And the downward wave doesn't look quite complete yet, so "buy op" isn't something I can focus on until we see at least one small impulsive wave in the upward direction, in order to give us a clear level to act against.

Keeping it simple, there's nothing much to do here if you missed Thursday's call to short:

In conclusion, there are several potential patterns on the table here, but no clear high-probability pattern, at least until the market tips its hand again.  The smartest thing to do at a time like this is trade safe, or not at all.  The market will tip its hand again soon enough.