Sunday 9 June 2013
Markets provide an opportunity to grow one's capital, and create a
return on capital, in addition to a return of capital, its preservation
being the benchmark to ensure it remains fully intact. Is there a
magical formula for success in the markets? No. However, there
is a realistic approach to increase the odds of consistent returns
while keeping exposure to risk at an acceptable level.
The S&P used to be our mainstay market concentration, but we
stepped away from that market when central planners took over,
starting with POMO, [Permanent Open Market Operations], conducted
by the privately owned Federal Reserve. With fiat being pumped
into the markets on an ongoing basis, it was a fatal blow to free
market operations, where supply and demand were the true measures
of value. Now, [then], there was only an artificial demand that took
quarrel with any attempts by supply to alter the Fed's upward
These circumstances were unacceptable, and so we withdrew from
analyzing the equity markets, rightly or wrongly, but right for us.
There may be change coming, and if/when it does, 2008 will likely be
relived, again, possibly worse, given how the buy side market has
become so distorted. It is now back to our game plan, and greater
attention will be given to reading developing market activity, which is what we do.
Are successful results possible? Absolutely! There are never any
guarantees in obtaining profitable results, but we know for certain that guidelines exist for gaining an edge in all markets: Trend, Facts, and
The trend is the most important first piece of knowledge one can have in order to become profitable. Trends persist in the market, and they
often go much farther than many think likely. If you want to be
successful, you must always trade in the direction of the trend, in
whatever time frame chosen. Plus, one must also be mindful of the
next higher time frame to not run into a larger, potentially opposing
force. Just this one observation, alone, can enhance one's odds for
Facts. They are incontrovertible, conclusive, not subject to dispute.
Facts are in direct opposition to opinions, themselves subject to beliefs or judgment, both of which fall short of certainty. We want as much
certainty in decision-making as possible. Facts provide that.
There are ways of determining the trend based on facts. There are
ways of determining which force, supply or demand, is in control,
based on facts. When you take the trend and combine it with factual
market observations, it results in creating an edge for every market
decision that can lead to stock market success. There is one more
Rules, the missing ingredient for a majority of market participants.
What undercuts successful trading/investing more than anything else? Having an opinion. We all have them, but they cannot be the compass upon which decision-making is based. Why not? Opinions are
subjective, and almost always charged with emotion, ego, both of
which are destabilizing factors.
Why do so many people lose so much money? They have an opinion about what a market will/should do. "This market can't go much
higher." But it does. [Trend]. "The market is overdue for a
correction." It may be, but it does not correct. [Trend]. Once
positioned in a market, emotions take over. "I can't take a loss. The
market will bounce back." [Going against the trend and ignoring the
facts.] You get the idea.
Rule One: Trade with the trend. Rule two: Buy strength, not
weakness. Rule three: Buy at support, once proven it will hold. Etc,
etc, When you have a fixed set of rules that determine when to
take a position within an established trend, the risk factors have been
greatly reduced, and the odds for success have been enhanced.
Neither is guaranteed, but the odds of probability are now tilted in
With this brief, but comprehensive groundwork, we apply it to better
understanding the charts and moving forward.
The first fact to determine for the weekly S&P is the trend, and
clearly, it is up. You can see how the lighter line connects the swing
highs and lows. The highs are higher and the lows are higher, the
essence of a trend. [It does not matter how one defines a trend, as
long as the guidelines for its determination are used consistently.]
It is also apparent that price closed higher for the week, and it did so
on increased volume, both facts, regardless of what opinion someone
may have. What does not show is how the weekly bar looked so
weak, going into Thursday, and it appeared that the market would
continue to sell off. However, the time frame is weekly, and we have to wait for the end of the week close in order to make a valid
assessment. That would be a basic rule for weekly.
If one made a determination to take action, based upon apparent
weakness on lower prices starting Thursday morning, that action would have been based upon a judgment made at the time, [and proven
wrong]. Taking any action at that point would have meant it was
based on opinion and a breaking of rules, or alternatively, not even
having a set of rules in place, which is just as bad.
This is not to belabor the point, rather to drive home the importance of knowing the trend and adhering to rules, based upon market facts. The time frame is weekly, so no decision can be made until the close
of the week is known, another fact. Despite the apparent drop in
price, almost 50 points, starting out Thursday morning, the Trend,
reasserted itself, and by day's end, price rallied the most in a single
day from low to high close in many months.
The weekly chart shows a strong, trending market. Higher time frames are stronger than lower time frames. The daily chart had been selling
off, longer in time and greater in price since the November 2012 lows.
The sell-off was approaching a swing high support from April, and the
bottom of the down sloping demand line.
The fact that price reversed and rallied so strongly from a known
[potential] support area, demonstrated how and why knowing the
trend is so important in order to react to the developing market
activity and not be swayed by emotions. This is how to trade in the
markets: knowing the trend, using facts gathered from the market,
and having a set of rules for engagement.
What to do now?
Was the May high the high for this move? The trend says no. More
evidence of a change is needed to make an informed decision. There
are two likely scenarios. 1: The high is in and this is a retest of the
high that will fail, leaving price to go lower. 2. This was just a natural
correction within a bull market, and price will make higher highs,
keeping the trend intact.
With a set of rules, the decision is an easy one. For now, we have to
go with the trend is up and should be heeded scenario, until proven
otherwise. We can also add the fact that the last swing low, from
Thursday, [should it hold], left bullish spacing. The last swing low is
above the last swing high, as the two horizontal lines show.
A weak retest of the 1596 low will confirm that the daily trend remains
up. [The weekly is not close to turning, at this point.] What is a
weak retest? Smaller range bars and lower volume when price
declines, indicating sellers are not in control, as one example. Should
that happen, it can set up another buy opportunity, next week.
The NASDAQ shows greater spacing between last Thursday's low and
the mid-April swing high. It is testing 50% of the previous range, a
general guide, indicating overall strength. There is a slight conflict
between the stronger volume on the sell-off from the May high,
compared to the lesser volume from last week's rally. The possible
offset to that negative is the fact that price rallied so easily from the low. Where were the sellers to stop the buyers?
Bottom line is, in both markets the trend remains up, and a solid set of rules to determine when to buy within an uptrend will best serve one's
objective of consistently profitable trading success.