The Crosshairs Trader's  Instablog

BAD NEWS:  There is absolutely no sympathy in the stock market.  If you need sympathy look elsewhere. 

GOOD NEWS:  If you have trading rules AND FOLLOW THEM you will not need what the market will not give.

Let’s look at a good example of what I mean.  The following is a recent chart of Intercontinental Exchange (ICE).

Notice that in just the last 6 trading days ICE lost all of the gain from the last 49 trading days (note: the sell-off in this stock started BEFORE the negative news yesterday!).  For trend traders following the 21 TANKS as a good trend line support money was made for several months.  However, warning signs began to appear for the following reasons:

1) The 21 TANKS acted as a strong defensive support until June 22.

2) A downtrend line formed on the candlesticks AND on the CROSSHAIRS indicators as ICE broke the 21 TANKS a second time.

Just these two simple warning signs gave a highly probable indication that ICE was heading lower or, at best, beginning to consolidate.  Either way, entering a long trade here on the likelihood that the 21 TANKS had regained support is a low probability trade.  Going short would have been a higher probability but hindsight is always 20/20 and anyone can make wise decisions after the fact.  My deployment chart did not give me a signal on this one to trade short so I was not in on this down side move. So what! 

My point here is this: the market usually gives slowly and takes quickly.  In this case ICE took back in 6 days what it had given in 49!

THE LESSONS:

1.  The market is a place where anything can happen AND HAPPEN QUICKLY!  Be ready to enter if your rules are met but, most importantly, be ready to exit if your loss point is broken!  If you do not respect the market, all the money you made over a long period of time will be taken over a short period of time.  The market has no sympathy for your disrespect. 

2.  Even the most tried and true Wall Street technical averages will not work 100% of the time, mine included.  In the case of ICE, the very strong support usually associated with the 50 SMA (“TANKS”) is broken as if those tanks were not there at all.  So, traders who were still long this stock since it found support on June 23 (the previous “break-out” level) were most likely looking for ICE to find support again at the 50 SMA. It did not happen.  In fact , there was a bullish report to buy the stock the day before the huge drop! If you were long here it was time to get out!

3.  As a trader you should do exactly what the market does:  give slowly but take quickly.  What do I mean?  By having a plan with a set of rules you enter the battlefield  when you want to and you do so on your time.  Better yet, let’s call it patient or slow time.  Once you enter the battlefield you exit quickly according to your profit target and your loss target.  Whatever those targets are do it decisively and quickly.  In other words, do not think about doing it, just do it. 

4.  Do not get angry about what appears to be an irrational market.  What is irrational is the trader who tries to make the market conform to his “rational” beliefs.  Sure, it does not seem rational for a stock to lose 49 days of gains in 6 days (news or not) but that is just the way it is.  Unless you have a few billion to trade with you will not move the market.  Accept your limits and move on.

5.  You never know when or how news is going to affect a stock’s price, so do not stick around to find out.  How to trade the news is really a post for another day (and one I am working on), but the bottom line is you just do not know how the majority of traders are going to react.  In this case, they sold and sold hard on news that Commodity Futures Trading Commission Chairman Gary Gensler may seek to impose limits on trading and positions in energy commodities (the heart of ICEs business).  If you are in a trade and news hits either take the profit or loss (whatever the case may be), chalk it up as a risk factor for trading, and wait for your next set up. 

“Happiness is a function of accepting what is.”  Werner Erhard

THE HEAD AND SHOULDERS PATTERN: A WEAPON OF DECEPTION?

“ALL WARFARE IS BASED ON DECEPTION.”  SUN TZU

Whether you like it or not “all stock trading is based on deception.”  Don’t believe me?  Ask yourself the following question and answer honestly: have you ever lost money trading when your trade was based on a well-known stock market pattern that did not work?

Let’s look at a recent example:   Those who were short the recent bearish S&P head-and-shoulder pattern were left scratching their heads as they were forced to run for cover.  Even the financial stations were fixated over this technical pattern that predicted a dire future for the market. Alas, as the right shoulder formed and the S&P crossed the 200 SMA an amazing thing happened: the market went up 7 days in a row!

Let’s take a look:

A BEARISH CHART INDEED! 

But take a look at this one.  Same chart but with a different perspective: A BULLISH ONE!

And the winner is…THE BULLS!

The dictionary defines deception as a trick or the art of deceiving someone. And how do you deceive someone?  By hiding the truth behind the facts. There is an art to this. Indeed, trading is an art, an art of deception, like it or not.  Does not matter whether you believe it not, it just is. The above is a perfect example. 

The shorts were tricked into believing the FACTS:

A head and shoulders formation (BEARISH):  FACT!

A breakdown below the 200 SMA:  FACT!

Recent support was broken:  FACT!

News headlines proclaimed it (AND IT MUST BE TRUE):  FACT!

The market rallies 7 days in a row to a new yearly high:  THE TRUTH!

Now consider these FACTS:

You should never load up on a sure thing: FACT!

Anything can happen in the market and often does: FACT!

A breakdown usually leads to a breakup: FACT!

The most obvious is usually hid behind the least: FACT!

The next time we see a head and shoulders it will work:  TRUTH?

“If you are ready to believe, you are easy to deceive.” Proverb

“Remember this lesson [the fake head and shoulders] because it will happen again.”  Charles Kirk THE KIRK REPORT

With a gain in the indices of roughly 29% since the early March lows and the S&P rallying for six weeks in a row-its longest streak since May 2007-it may be time for a pullback or, at best, a consolidation. In CROSSHAIRS TRADER terms, the current BATTLEFIELD TERRAIN is categorized as GREAT DISTANCES or TEMPORIZING, both of which indicate caution when entering the battlefield. If you want to go long (or trade call options) do so taking very quick profits with stocks that have been leading the market higher, have bullish patterns and have favorable indicators. It is no fun getting on an elevator on the 11th floor to go up only to realize that you are on the 11th floor already! If you want to go short (or trade put options) apply the same rules as going long. Even though we are in a bear market, the intermediate trend has been bullish and until this changes, shorting the market would be to trade the pullbacks and bearish divergences or to find stocks that have not participated in this last leg up. Just my take on things and are subject to change as the market dictates. By the way, you did know that I am a "yard sale cartoonist"? Once in a while I will draw something that others may find useful. TRADING IS WAR. PREPARE YOUR WEAPONS.