Friday 7 May 2010
[This is a market commentary with no specific recommendation.]
The best laid plans gone awry! Just as we think we have properly analyzed
what may unfold, it could not have been as far off as it was. The lesson that
should be ever present every day is, Anything Can Happen!. We thank
Mark Douglas, Trading In The Zone, for that gem. That thought should be
embedded in every trader's mind. Every aspect of one's decision-making
should reflect the wisdom of that message. We have made that implicit in
trade recommendations, starting with knowledge of the trend.
When you know the trend, you are more likely to make money by being in
harmony with the prevailing directional price movement. Even a poor
decision on entry can be rescued by a trend asserting itself. There were two messages in yesterday's analysis, [see S & P - No More Guesswork Here,]
Knowledge of the trend, [first paragraph], and knowing the trend is down,
trade only from the short side, [last paragraph].
Yesterday was a complete surprise. The last time we saw a move like that
was in 1987, very similar. The funny thing about surprises is the move tends
to be in the direction of the trend, and yesterday was no exception. The
only position we recommended was on the short side, in line with the trend.
There was no weak rally that reached the given targets to establish a short
position, but at no time in the decision-making analysis would we have been
in harms way. Why not? We knew the trend.
Another issue about taking into consideration that anything can happen
is being flexible. We got the part about the trend changing, but not the
manner of the way it changed. The moves up had been somewhat
controlled all the way up. The moves to the downside, particularly during
the last several trading days, were signaling weakness in wider ranges
down and increased volume, revealing the inner character of price activity
was that of distribution, [see S & P - Know When To Hold'em , first chart].
The decline of the two days prior to yesterday's precipitous drop was
already greater than had been "normal" in recent months. Expecting a rally
to ensue made sense. Even the possibility of a lower low was taken into
consideration, but as a small step leading up to the anticipated rally for
establishing a short position. It can be difficult to psychologically adjust to
the newly developing market behavior. As it turns out, yesterday was an
anomaly, an extreme that has not occurred in over 20 years. That is what
having rules is all about. It will save you from the unexpected, and maybe
put you in a position to profit from the surprise move.
There is organization in every market, and there is a process of phases that
all markets undergo... accumulation, mark up, distribution, then mark down.
What you are seeing now is the markdown phase that followed distribution.
It is for a substantial reason that we say the market is the best source of
information. Price activity, as seen in each bar, how large or small, where
the close is on the bar, and then the volume, large or small, all come
together and provide the market's story, where it is going and what one may
expect to happen along the way
Today's discussion is not to say it was possible to know the extent of what
may happen at any given time, rather it is to serve as a reminder that
adhering to market momentum, coupled with specific rules of
engagement will keep one on the "right" side of a market, more often than
not. That is a decided edge in the endeavor to be profitable, on balance.
Losses cannot be avoided, but by employing one's rules, losses will be
As we present ideas, there is usually a theme of logic behind the analysis,
which is all based on market activity in the form of price and volume
incorporated into the known structure of market behavior. Having this kind
of approach, one should not ever find themselves on the wrong side of a
trend. It takes little imagination to understand how those who were trying to
find a bargain or "take advantage" of a potentially oversold market and
taking a long position paid dearly for ignoring the trend.
All of this is true for most any market. Know the trend, have a specific set
of rules, allow for the fact that anything can happen, and expect to be
consistent in results, as a natural consequence. There are ways to make
money on balance, and it can be accomplished without taking undue risk.
What to do for now? Nothing. Let the market sort itself out, quiet down,
then look for the kind of present tense activity that allows for taking a
position. The large range will contain the market for some time to come.
Months, maybe even years. The one thing we can know for certain is that
the market will reveal its intent, again.
It always does.
As an aside, do not listen to any of the "talking heads" promoting some silly
notion of a "fat finger" mistake. Somebody moved the curtain, and we got
a glimpse of who is behind it, and we learned that no one is in charge.
There was no "fat finger," only the "fat cats" driven by unbridled avarice
now trying to hide their fraud. Keep focused on the message of the market,
for it is unfiltered and true.
This is what happens when a private corporation, called the Federal
Reserve, is allowed to "print" fiat currency and flood the country with it as
though it were a panacea. As long as the public accepts this deception,
the lessons of Germany and Zimbabwe go unheeded.