Big Week of Economic Reports

Monday, August 30th, 2010

This is a jam packed week filled with big economic reports:

Tuesday: Chicago PMI, Consumer Confidence, Case-Shiller Home Price Index and FOMC Minutes
Wednesday: ADP Employment, ISM Manufacturing Index
Thursday: Jobless Claims, Pending Home Sales Index
Friday: Employment, ISM Non-Manufacturing Index

The economic numbers seem to be getting worse and worse over the last 3 months and expectations are very low for many of these reports. If the reports are better than expected I think we can expect to see the markets hold up and maybe even trade slightly higher. If they come in worse than expected I think there is a possibility of a big sell-off taking us to new yearly lows.

It would not surprise me to see a few beat expectations and few disappoint to the downside. It really is all going to come down to Friday’s employment number. Goldman Sachs came out today and revised their estimate for private job growth to zero which if true won’t be taken kindly by the markets.

Either way I think the stock market is firmly entrenched in a down trend and has some tough sledding ahead of itself moving into September and October.

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Euro/Yen Signaling Major Market Weakness

Monday, August 23rd, 2010

The Euro/Yen cross has been one of the best indicators of risk and stock market direction for the past few years. It is now moving towards making new lows since its peak in 2007.  This can’t be seen as a positive sign moving into the next few months which are typically the worst for equities.

Here is the chart and notice the break towards new lows today:

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The Banks Look Weak

Monday, August 23rd, 2010

The stock market as a whole looks like it is just starting another correction phase led to the downside by the banks. In my opinion the banks are the lynch pin that will move this market either up or down. Right now with the current head and shoulders pattern on the bank index, see chart below, I think we are in for a double dip. The banking sector is one of the most important to the economy and is also the sector that lead both decline in 08 and the advance in 09.

While many market pundits are quick to dismiss the double dip as a possibility the fact remains that every stock market decline as large as the one we saw in 08-09 led to a double dip. Just look at the 1930′s, the 1970′s, and Japan in the last 20 years. They all experienced a double dip and this time is no different.

Don’t believe me…take a look at JP Morgan, Bank of America, and Wells Fargo. They are all trading at or near 52 week lows.

Here is a chart of the bank index:

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S&P 500 Still In A Holding Pattern

Saturday, August 7th, 2010

Regardless of the weak jobs number on Friday the S&P 500 held above its uptrend line. The index continues to trade in an upward sloping band that is bullish until it breaks to the downside. Right now, odds favor a test and a break of the June 21st highs and a potential run into resistance at the 1140-1150 level. As long as the S&P continues to stay in this band it will have an upward bias. I suspect later this month we will have a break to the downside but until then stick with the trend. Here is the chart with the uptrend lines and channel bands:

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Golden Opportunity??

Tuesday, April 6th, 2010

Gold has been backing and filling for the better part of the last 5 months.  It now looks to be on the brink of a breakout to the upside.  I am going to show you two charts that project to 1220-1250 if a breakout occurs. It must break above 1150 to trigger these potential moves…until then its stuck in a sideways channel…

This is pure measured move of the consolidation box where 90% of the trading has taken place for the last several months. It measures to 1220.

Here is the same chart with a slightly different but similar interpretation. On this chart we have an inverted head and shoulders formation that projects to 1250.

I think the best way to play this outside of the buying gold futures is by buying Newmont Mining. They have the best looking chart in the space and should benefit the most on a move higher in gold. Also, note that Newmont has already broken higher technically by breaking above the 53 resistance level. As always, trade with stops…

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Quarter End and the Employment #

Tuesday, March 30th, 2010

The 1st quarter of 2010 ends Wednesday and I think we may see 11,000 on the Dow and 1200 on the S&P by then. From what I am hearing many managers have underperformed and may need to push the markets higher in the next 2 days to try to make up whatever performance they can. The way they do this is to leverage to the hilt and try to move the markets up 2-3% in the hopes of making double that, 4-6%, from leverage.

In addition, almost every newsletter writer, myself included, has been looking for a pullback and its just not happening. Look for the shorts to capitulate if we make new highs today driving us to 11,000 on the Dow. I think we could see 11,200 and 1200 in the S&P on a short squeeze by Thursday.

The market needs a catalyst to break this uptrend or a blow off to the upside before any significant downside can occur. I was thinking that a break down in commodities may trigger a sell off in equities, but they reversed hard to the upside yesterday, only adding more fuel to the rally. Copper seems to be leading the charge and came within a few ticks of new high for 2010 yesterday. It would not surprise me to see commodities rally into quarter end and lead equities higher because they have lagged severely this quarter.

Also, the always market moving employment number comes out on Friday. It is slated to show job gains for the first time in nearly 2 years which is also providing support for equities. Look for more retail investors to come in on that news that the economy is turning around. I can already see the headlines and hear the evening news saying the economy is finally showing signs of strength…blah…blah…blah…

Right now even bad news is good news. Russia had a terrorist attack yesterday and the equity markets didn’t even flinch. Even the Russian markets closed higher…

Yesterday we gapped higher on the S&P and held the gap into the close. That is an extremely bullish sign, short term. As much as I’d love to see equities get killed here, they just want to go higher…

Anything can happen, but I’m just calling it as I see it…

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Breakdown in the CRB Index?

Monday, March 29th, 2010

The CRB Index, the Commodity Research Bureau Index, is on the verge of breaking down. Check out the chart:

The CRB index has been trading in a sideways pattern for the past 6 months. We are now at the lower bound of the channel that represents 90% of the price action during that time. Do we bounce or break down? From the looks of the Dollar Index, it sure looks like we are going to break down. Until that happens there isn’t much to do but be on the look out for the break. Commodities have been drifting lower for the most part this year and demand seems to be waning. RBOB gasoline supplies are at 19 year highs. Grains are extremely weak and metals are treading water.

Watch for a break out of this channel for a decent trend move. Energy and metals seem to be losing momentum fast but have yet to completely break down. Those are the two sectors I would look to short if the lower bound fails to hold.

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Flexibility…No I’m Not Talking About Stretching

Sunday, March 28th, 2010

Successful trading is very much a counter intuitive game. It often requires you to be extremely mentally flexible and rigid in that flexibility. Yes, I did just use the words flexible and rigid in the same sentence. On top of that, I said you need to be rigidly flexible to be successful in trading.

The markets ebb and flow and are constantly changing and evolving. In order to be successful you must learn to move with the markets, rather than resist them. Traders that try to fight the markets or impose their will on them lose, lose quickly, and badly.

Being flexible is often much easier said than done and the reason is because most of us are mentally inflexible. This mental inflexibility often stems from our ego’s need to be right and defend itself. If you haven’t already experienced this, you will and it won’t end well. Think about stubborn people you know, do they live with ease or resistance?

So, the question becomes, how do we become more flexible? While I could go into all kinds of trading semantics about how to do this or that, the real answer is to surrender your ego. How do you do that? By reading Eckhart Tolle’s The Power of Now and A New Earth among other eastern spiritual books. Why eastern spiritual books? Because most of them all have to do with the ego and the mind. They have to do with embracing and accepting life as it is rather than resisting it. This is not about religion, its about human functioning. Humans make up markets and last time I checked we are all human.

These books will teach you so much more about the organic nature of life and the markets than the lame western psychology books and teachings. Western psychology is largely based on how to coddle, repair, and trick the ego rather than to move beyond it. I am not interested in playing with the ego at all, been there done that…

The concept that most of us have yet to grasp is that “CHAOS IS THE NORM,” not the other way around. Once you really understand what that means only then will the markets begin to make sense to you. That still doesn’t mean that you’ll understand what is happening you’ll just resist it less.

While a lot of this may sound esoteric to many people, I can assure it is not. Trade for as many years as I have and go through the ups and downs in life and in the market as I have and you’ll understand. I am not putting myself on a pedestal, I am trying to wake you up and show you how to succeed in life and in trading. My point is that I have already had to learn the hard way, so why should you try to reinvent the wheel?

You probably won’t hear what I am saying from many people. In fact, I have read about and heard a few market psychologists that say many of the best traders are often egoic, totally out of control, over emotional, and that gives them their edge. Don’t waste your time with this non-sense!

I would counter their argument by saying, I was once one of those traders and while it worked for a while, it doesn’t work long term. I have lived it and experienced it firsthand and I can tell you definitively, that personality type will crash and burn. There are so many great traders that have crashed and burned because of exactly this type of personality.

I am not afraid to say I was once one of them and after riding the roller coaster one too many times…I said enough is enough. Einstein once said, doing the same thing over and over and expecting different results is the definition of insanity. While, I learned that one the hard way…

Now, my trading is better than its ever been and its because I am not fighting with myself, the markets, my strategy, or any goals or expectations. I am mostly, completely free of all that mental noise and I just let the markets, in their great wisdom, lead me and show me what to do rather than let my ego try to prove to them who is right or wrong.

If you want proof…just refer to my track records page…

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What History Suggests About the Equity Markets

Friday, March 19th, 2010

First, let’s start off with a little video from Consuelo Mack where she interviews fund manager Bob Rodriguez. After that we’ll get into the numbers of what history suggests…

Now what does history suggest? A rocky road ahead with lots of volatility. In US history there are two other bear markets that rival this one, the 1930′s and the 1970′s, and here are some numbers to ponder:

In the 1930′s the US equity market experienced these price swings:
-85.98%
+93.91%
-37.25%
+115.85%
-21.02%
+127.04%
-49.10%
+59.76%

The market finally made a new high in 1954 after 25 years on spin cycle.

The stock market went no where between 1966-1982, 16 years of slop and chop.

The 1973-74 decline of -47% was followed by an 80% bounce and then a -28.26% decline.

The current rally in the Dow is 67%, 75.5% in the S&P 500, and 91.9% in the NASDAQ.

The moral of the story? There is historical precedent for the move we are having. Don’t fight the trend. We can go higher, the biggest rallies happen after the largest declines, and we will have a large correction of greater than -20% most likely before the end of the year. Lastly and most importantly, stick with the trends and make sure you have stops on all your positions.

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Long Term Performance – Trading Systems Course

Thursday, March 18th, 2010

Here are the test results for just one of the 20+ trading systems taught in my TRADING SYSTEMS COURSE:

•    The test begins on 1-1-1967.
•    The test ends 3-17-2010.
•    The risk per trade is 0.50% or 50 basis points.
•    The commission is $12.00 per round turn.
•    The slippage is 15% of the day’s range from the entry to the high for buy orders.
•    The slippage is 15% of the day’s range from the entry to the low for sell orders.
•    The test was completed on 54 global futures markets.

Stepped Parameter Summary Performance

Test		Ending Balance	CAGR	MAR	Mod. Sharpe	Ann. Sharpe	Max DD	Longest Drawdown	Trades
1		141,394,534,688	38.83%	1.21	1.48	1.05	-32.1%	20.8	7,947

Yearly Performance Summary

Year		Closed Balance	End Total Equity	Total Gain	Gain %	Trades
1967		101,079.70	106,189.10	6,189.10	6.2%	59
1968		118,425.40	128,460.40	22,271.30	21.0%	52
1969		140,568.50	187,350.40	58,890.00	45.8%	55
1970		215,430.30	226,939.10	39,588.70	21.1%	65
1971		240,543.70	266,061.20	39,122.10	17.2%	67
1972		259,864.50	426,661.30	160,600.10	60.4%	65
1973		878,254.15	960,058.95	533,397.65	125.0%	64
1974		1,318,990.35	1,538,701.60	578,642.65	60.3%	94
1975		2,334,421.25	2,709,913.00	1,171,211.40	76.1%	93
1976		5,295,570.10	6,021,610.45	3,311,697.45	122.2%	102
1977		7,517,210.00	12,593,419.00	6,571,808.55	109.1%	94
1978		17,839,930.85	18,452,326.00	5,858,907.00	46.5%	98
1979		24,581,538.25	28,554,883.95	10,102,557.95	54.7%	115
1980		32,244,401.80	38,185,612.70	9,630,728.75	33.7%	122
1981		47,798,683.05	58,058,388.40	19,872,775.70	52.0%	99
1982		73,287,901.05	77,994,848.05	19,936,459.65	34.3%	118
1983		75,568,935.64	82,969,667.27	4,974,819.22	6.4%	150
1984		82,807,186.34	108,729,435.37	25,759,768.10	31.0%	168
1985		120,920,257.68	161,626,634.01	52,897,198.64	48.7%	151
1986		182,265,863.90	215,907,183.43	54,280,549.42	33.6%	178
1987		294,348,204.95	449,249,878.25	233,342,694.82	108.1%	171
1988		443,307,985.22	522,834,052.01	73,584,173.76	16.4%	201
1989		490,046,349.25	678,009,719.04	155,175,667.03	29.7%	216
1990		828,622,008.04	988,930,709.70	310,920,990.66	45.9%	200
1991		804,147,420.24	1,379,670,615.13	390,739,905.43	39.5%	226
1992		1,430,179,998.59	1,696,366,327.09	316,695,711.96	23.0%	224
1993		1,624,343,718.86	2,474,653,999.85	778,287,672.75	45.9%	238
1994		1,984,323,846.23	2,816,867,927.32	342,213,927.48	13.8%	257
1995		3,119,901,799.93	4,533,825,767.98	1,716,957,840.66	61.0%	216
1996		4,462,096,155.41	5,353,961,433.30	820,135,665.32	18.1%	248
1997		6,009,879,173.34	8,048,121,567	2,694,160,133	50.3%	238
1998		8,838,294,569.78	11,693,282,789	3,645,161,222	45.3%	232
1999		8,309,989,129.46	11,891,012,837	197,730,048.40	1.7%	292
2000		8,778,800,797.01	12,847,041,479	956,028,641.45	8.0%	318
2001		17,558,600,217.34	18,441,241,177	5,594,199,698	43.5%	268
2002		18,812,319,117.87	23,340,460,825	4,899,219,648	26.6%	292
2003		26,115,162,860.84	38,318,648,566	14,978,187,740	64.2%	268
2004		32,026,524,545.70	42,966,289,370	4,647,640,804	12.1%	286
2005		34,031,833,421.30	48,066,688,013	5,100,398,643	11.9%	307
2006		45,185,160,691.48	55,426,121,084	7,359,433,070	15.3%	303
2007		58,351,749,638	71,283,842,663	15,857,721,579	28.6%	294
2008		110,094,470,325	162,813,559,297	91,529,716,634	128.4%	258
2009		125,528,613,914	144,009,999,689	-18,803,559,608	-11.5%	279
2010		141,394,534,688	141,394,534,688	-2,615,465,00	-1.8%	106

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