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 relatively minimized.
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. For as long as the public accepts this deception, the lessons of
Germany and Zimbabwe go unheeded.
