Trembling Hand Trader

The back end of a bull?

This is what the back of a bull looks like.

And I think so does this,

This looks like distribution - not a healthy pause before the next run.  Fewer and fewer stocks are participating in the upward momentum. My last post was about looking for direction when the inevitable bounce came from the falls from yearly highs and its been disappointing. Maybe Santa can save the indexes by holding up a couple of big Caps but underneath them less stocks are rewarding holders and it would seem more are heading for the exits. AUD could bring back some specie juice if it takes the highs out. But I'm only watching that as an "if" at the moment. Not trading it like I expect it to happen with any gusto.

Interesting Rollover on the cards?

Many an internet Guru has lost their Guru status on calling for falls this year and been given the cucumber rumba as the indexes continued on a relentless climb. But is this rally finally losing momentum? We will be down today but will this develop into something more? I actually think we have chance here to see a deeper fall than we have had on previous pull backs. Have a look at the chart below of the 10 day average of the advancing stock minus the declining stocks. This chart gave me a good heads up of the end of the bull run back in December 07. The problem with the Indexes as an indicator of market strength is that a few big caps can hide the underlying weakness in the broader market. Just like we got back in 07.

The blue lines are the points where we have had divergence from the broad market index this year and what great signals again they were. The first one was a ripper. As we were making possible generational lows the downward momentum had well and truly come out of most stocks months before the low was reached on the index. Then we got some significant divergence on each push up to new monthly highs in May and June signaling the 8% fall we had in late June. Now we are at a similar point in October where the index has made new yearly highs yet the adv-dec has made 2 lower highs. These are signals of weakness in the broader market. The money isn't chasing higher prices here. A decent pull back would actually be healthy.

If we get a good pull back the bounce from any such fall will tell us a lot about the health of the market for the next medium period. If you're a Bull you would be looking for something like I have marked on the chart below of the same 10 day Adv-Dec (red) and the XAO (blue).

So you want to be a trader?

Oct. 8 (Bloomberg) -- Neill Junor remembers the exact moment he decided to quit snorting cocaine. On a chilly December afternoon in 2005, the former equities analyst took a stroll in London’s deer-filled Richmond Parkto select the tree from which he would hang himself. 

Interesting article on Traders and Bankers in the City. Just about sums up the live.

All the trading rules you will ever need.

As hard as people want to make this game here are all the "rules" you need to fill your hand with aces. From no less than some old dude my Dad would sing to while my sisters and I would scream in merciful agony to PLEASE stop, Kenny Rogers. Maybe my Old man was teaching me more than I realized, LOL.

"every hands a winner and every hands a loser,"

There's a lot in that line. Big wins can mask danger and losses can be big winners if treated the right way. By taking some sort of info from them, whether that is about the condition of the market or your interpretation of the market or application of your trading.

USD vs the World

So if you haven't notice by now there is only one trade going on. It's basically USD versus everything else. In the 08 meltdown it was a carry trade unwind versus everything else. You could pretty much throw your bets on anything inverse the JPY on a minute to minute basis. Now its the USD weakness or relative strength versus everything. Obviously commodities and precious metals but also or especially equities.

Now the sweetly ironic bit in the play that the tin hat brigade has been warning of since 1999 is that gold isn't the best one of the "everything else". Not yet, maybe tomorrow, maybe in two months, maybe in two years but not yet, not since the March lows. That's funny, who would have thought that an obvious trade wouldn't be the best one?? Who would have thought that swallowing the rhetoric of the religious gold followers would have you lagging when their predictions start to turn true? Well half of it anyway, the weak USD half. Funny how this game doesn't reward followers.

Especially those that buy their lattes in AUD,

Where are the moves?

You often hear statements such as "FX is volatile that's why I trade it". So just to put some numbers to the idea I had a look at the daily ranges expressed in % moves of ASX20 stocks, FX and Equity Index futures. This is what I found taking data from June the 1st this year to now.

 

 

So it seems that again a trading cliche doesn't stack up to reality. Its clear that FX is not volatile by the amount of leverage that people have to use to make the smaller moves meaningful for profit and loss. Of course that's doesn't make FX the worst instrument to trade nor is daily range the best or only indication of a good instrument to trade. I would consider trading cost, tick size and spread far more important.

One often selling point by FX brokers is that its a 24 hour market. For me this is actually the biggest negative for a couple of reasons. Firstly this game is addictive and tiresome. Having your market open all the time removes the necessary break and time away from endless hours at the screen. This cannot be underestimated. A lot of the learning comes once you step away from doing and focus on what you have done, in a calmer state. You cannot do this while the quotes are flashing changes in front of your eyes. Especially if you are going through a draw-down. And maybe the biggest changes happen when your market closes and you are in a disgusted state from your seemingly stupid actions. If your market is still open and you are in a distressed state your likely to just add to your problems. But at close time that is a great opportunity to start the "never again" planning while you cannot do any more damage to your equity and head.

The other negative of the 24 hour market for me is actually the time that the action is spread over. Take the HSI. Its only open for 4 & 1/2 hours yet you get at least the daily range that most FX instruments take 24 hrs to do. The closing and reopening of equity markets for a daytrader is where the opportunity lies. When you have lots of money being put to work in a limited time. Your trades are on and they are either proven right or wrong quickly. Then you can move on to the next idea or better still walk away from the screen and have a life.

Do not waste your time with TA

Big statement, especially from a trader who uses TA as a tool but its true. Technical analysis is rubbish as a predicting tool. Especially if you are new to markets. Technical analysis will not give you an edge in predicting where the markets is going. What it does do is confirm your biases. Its a tool for confirmation bias.

Now if you have five to ten years of experience of how your fellow traders act given certain previous events that's an advantage. If you have built up a huge database of implicit knowledge that's something that will work in your favour. BUT if you are new, all it will do is have you acting on prior price action in the false belief that what just happened will be repeated to some degree in the future. Classic example is this sorry thread on Aussie Stock Forums of head and shoulder patterns. The calls are running at a disastrous 6 correct out of 26. What works is not so called classic patterns from some dudes who found them 80 years ago in a different market over a different time frame. Or some overbought/oversold indicator. What works is recalling the right pattern at the right time. Using a squiggly line at the bottom of your charts will not help if you dont have the large mental database to know when the pattern you are looking at is likely to be wrong.

A good example is the arse whipping the bears are taking at the moment. Have a look through any forum and for the last month the most common type of comment you hear is,

"the market has moved 1 way the last XXX, looks overbought here and is due for a bull back, have a look at the RSI/stochastic/MACD"

Really?? What about this,

 

Yes that chart is upside down! Its the XAO from Jan 08 record breaking move. That's why this game is so farggin hard. You have to act on something. On some bias that enables you to take risk on an uncertain outcome. People use TA for that. Where they fail to approach it correctly is they think that TA has some sort of predicting qualities. NOPE. It just gives you an "if- then" type of problem solving tool. Where traders get a real edge from TA is that through experience your biases towards outcomes become a little more accurate. Instead of taking cues from that squiggly line at the bottom of your charts your subconscious deals with what weight you will give that info.

To that end here is a recent example. For the last 3 weeks I have been pointing out to any punter that cares to listen on ASF that its clear that global funds are in a risk seeking mode.That overbought indicators are not going to serve you any good when funds are flowing. That a straight up play is not out of the question. If one took the time to study how markets moved forward, especially indices, you would see that 3 to 5 days is all that is needed to work off any oversold/bought states. Indies push and pull, consolidate and retrace to various 50% levels then take off again. Whether thats forwards to new territory or back to where they have just came.

 

In the current market any overbought state you feel the market is in will be worked off with a simple 3 - 5 day consolidation. Not when your RSI rolls over.

Good time to be Bearish?

Last week the markets off-sided most with 5% gains while people were looking for sense to come back to this delusional rise and start the next leg of the bear run. After all its reporting season and that's got to mean a sell off on bad news - right? Nope the ASX XJO had the 5th best weekly percentage gain since the bear market started(5.33%).

So the bears got the shaft last week but surely this week they will fight back and smash the market? Well maybe not. Since this Bear market has started in late 07 we have had 11 weekly gains greater than 4%. The week after such gains has averaged -0.5% against the average weekly loss for that whole period of -0.28%. So there is a bearish bias there but looking at the figures a little more we can see that there are 5 down weeks and 6 up weeks. Most interesting is we have two weeks that are right in the savage part of bear market in late 08. Weeks where I don't think we will see down moves again for some time. Without those two weeks the weekly move after a 4% or greater gain would be a 0.66% gain!!

I don't see any great edge in being bearish because of the gains last week.

More HSI Stats

Following on from yesterdays post about HSI morning range levels. Here are the stats for the last 50 odd trading days. As you can see that morning range of 122 was the smallest in the sample.

Knowing when to expect the unexpected.

 Since the recent news that the SPI will soon be shut down for all time because its so friggin boring I have been focusing on an old mistress that has at times treated me well at others like a whipping boy. The HSI. The first thing you need to do when focusing on a new market is to know some basic stats about how it behaves. Forget about TA and classical patterns. Start at what does happen. Not what some dude back in 1952 was putting in a book to sell to the punters.

So I started with the most basic. Average daily range. Pretty simple but I'm always surprised at how many people trade a market and don't have a clue as to expected range. This is what I got,

 

Rather impressive daily range. Nearly 500 ticks from High to Low each day. Now that's a market!! But how can this be of use? Its already been a huge help in adjusting to a new market. I have a bias to fade just about everything. But that can be dangerous, especially if I move from the SPI with a 60 tick range to the HSI with the 500 tick range. If we are stuck in a relative tight range bound move of say 150 ticks I know to be cautious as time goes on because the previous stats suggest that there is a lot more to come. If I take my previous SPI approach to the HSI I'm going to get into trouble. I'm going to be fading breaks out of ranges that could well have another 400 ticks to run!

But there is more to know how a market should act based on how it has previously performed. What about when its not performing to expectations? Well if you can recognise early that the market is "different" that too can be a huge edge. Yesterdays morning session of the HSI had an unusually small range of 122 ticks. Anyone who was trading breaks would of been very frustrated trying to get trades to move out of the range and anyone fading the edges would of been pretty happy with their efforts. But there was signs that things were about to change. The morning session had about average volume so the lack of movement wasn't due to lack of participation it was accumulation. While the HSI was closed for lunch most other Asian indexes made or tested their highs. When the HSI open the result was explosive. Anyone taking the same play from the morning session to the arvo open got into serious trouble.

 

3950. Line in the sand

It looks like the Bears, or at least 1 big bear, has decided that 3950 is enough for this run. It has been defended twice with some serious volume two days in a row. Will be watching for a roll back into various 50% support levels. Last weeks mid point being an obvious support at 3860. Below this the shorts may be back in control.

Stronger for longer?

So we made a new high yesterday and will push up a bit higher today on the open. Well who woulda thought? Not the media Muppet's that's for sure, nor the yesterdays news crowd which have been busily stocking up on gold and baked beans.

I'm not getting carried away with this but the first step is in place a higher high. Lets see where and when the higher low comes into it. Something that is interesting is the biggest of the big Caps made a high mid April and didn't tickle those highs yesterday as the XJO/XAO was making new highs. So will that be some nasty divergence or a sign that once BHP and the Big 4 banks get going we could easily add another 200 points in a couple of days. Maybe next week?

Something to keep an eye on.

First things first

So here is the first good sign since about October 07. I've got the last highs marked on the XJO at 3818 and an eye on the sub-indexes as well as the big caps. They have a chance next week of giving them a nudge if not pushing through. If we can get that and IF we can get a higher low come late April/May that's going to be some sort of signal for tech traders that look forward rather than worry about yesterdays news.

That was your chance Junior.

All the way back in fairy land when the world was a happy and wonderful place where you could just bend over and pick $100 notes off the ground I started to call for the end of the Bull market. That was only one and a quarter years ago. Little did I know then that we where about to fall straight into the biggest and nastiest bear market the world has seen since my Grandfather was trapping rabbits for food and gold panning washed out creeks for a way to survive the great depression.

What a lost opportunity that was. I will be surprised if I see such a movement in markets in such a short period in a very very long time. So yes yes as a trader that's just another amazing trade not taken. But what is ahead? Where to find the next great trade. I have been bullish since the start of March looking for a Bear market rally and well we have had a ripper but will this turn into something more? Are the lows we put in at the start of March the lows of this generation of punters? Yes I know the economy stupid. I know unemployment has a long way to go and this and that. But the stock market isn't the economy now. Its the economy in the next 6 to 9 months. Like at the top the share market topped out way before the economic numbers started to roll over. I expect the same on the way up. That the market will have hit a low and already put in a solid 20% to 40% rise before people are thinking well this might not end in a depression.

So what we need is some evidence of bull markets. We need some of the basics, higher highs, higher lows. We need some leadership from sectors. We need something to hang our bets on if that's what we are going to do. So I'm looking for this evidence now. Not after another bull has bolted, too far. Will post some findings here soon.

Wasting time learning more??

Here's another great post from Brett Steenbarger,

The Power of a Single Premise

Consider what your trading development would be like if you accepted the simple premise that, in some measure and on some occasions, you are already the trader you wish to become.

What if, at times, you already recognize market patterns, generate solid trading ideas, and manage risk well? What if you don't need to work on your trading problems at all and, instead, simply need to harness the influences that enable you to trade well?

What if everything you need to succeed is already part of who you are and what you do? What if the only change you require is to become more consistent with your strengths and competencies?

Would you still seek out advice from gurus? Would you still look for answers in the latest indicators and systems? Or would you devote yourself to becoming the best you can be--enacting the best within you--confident that the answers you seek have been part of you all along?

I cannot emphasise enough how much this post captures the basis of trading well, to me. That you don't need more stuff you just need to practise what you have. That the endless search for market knowledge is wasted time. You are better taking what you know and testing and practising that to death. After you have the basics everything else is just another layer of wasted complexity. Whats required is working on your strengths - niche development.

And I bet if you take what interests you and what you know you can do well and test and practise and refine it with real honest review you would not need any more gurus or indicators. You would have enough to work on to stop you wasting time on the search for the holy grail.

Further more nothing will motivate you and sustain your drive and attention like your own creations. Your own little baby. So here is a practical little exercise to get you going on the birth of your little baby. It's the what I like/dislike about myself. It's a good technique used by shrinks to pick open problems but very helpful to open up your trading.

Grab a nice big sheet of paper, make two columns and on the left put everything that you like about your trading and on the right everything you dislike about your trading. For example,

                        Like                                                                      Dis-Like

Quick to execute trades                                                Lose interest with slow trading

Excited about intraday trading                                       Over leverage my trades

Good with back testing for stats                                    Waste capital on unplanned trades

Good at trading the open on the futs                              

Something that may help is pulling out old statements and charts of trades, both good and bad, to jolt your memory. Don't get too down on yourself about the dis-like column, shit happens. The point is to pick the good stuff and get excited about that. To find your niche and work it. At the same time don't throw away the dislike column either there will be some good stuff in there to work on, at some time. But you don't need to work on the D word, see last post, you need to build on your strengths to succeed.

F'in Discipline

If you are going to send me an email don't in any way put this word in any part of the email,

                        DISCIPLINE

Its banned until further notice. Answer me this,

You & your partner are captured by Somali pirates. They give you the opportunity to go free if you can shoot an apple off your partners head with a pistol from 10 meters. A Jeannie turns up and grants you 1 of two things. The mindset to perform the task calmly OR the skills to shoot an apple from 10 meters,

Which one will you take? Shootings skills or a calm approach to blowing your partners head off???

Its all bullshit, the discipline line. Its not your problem, its lack of skill OR lack of proper planing OR just lack of understanding of markets.

All three can be worked on by SKILL development and matching of your talents to your application.

Quieter times?

Is the market changing? As you can see from the chart of the Australian XAO the weekly range started to go nuts at the end of 07 and made some truly extraordinary moves through 08. But what can we expect of 09? If you trade intraday I am afraid that last year was probably as good as you will see for some time, maybe for your lifetime! All that leverage has been cleaned out and not likely to come back for some time.

As the chart shows we are still at elevated levels, making higher lows. That's an up trend. But I will be watching this chart for clues. Are we about to fall back towards the "norm". If so it would be wise to know it and adjust trading targets and stops appropriately.

 

The funniest Google street view picture

I haven't posted for a while and this has nothing to do with trading but it is very funny. In fact is this the funniest Google street view you have ever seen? I was at a friends house (Dow street, Port melb, Vic) looking at his house on Google Earth when we decided to see what was down a near by Lane. Bugger me this is what we viewed!!

His neighbor on the outside crapper with the door open!! Classic!

 

 

Check it out yourself here

EDIT: Maybe Google can add a new service, Poogle View.