The Almanac reading for next week is a bearish Monday and Friday.  It also says that Friday has a history of huge gains.  Perhaps this next week will give the breakout that most people have been waiting for.  I don’t have much to say about the markets this week.  It has chopped around and around within this box formation.  Until we get a breakout, there is nothing much to report.  I do however think that if the breakout comes before the end of the year, it will probably be a fast break to the upside, and then a quick reversal.  This market is not rewarding breakouts at all, in either direction.  Keep that in mind.

There is this weird thing that I have experienced and I am sure everyone has also experienced it as well.  It is this hesitation to get into a trade.  Your mind recognizes one thing, but for whatever reason, you choose not to take the trade.  Usually there is an element of fear involved.  Many books have talked about this hesitation to place trades, and how it is not a desired attribute for a professional trader.  If that is true, then why do people still hesitate?  Why do people do anything that they know is not good for their trading in the long run?  Our minds are wired in a way that tends to sacrifice long term goals for short term rewards.  History is littered with examples of this behavior, such as when Mesopotamia overused their crop fields to the point that salinity ruined their future crop yields.  It is in our very genes to resist change if it seems harmful, even at the expense of long term survival.  These kind of facts fascinate me because I see them in how I act.  I swim probably five times a week, and have been for a few years.  Yet probably at least once or twice a week, some thought comes in and says “yeaaahh, why not skip swimming today?”  I know it is good for me, I have ample evidence that it is good for me and that I enjoy it, so why this continued voice?

In trading, we hesitate and do all those things that are not good for our long term results because in actuality, it sometimes works.  It does not work often enough to be consistently successful (unless it is one of those historic periods like the Internet bubble where foolery is rewarded for years on end), but those times that it does work, that part of our mind that operates on the short term time frame is strengthened in its resolve.  Think back to those times that you have gone through a large change, where your lifestyle and circumstances have changed drastically.  Was it so bad after a few months adjustment?  That is another quirk about us humans, we adapt fairly quickly to events that we would do almost anything to avoid before hand.

Put these two things together, and you can see a genetic and cultural strategy that has enabled our species’ survival.  Stark resistance to change, even sacrificing long term survival for keeping the status quo, and fast adaptation to new circumstances, even if they were perceived as being all but hell one earth.  You can take these two facts and now look at that urge you feel to take short cuts you know sacrifice your long term potential.  See those urges to hesitate, jump the gun, not exercise or eat correctly, and recognize them as your mind acting out an old pattern that used to keep people alive in the Savannah.   Embrace the second part of this equation: the ability to adapt and accept situations that seem terrible before they happen.  Then your life will change for the better.  You will gain a confidence in yourself to adapt to any situation, no matter how dire.  But you have to be willing to change constantly, never becoming static.  If you do not, then your mind will build up resistance to change and eventually you will suffer.

Think about this over the weekend and let me know what you find,

Have a great day,

Lucas

Wow what a week right! The last three days were crazy cool! Three gap ups, each running and making new yearly highs on the ES, and then each failing with Friday being the most spectacular failure of them all. I made a tweet earlier this week saying that the next couple weeks had nothing but bearish signals in them on the almanac. Next week, the almanac reading is a bearish Monday and Thursday. This market has definitely “lit the crack pipe” as Brad would say on Shadow Trader. If you were able to get through this week with minimal losses, you are to be commended. It was definitely difficult to hang on to both shorts and longs unless you were a long term trader.

That being said, I have a cool comparison at the bottom of this post. There are three similar looking charts that need a bit of explanation. The top is the ’29 crash on a daily chart, the middle is Friday’s market action on a 5 minute chart, and the bottom is the September 2008 crash on a daily chart. See the similarity? I put some white dots to guide your recognition. The first dot is the high, and not really all that important (but newbies seem to think it’s Panacea in the flesh). The market falls on selling pressure from there, and limit buy orders are triggered that temporarily shift the order flow to the upside, represented by the second dot. Then comes the crash as any remaining buy orders are knifed through and the order flow gets pounded by sell orders in a chain reaction. Eventually the bottom is hit at the third dot, at which point this weird type of rally occurs. It is a slow grind upwards that simply represents a lack of any more sell orders. At a certain point this ends at the fourth dot and selling resumes on a more orderly scale down to the next intermediate bottom at the fifth dot.

I am showing this because I think it is really cool, but also because it details a lesson. If you read many blogs, everyone ‘knows’ that Goldman Sachs, often dubbed ‘Government Sachs,’ runs the market.  This is often good justification for decrying what manipulative, greedy bastards they are.  I will not deny these charges: I am sure they use illegal and underhanded tactics to make money on a constant basis (they have to carry guns around for God’s sakes).  However, as individual traders, we can learn from them.  If the rumors about them are true, then I have their attitude pegged as “predatory” in nature.  To make money, they have to take it from others, and while Goldman uses the government and other often despised tactics to do this, their perspective is one that you should adopt.  When I read other blogs and the comments, I see this attitude of “I would be right if it weren’t for Obama/The Fed/Goldman/etc.”  These traders are so concentrated on themselves and their own opinions that they never open their eyes.

If you want to be successful, you need to become like Goldman.  I do not mean break the law, lie, cheat, steal, or hurt others.  I mean you must adopt their attitude: the way to “win” this game is to be on the other side of the losers. I put win in quotation marks because you cannot really ever win in the market.  Remember the saying “you can beat a horse race but not the horse races,” or “You cannot beat the market?”  These  quotes are saying that you cannot win, which would appear to be terrible news right?  Wrong.  It points to a basic truth that you must understand to reach the next level in your trading.  You can never win consistently, you can only let others lose consistently against your positions. Ha! Sounds like complete crap right?  I am sorry if I am being obscure but you must understand this if you want to make money.  You cannot make the money on your own, you cannot figure out where the market will go, predict its movements, or do anything you have  been led to believe you can from all the advertisements.  All you can do is watch, and wait for other people who are “smarter” then you,(who can do all that stuff you realize you cannot) and take the opposite position they do.  They will give you their money consistently until they either do not have anymore, give up, or figure the truth out.

The market is a giant game of taking money from the “smart” guy.  He is the guy who stays up late at nights, going over the same charts hour after hour, and trying to validate his self worth to anyone who will listen.  Let him do all the hard work, just know that he will be wrong eventually, and consistently, and take the opposite position.  Become Goldman Sachs; think like they do.  When you look at the market, know that it is your domain. You can calmly wait for suckers to bring you their money.  You may not have Goldman’s power, resources, or history, but you don’t need it.  That guy who you are taking money from really isn’t all that smart, and he always shows up again with plenty of money to go around.  He is forced to by the self inflicted slavery he suffers under. That comparison graph shows that while the market may very well be manipulated, most of those doing the manipulating are doing it in the same way they have been forever.  If you can just forget your “self,” it is so easy, but you have to open your eyes and really watch the other market participants.  There is tremendous power in just looking, and listening.

Love,

Lucas

The Almanac reading for next week is a bearish Monday and Friday and a bullish Tuesday and Thursday. Kind of like a bear Oreo! This last week was interesting. We definitely had some huge movement on the holidays because of Dubai. I am going to jump right in with a market/philosophy lesson, skipping my usual market look over.

If you have not read George Soros’ The Alchemy of Finance, you should. A lot of people complain that it is a bit cryptic or hard to follow, and I will definitely give them that point. However the overall message rings very true on how markets work.  The premise of the book is that economists are wrong in their closed system models of the market.  Most economists think of the fundamentals, and then people making decisions from those fundamentals.  Soros says that the system is circular, in that there are fundamentals, people make decisions from those fundamentals, and then these decisions  change the fundamentals.  You can then have self sustaining processes where your actions confirm the fundamentals.  From this you get the boom and bust cycle we all know so well.

One of the points I take away from this process is something he says about how the underlying trend is usually tested, and if this test is passed, the trend resumes.  So for example, the market will run up, then stall out and some kind of event will occur that causes a sudden fall in prices.  If the market recovers, this can then propel the market to the next leg up of the trend.  In this way, trends are challenged, and with each challenge, they become stronger.

So in my mind, there is this time element with the markets.  Depending on the market environment, the time element can aide the bull side or the bear side.  At the moment, as crazy as it may seem, a ton of financial advisers and money managers are not in the “fully aggressive” basket of their allocations.  They do not trust this market for good reason; the fundamentals are horrible and PE ratios are no where near indicating the start of a new bull market.  The way I see it, the longer we chop around and do nothing, the more the time element works in favor for the bulls.  The longer we go without seeing another dip, the more those money managers are going to start to feel safer putting money on the line.

I said a few weeks ago that a certain week in the market was going to tell us whether the rest of the year would be choppy and slightly bullish, or bearish.  The big guys did not come in and sell so I said it would probably be a choppy mess.  So far so good!  This Dubai incident will tell us a lot about how the market is reacting to tests of its underlying trend.  So far, nothing is indicating that the bulls are liquidating en mass.  With that said, I think a nice correction, maybe about 100 SPX points would really be good for the market’s underlying trend.  However it will not be the blood curtailing  plunge we saw about a year ago.  Those kinds of plunges will probably not happen again for at least another year.  Any down move will be choppy, as the selling will just outweigh the buying.

I would say that option premium will probably start being a very lucrative trading vehicle.  Selling premium on both sides of the market, especially the bullish side, will net some positive gains if you can sit on it without panicking out.  Tilt all your option spreads to the bearish side in case there is a plunge, but do not expect a crash up.  I will probably start putting on some verticals next week to the bear side.  Whatever this market does, it is not going anywhere fast for now.

Happy Thanksgiving,

Lucas

The Almanac is interesting for the upcoming week. It is bullish every day that the market is open. It says to get long in the weakness of the prior week and then cash out on the strength of this upcoming week. I have seen this phenomenon before. The volume is epically low, so people think the market will be dull and listless, only to find that the market gets pushed up incredibly violently. Check out the last few days of 2008, or more recently labor day last September. Don’t be surprised if the market gets tossed around quite a bit this next week; it will be easy to move around.

One last note, Thursday of last week was violent, and I think it bears a significant lesson. Ultimate tops, significant swing points, or whatever you want to call them often happen right when the market makes a great set up in the opposite direction. Jason Alan Jankovsky covers this in his 28 Rules book (check out the recommended reading section). Wednesday looked like a great buying opportunity. The market had run up and was trading in a tight range, and by the end of the day, all losses were rallied off. It was easy to see the market gaping higher the next day and continuing to run. Thursday rolls around and WHAM, all of a sudden all the bulls try and exit at once. I recommend reading Jason’s book, he points out that the buy signal (in this case) must come into play so that the longer term traders who are selling can enter. You can see this on all kinds of different time frames: for example a sell signal on the 15 minute charts is actually a buy signal on the hourly. Check it out.

One thing I want to cover this week is the difference between understanding and memory. We often take for granted this difference, but it has some trading implications I want to dive into. Memory allows us to see a string of symbols, a picture, or whatever, and then regurgitate (isn’t that a great word?) that information later. Understanding is similar to memory in that we can regurgitate the information, however with understanding, we know the information in a way that allows us to use it in creative ways.  The simplest example is where we have memorized a shape and can see it in our mind, and that’s it.  With understanding that shape, we are able to rotate it in our mind, and see it from different directions.  This is really what separates us from animals: our ability to understand the abstract.  Some people say they are not creative, yet they use their creative capacities all the time when they take something they understand and see it differently in their mind.  Just rotating a shape in our mind in a way that we have never seen before is the definition of creativity!  It did not exist in our mind that way until we made it up.

This applies to trading in drastic ways.  There is a huge difference between memorizing a certain pattern and being able to identify when that pattern is present, and truly understanding the pattern.  There is sage advice offered all over the place saying that when you start trading, you stick to one pattern, one or two time frames, and then trade that over and over again.  This is supposed to teach you discipline, the ability to follow a system, etc.  What this really does is move something from memory to understanding.  The sad fact for the newbie is that he will never make any money if all he can do is identify lines and shapes, and then think “down” or “up.”  Traders who understand their systems are able to take it into their mind, rotate it, change it, or anything else they want.  When they look at the market, they are coming from a place of understanding.  Often the newbie is on a quest to find the best memorize-able pattern that will just work for him.  Understanding and creativity can be tiring, and often our ability to utilize them is directly tied to the amount of energy we have.

Think about yourself, how much of what you do is memorized and just regurgitated (there is is again!).  Can you expand your understanding?  It can be tough because it requires more work, but it is definitely worth it in the long run.

Love,

Lucas

P.S. I am not sure whether to laugh or cry at this picture.