Posted on August 15 , 2009 In Weekly Updates

Calibration

The Almanac update for this coming week is a bullish Monday, Tuesday, and Wednesday.  The last five August expirations have been bullish (with the exclusion of 2008).  As far as this set up goes, I think that usually August is a pretty weak month, and that rolling into expiration, the market gets a good bounce.  The market today is very extended, but is still in Bullish mode.  Last week we broke the hourly 50 SMA several times, just to rally back over it.  The 1000 level in the ES is acting a bit like a boomerang, every time the market goes too far on either side of it, it snaps back.  The high of 1016 was tested on Thursday and failed, giving rise to the Friday sell off, only to snap right back up in the late afternoon. Enjoying this chop?  Don’t forget we are still in bullish mode until proven otherwise.

What do we do as traders?  Do we sit and think about the market and what it may do, weighing all different kinds of technical and fundamental information? A great saying by an unknown author said “Slaves predict, Kings react.” You do not have to know what the market will do, in fact its a total waste of time and energy to attempt it.  You can tell amateurs by there constant opinions on market direction with specific facts that make it a deterministic argument (i.e the market is going down because economic data 1, 2 and 3 say so).  Become a reactor, become a professional.  Let the market decide what you are going to do, and just go with the flow.  As a professional, you just know what to do, there is never hesitation.  In other words, you have Calibration.

Calibration is acquired through acting out repeated practices under uncertainty overtime.  So say you go into the market knowing you will use a toolbox of indicators to evaluate it.  At this point, you create certain setups that will give you a statistical edge overtime through their execution (i.e. a pullback to the 34 EMA with MACD confirming the trend instigates a trade in the direction of the trend).  You watch the market and react by trading your setups when they occur on whatever time frame you have chosen.  Overtime, you Calibrate to the market and these setups, and you move into the world of a professional.   There is never a moment when you are uncertain, there is never a moment when you have doubts, and you know what to do in all situations and have complete faith in your ability to cut losers short and let winners run.  In fact Warren Buffet has one of the simplist setups in the world that anyone can copy (if they have the discipline that is).  He buys when everyone is scared and sells when everyone is greedy, he doesn’t know what the market will do, but he knows its a sound strategy to follow.  Sounds nice to be a pro doesn’t it?  There is a catch, the market becomes boring!  Your mind has nothing to do because you know exactly what you will do under uncertain conditions. Your mind cannot think about the future, huge profits that may come if you nail the market exactly right, or all the accolades you will receive when you get the big winners.

So if you want to become a professional, the market may get a bit boring for you overtime because you Calibrate to it.  There is one more saying that I firmly believe in: “Whats the difference between Boredum and Bliss? Attitude: in both situations you are just sitting around doing nothing!” So if you want trading to be blissful (and drop all the excitement, uncertainty, anxiety, and depression), change your attitude and come on over to the pro side.

Love,

Lucas

Posted on August 8 , 2009 In Weekly Updates

The Crowd

“The CROWD is always wrong at market turning points but often times right once a trend sets in.  The reason many market fighters go broke is they believe the CROWD is always wrong.  There is nothing further from the truth.  Unless volatility is extremely low or very high one should think twice before betting against the CROWD.”

This week’s update starts with a quote from Shawn Andrew who rightly observed something that we are currently experiencing.  I am sure there are countless numbers of you that have observed, and observed rightly, that the economic situation stinks, this rally is mostly hype, and there are serious signs of a top forming (VIX not making new lows as the market makes new highs, overbought indicators, etc).  Yet if you have shorted, you have had your hat handed to you, and probably pretty painfully.  This shows the importance of having non-subjective indicators that you can rely on to show market sentiment.  You could have chosen the hourly 50 SMA for this rally and been saved from shorting this entire up move.  This market has yet to close below it in weeks!  Do not let your own intelligence get the best of you and remember this quote from Shlomo Riskin as well: “When your one step ahead of the crowd you’re a genius.  When your two steps ahead, you’re a crackpot.”

August used to be one of the best months for the stock market seasonally speaking because it was harvesting time.  Since 1988, August has been the worst Dow and S&P month since 1988.  This week coming up we have a bearish Tuesday and Thursday with a bullish Friday.  The Almanac also says that mid-August is stronger then early August.  Like I outlined above, this market is definitely itching for some kind of pullback, but for now all we can do is wait and be patient.  Today’s poster is in honor of the employment report.

Best of Luck and Love,

Lucas

Posted on August 1 , 2009 In Weekly Updates

The First rule of Fight Club is…

This week coming up has no Almanac readings but warns that the first nine trading days of August are historically weak.  Successful stock speculation is about risk management, and this market has some very “toppy” risk to it at the moment.  One thing I catch myself doing at times is trying to catch each and every move instead of focusing on the significant ones.  There is this tendency to want to be in on the up swing, out on the down swing, then in again when the upswing resumes, but Jesse Livermore has some good advice on this subject that I want to remind you of here:

I have been short one hundred thousand shares and I have seen a big rally coming.  I have figured and figured correctly that such a rally as I felt was inevitable, and even wholesome, would make a difference of one million dollars in my paper profits.  And I nevertheless have stood pat and seen half my paper profit wiped out, without once considering the advisability of covering my shorts to put them out again on the rally.  I knew that if I did I might lose my position and with it the certainty of a big killing.  It is the big swing that makes the big money for you.

(Reminiscences of a Stock Operator by Edwin Lefevre)

I wanted to post this quote because I think most of the losses I have incurred in the past have been from correctly appreciating a situation, but not having the patience to go about it the right way.  This rally is getting on many trader’s nerves (Slope of Hope has been a bit depressing of late) because it just doesn’t seem “right.”  Regardless of what you hear in the media about computerized trading, front running or the PPT, the market is still the same animal that it was back when Livermore used to trade.  The same emotions are still at play.  This bull run we have had is showing signs of topping, but those are only signs.  You do not get out and set up your hammock on the side of the road at the first sign that says “beach: 20 miles.” Big moves do not start or complete in a day, and this bull run could have some more legs, even into the end of the year (those headlines would be hilarious: 2009 Massive Recovery: We Are Saved From Ourselves!).  Have patience, and when the time is right, have the gusto to sit tight!

One more thing I wanted to share was a thought from a movie I re-watched recently, Fight Club.  I own it, but hadn’t watched it in quite awhile.  The movie is a dark look at enlightenment, but one thing stuck in my mind that the two main characters mentioned near the end of the movie.  Tyler Durden was telling Edward Norton’s character that he is everything that Edward Norton’s character is not: “I look like you wanna look, I f**k like you wanna f**k, and I am free in all the ways you are not.”  I started thinking about what my opposite would be like, focusing on the word “free.”  I recommend watching the movie, its fantastic, and afterwards think about this line.  If you could create someone who was free in all the ways that you weren’t, what would they be like?  Furthermore, what is preventing you from being free in those ways today?  Why can’t you be free from the things that cage you right now?  If not now, then when?

Sitting Tight,

Lucas

Posted on July 25 , 2009 In Weekly Updates

Mastery Released!

I have provided a direct link below as well as a link on the sidebar of the website to the new static content article “Mastery.” This was one of those articles where I had a few pages written, but decided to toss it all out and start anew. I am glad I did because it just flowed! I would not recommend reading it casually. Either print it out or dedicate some time to go through it thoroughly as it’s quite long. As always, any feedback you leave is appreciated.

For this next week coming up the Almanac gives three readings: a Bullish Monday, Thursday, and Friday. Its tough to tell whether these will play out because this market is pretty overbought, but nothing says it cannot become even MORE overbought. I would say continue to lay off shorts until there is a decisive signal that gives a reason to short. I broke this little rule earlier in the week to my own detriment. The broadening top pattern mentioned last week may be a bit overshadowed by a inverse Head and Shoulders that everyone seems to be talking about. Lucky for you, you do not have to worry about this because you only trade what the market tells you to right? This market is saying it is going up for now, and short traders beware. I always loved some advice I got when I first started trading and I will share it with you now: Don’t short rocket ships and dont catch falling knives. This market is on rocket fuel, and whether that is Government Sachs or just plain mania, don’t short the rocket ship. The Almanac also warns to beware the “Summer Rally” hype as summer rallies are the weakest of all seasons.

Today’s funny picture is about seizing the moment, very apt to trading!

Mastery

Have Fun,

Lucas

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