I've been busy wrapping up a few things I've been working on and haven't had much more to say. I considered the top of the flag in the ES at 1992 to be a shorts-are-in-trouble inflection point and the 2034 bottom of the 8-month range to be a short-are-toast line in the sand. I'm not all that surprised at the rally but if I had conviction this was going to happen I would have bought and held the Oct NFP reversal. Clearly, that was the game changer that scared the shorts and empowered the bulls, but all I've done is traded a few short-term moves.
Let's be clear about the narrative, though. I read an article saying how the China stock market was the reason for our big breakdown in August, but I would give that reason a 0% weighting of why we broke down and a 100% weighting to the fear of interest rates rising. The China stock market was booming for months while we were in a range and it was busting for months while we were in a range. It was all about the Fed.
If you asked 100 traders if they thought a 25bps interest rate increase would have any economic effect, I bet 100 of them would say no. So the fear is not the actual rate rise, it's a fear of whether enough other people would be afraid of the rate rise. And that uncertainty prevents confidence when breaking a market out and that lack of confidence is a vulnerability that allows shorts to cap rallies and over time enough of the positioning changes sides and gains confidence and a trendline emerges as we enter the time frame it's possible for the rate rise that the Fed has pounded the table about all year and boom, massive selloff. 0% about China, 100% about the Fed.
It's a central bank driven rally. Easing made it go up, tightening will make it go down. And I don't necessarily mean right away. For example, right now would be the perfect time for the Fed to raise rates. The shorts just got rolled and the perma longs just got an opportunity to build a cost basis way off the highs. A selloff now is not likely to sustain downside action. It would take time to reset the positioning, imo. So if the real reason the Fed chickened out was because they're afraid to pop their bubble, which they should be since their whole plan is based on a "wealth effect" then there will not be a better time than after the obliteration of shorts. Do I think they will do it? No.
I've been tracking this dollar consolidation for seven months now, taking short term trades but essentially waiting for the central bank fuel, and the ECB delivered on Thurs, but it's terrible timing with the Fed on Wed, GDP on Thurs, and NFP next Fri, so there could not be a more turbulent set of events lined up right now.
Personally, I bought the dollar on Thursday post ECB but I will be selling half before the Fed. This could either play out perfectly, or be a nightmare. Technically, we closed the week at the trendline. A high percentage of significant breakout trades will return to backtest the breakout area, so if we breakout and see a price extension on Mon and Tues into the $98 or $99 level it will be an easy decision to take off half, or more, before the Fed and look for the dollar to get crushed on Fed day and possibly GDP day as well to backtest the trendline break. If that happens, I'm thinking it gets bought up and closes the week strong and off we go, assuming GDP isn't zero.
The nightmare scenario is if we sink back down away from the trendline heading into the Fed. I will likely close the whole position and start over. No one thinks the Fed is going to raise rates on Wed, so it's really just a matter of whether the big buyers step in post Fed or post GDP and whether it's supporting a trendline backtest or making a breakout from within. As long as GDP isn't way below expectations, I think a Fed on hold and an ECB projecting dovishness for December will lead the pair toward parity. But I also think you have to be really careful with the unfortunate timing of news events coming up.
Dollar monthly. The end of Oct is Saturday, so if the dollar breaks out and closes strong, picture what the breakout bar and the chart will look like.
Dollar weekly right at the trendline.
EUR/USD weekly just below its trendline.
ES weekly backtested its trendline breakdown. I'm sure more shorts got washed out, but the COT report as of last Tuesday still showed a huge net Spec short position. Even if a lot of it is a hedge for a long equity portfolio, it still exists, and no one wants to lose on their hedge forever. I would think a selloff would give them an opportunity to buy em back. Again with the crazy news events coming up, but I'll wait at 2037-ish but with Apple earnings on Tuesday it might go higher first.
Check out Apple on the weekly. It basically formed a big head-and-shoulders pattern and is backtesting the neckline breakdown at $120. At this point I would think any earnings that aren't zero will be an opportunity for the longs to put a nail in the coffin of the shorts. A head-and-shoulders is a pretty powerful pattern, but it's just as powerful in the other direction when it fails.
Regardless of the actual earnings number, if they break this market up huge on Tuesday, I would think the overall NQ and ES longs would have to unload into that. It's straight up.
Oil and gold broke out, ran a bit, and then reversed. I kinda suspected that. Unfortunately, I traded the long part and never flipped back around. The reversal day in oil couldn't have been more obvious. I dropped the ball on that one.
Oil daily came all the way back. I can't imagine this sustaining upside with fundamentals the way they are and a potential dollar breakout. But I can't short it here. It needs to breakdown through the trendlines and then backtest and reverse for me to be interested.
Gold will obviously be affected by the big news events. This is why I tend to trade in halves when I'm not confident in the move sustaining itself, or it's counter trend. I did well on the first half and gave too much back on the second half. There's really nothing I'm interested in here. I suspect gold will form a big triangle over the next month or so. The COT positioning for gold and silver is almost as net Spec long as it was when gold was near $1300 only now it's $130 lower. This is what I mean by the long side getting full on these bear market rallies. It will likely take QE for this market to sustain upside action. QE seems unlikely unless the stock market rolls over hard and they have to save it, so I'm expecting the metals to eventually breakdown again, unless, of course, the dollar reverses but with the ECB more dovish than the Fed, that doesn't currently seem likely.
Bonds tagged the downtrend line off the highs and pulled back then stopped at the 50-day EMA. I'm avoiding this space for awhile. If you must trade bonds I'd use that downtrend line off the highs as an inflection point. A breakout to the upside is a sign to backoff the short side. If you wake-up everyday and must short bonds, you could look to a loss of the 50-day, which is Friday's low or the next test of the downtrend line, but I'd wait until after the fireworks of these big news events. It should be noted that bonds have been making lower highs, so until that downtrend line gets taken out, shorts have hope. I'm not personally interested in shorting bonds. I rather long stocks. Close enough.
There are 3 things I wish for this world: the end of poverty; world peace; and a VIX permanently in the 20s. Probably in that order.
I love more active trading because I prefer to take half off as we go and reload, and the higher VIX makes for lots of bounces. If I try to hold the same position from the beginning to the target, I end up making stupid decisions, so it's really just a way to protect me from myself. Otherwise I end up bailing out when I should be reloading.
ES daily. The SPX double bottom was an easy decision to bail entirely on the short side. I even considered going long but didn't, except for a quick trade on Friday. While the "bad news is good news because the Fed can't raise rates" idea is enough to scare the shorts, I don't see the long side having the conviction to change the overall sentiment, which is "uh-oh QE doesn't work - the doomers are right." Meaning, the entire bull market since the 09' bottom was fueled by massive injections of liquidity and driven by the idea that the central banks have a clue of what they're doing. But they don't. And more people are starting to figure that out. If you want to make the argument that the market will rally in anticipation of more easing, at least that makes sense. But I think it's too early.
Those are massive reversal sticks on the weekly charts, but you have to factor in the context that it was mostly a short squeeze and not natural buying. Which means it will likely fizzle out. The big buyers never chase so usually what happens after a short squeeze is the market comes back a little the next day (even if Sunday night goes higher). I'm thinking around 1930-ish on the ES. Besides short-term trades, I will likely be waiting to see if the buyers can take it up to test the 50-day around 1978 in the ES, 1985 in SPX. That's where I'd like to take a shot at the short side for a longer play (if we make it that high). Hopefully, they give me an easy spot to get back in. At the moment we're in the middle, and I don't play middles, so it either has to come up to me, or I need to see the sellers step back in and push it right back down where I'd be looking to play the breakdown of the trend line off the August lows, or find another way in.
A break above the top of that flag at 1992 would make me stop shorting and question my view of the sellers in control, but technically a bounce could go all the way to the downtrend line off the highs and still be bearish.
SPX monthly. Ultimately, I think we're headed for this monthly uptrend line in the mid-to-upper 1700s. but it's a matter of how hard the bulls are going to fight.
Bonds daily hit the 160 trend line target and then some, but pulled back. I'm likely not interested anymore. I do think if equities resume the selling, hopefully after a continued bounce, that there could be a breakout trade above this trend line in bonds. But I'm probably just going to focus on the ES or NQ instead. It's kinda the same trade.
Gold daily reacted how you would think to the idea that the Fed is screwed and will eventually be forced back into easing. It stopped just shy of $1140, which is a very well-defined trend line that turned into a fake-out last week. I think this is a playable breakout and if it holds, I'm looking for gold to make it to the lower $1200s, possibly all the way to the next trend line at $1230-ish, although I'd be taking some off around $1180 because that's how I trade. I'm not a believer that the metals have bottomed, but a close above $1230 would go a long way to convince me, so until then I'm thinking of this as a counter trend bounce play, if it breaks out.
Oil daily is still going sideways and approaching the big weekly downtrend line off the highs from last year. A breakthrough that holds should run quite a bit. I'd expect a fight though. Check out the smaller inner triangle fake-out on Thursday. You always have to be aware of those fake-outs. Like gold, this will be very influenced by the dollar. Clearly, the ideal scenario is for the dollar to breakout or breakdown at the same time oil and gold break significant areas but chances are it won't happen together so you just have to be aware that things could reverse or amplify later this month when the ECB and Fed meet next.
Nothing to see with the dollar daily. It did recapture the 50-day on the last 3 pokes to the downside. And you have to wonder why it recovered so much on Friday. That is a sign of strength that shouldn't have happened. I'm expecting the dollar and the Euro to stay in these ranges until the central bank meetings, but I'm watching closely. If they break these patterns on fundamental news it should lead to a trending move for many months.
I was willing to grant the Fed a small window to attempt a token, symbolic rate rise for a few non-economic reasons, but mostly so they could say when we're looking back in a few years, after it all blows up, that they weren't the most irresponsible organization on Earth and they tried to raise rates but the market wouldn't allow it, so the fact that we hit another recession with their back against the wall and no choice but to go negative is not their fault. They tried. What so many people seem to be in denial about is there is never going to be the economic conditions for hiking rates, especially not a full cycle toward normalization. Those dot plots are delusional. That will never happen. A possible rate hike was only about whether they could pull off a one-and-done, or whether the market would let them do two, meaning how far could they get before they're forced to retreat. We can squabble over whether they actually had any intention all along to raise rates or not but the big game changer was the China devaluation in early August.
The broad trade-weighted dollar index actually broke its March $117 highs right before China announced their devaluation and it's currently $3 higher at roughly $120. The difference in this index is that it weighs the Euro at only 16% and the Yuan at 21%. Whereas the narrower currency-driven dollar index with a futures contract doesn't include China and the Euro weighting is 58%, which explains why it's still consolidating well off the highs as the trade-weighted dollar breaks out.
China's exports fell in July by over 8% and in August by over 6%, so if this trend continues I would expect the China devaluations to continue (overall), which will drive the trade-weighted dollar index higher even without the Fed raising rates. Not only are the Fed's hands tied because there is not an actual economic recovery taking place (can we please stop pretending the 5.1% unemployment rate means anything - seriously, put down the Koolaid), but with China entering the currency wars and putting upward pressure on the dollar, the Fed simply can not add fuel to the fire by tightening. And now that they openly admit this is a problem, even worse news for the Fed would be if the ECB expands its QE program. I'll get to the charts in a moment but this is one reason I can't give up on the idea of the dollar just yet. I thought the Fed would be the big catalyst one way or the other but it might end up being the ECB in Oct.
The other major bombshell from Yellen was the admission that they would even consider doing negative interest rates. The main reason I switched from being an inflationist in my end game outlook to a deflationist at the end of 2012 was the realization that the central banks would eventually run out of assets to buy so their ability to inflate the currency away had limits. So I thought the most likely outcome after they reached those limits would be a massive global deflation and the introduction of a new reserve currency like the SDR so all the countries of the world could devalue their debts overnight against it. And now that I write it, I still think that's the only inevitable option, but the path of how we get there might be drastically altered if the Fed goes down the road of negative interest rates. But that's getting too far ahead.
The "appropriate" response to the negative interest rate question should have been like that beer commercial with Colts coach Jim Mora when he said: Playoffs?! Playoffs?! Yellen should have stood right up and got that same twisted look on her face as she said: Negative?! Negative?! How crazy do you think we are? But she didn't. And that's very revealing.
So here's the thing about the dollar. Yes, it could be in big trouble. However, if the ECB expands in Oct, and the Fed hasn't admitted it can't raise rates, we could see a self-propelling loop where the Euro tanks, forcing the dollar up, forcing China to devalue more, forcing the dollar up...until the Fed finally has to return to the devaluation game. So the timing is the key. And this is where technicals will help. There's a very clear pattern in the EUR/USD and the dollar index. Most likely the resolution of these patterns will run quite a bit. But there's been a few false starts as the market tries to figure these fools out.
Dollar daily bounced off its 200 EMA and closed Friday strong. It now sits beneath the rest of its moving averages with a lot of room before any kind of action is forced.
The EUR/USD weekly chart closed back inside the range after breaking out and getting rejected twice now. The next ECB meeting isn't until Oct 22nd, so technically there is room to hold this pattern until then but the daily ranges would have to shrink and it's rare to go all the way to the end of a triangle. I've seen it before and it would be a dream scenario if it happened because a triangle this well-defined breaking out on fundamental news would be the most confidence you could possibly have taking a trade. One can hope.
The gold market acted how you would think with a dovish Fed, but it is approaching a well defined trend line of its own. A breakout through there opens the door to the monthly horizontal resistance at $1180, or the bigger downtrend line that runs through $1230-ish. I'm still thinking the long side of gold is counter-trend and short-lived but I consider these spots playable. You just have to be careful of the fake-out.
Here's what a bullish scenario would look like to me. First, the ECB has to not expand its QE, causing the Euro to breakout to the upside and the dollar to breakdown. Second, gold needs to break and hold $1140, $1180, and then $1230 without the trade becoming so full of Spec longs that there is no one left to buy. Next, the Fed has to officially announce they are no longer considering raising rates but instead of thinking about NIRP or more QE, which would likely require drastically worse data and/or a stock market melting down below last Oct's lows. Until then all long side trades in gold should be surgically executed and short-term, meaning take profits at resistance and look to reenter or even get short. Gold requires a shift in sentiment that creates incentive for the Commercials to believe they can hedge from higher prices because the Spec longs are returning with conviction so the depth of offers can lighten, which allows prices to rise on less contracts. I'm still more concerned that the Fed won't concede for awhile and the ECB will expand, but we will see. The dollar is requiring a super human level of patience but one way or the other it will pay off.
Oil weekly also has a well-defined downtrend line. Eventually, it will break and make for a great long trade, but it too will likely depend on the dollar. The correlations haven't been all that strong lately but that has a lot to do with the uncertainty of the dollar in this huge consolidation period. It's not like the dollar correlations are tick-by-tick or even day-by-day, but when the dollar has a strong belief behind it, meaning its trending due to central bank actions, the correlated assets will not ignore it. So in the short-term, until the dollar and euro make the next move known, oil's own fundamentals should be more important. Until proven otherwise, you have to assume this downtrend line will be defended by the spec shorts and the commercial hedgers, pushing oil lower, unless the dollar breaks out of its range to the downside. In terms of oil's fundamentals it sounds to me like the level of production needs more time to slow down before the demand will outstrip the supply and cause it to bottom.
Bonds made a strong post Fed move but this too will be influenced by both equities and the ECB. Equities is obvious but if the ECB expands their QE and causes a dollar breakout to the upside it will cause China to devalue more which means selling bonds. I don't know who wins between a flight to safety bid and possible China selling but when you look at the bond chart you have to notice that it put in a lower high and is now making its way back to the downtrend line. It's also overbought on the short-term charts so this is one of those times when if it happens to pullback and setup a low risk intraday entry to the long side, I would take it and try for the test of the downtrend line just over 160. At that point I would play a breakout of that downtrend line, or not be involved. Only because I'm not into shorting a 30-year bull market in a time of potential sustained equity weakness.
ES daily did its usual nasty thang, breaking out of the flag on dovish news but reversing at the 50-day EMA to the tick and closing back into range at the bottom. Even though it was a good 20 points away, I consider this the backtest of the 8-month range due to how it transpired as sellers capped dovish news, which makes perfect technical sense. I did bet my life it would happen, although, 10 points short of where I thought it would go, which I already factored in 10 points short of the actual level, so maybe it's a stretch but it's not like it has to touch the level to the tick. In fact, coming up short just shows weakness. This market should not close above the top of the flag at 1992 anymore if the sellers mean bidness.
If you're a bull you have to be asking yourself why the reversal when the Fed, if anything, was surprisingly dovish and the flag broke out to the upside in options expiration week? In a bull market, bad news gets bought up. In a bear market, good news gets sold. It's just about the positioning, the sentiment, and who's in control. The actual prices are fairly meaningless.
It pretty much went how you would think. The weak shorts got flushed out into FOMC like they always do, you had the surprise dovish breakout, and then the big sellers showed up and made everyone their bitch. So you have to assume the sellers will show up to cap rallies and keep the pressure downward from this point on. We are a bit oversold on the short-term charts, so a rally, even almost back to the top of the flag shouldn't be a surprise if it happens. But the sellers need to prevent a close above 1992 to stay firmly in control. If you're a bull you also have to be asking yourself what could possibly happen now to cause the buyers to regain control if they couldn't do it on a no-rate-hike-until-the-world-is-a-utopia Fed? I consider a breakdown close from this flag to be the official game on to the short side, potentially all the way to last Oct lows. And any close above the flag at 1992 would be a caution flag making me question why the sellers couldn't hold it down.
My comments will be brief because the extreme binary event of the Fed this week makes any kind of speculation on price movement impossible. I personally believe the Fed desperately wants to get off the zero bound, but there is no economic reason to raise rates, and there won't be, so the longer they wait the less chances they will have. While I have no idea if they have the guts to pull the trigger this week, this is the first Fed meeting all year where it's at least possible. Maybe they pass now but she clearly sets up October because one thing is for certain: they've done the world's worst job at signaling their intentions. One thing Bernanke did well, and I can't tell you how much it hurts to say he did anything well, but he was easy to read. I knew what he was going to do before he even thought it. Yellen, on the other hand, as a woman, is an impenetrable enigma wrapped inside a mystery, spraying a cloud of ink like an octopus everywhere she goes. Like, what do you want, baby doll, just tell me what you want. Why do I always have to figure it out? (I might not be talking about the Fed anymore.)
If they do raise rates, I'm thinking they already have the ECB and BoJ on deck to expand their QE in October. Personally, my strategy if I was the Fed caught in this self-inflicted box, I would spray another ink cloud about how it could be any meeting now and arrange with Draghi to increase his QE first, causing a massive equity short squeeze, and then raise rates in Oct with stocks at higher prices and shorts licking their wounds. But chances are they aren't thinking like a trader. So in lieu of a bold prediction, this is such a binary event that however prices react should have follow-through. And I don't mean the instant knee-jerk reaction, but once the bots settle down, meaning, particularly the weekly close should be revealing. It might be easy to figure out right away, or maybe it takes till Friday. But there are patterns to watch.
Dollar daily.
I ended up getting completely flat and will stay that way, barring a day trade, into the meeting. I prefer to trade the dollar long but I won't be fighting the market if it doesn't like what she says. I was hoping the dollar would make it to the top of the wedge before the meeting but it curled over due to struggling equity prices.
The Euro is technically sustaining this breakout but nothing matters with Fed day a cometh. If I have to abandon the dollar long ship altogether, I will go with.
I have nothing to say about gold, except that I expect it will be straight-forward. Raising rates would be bad. Staying at zero could see some buying, which would be short-term, imo. Gold is going lower in the bigger picture. I have no interest in the long side of the metals (except a short-term opportunity) until the Fed starts talking about more QE, and I don't believe that will happen until next year.
I will say one thing about silver. IF the Fed raises rates, keep an eye on silver Thursday night, especially at the China open at 9:30pm eastern. Probabilities would be higher than normal for a thin market smackdown.
One major note about the ES. The Large Specs haven't been this net short since mid-2012. The Small Specs haven't been this net long since before that. The VX longs are also at an extreme. This is a recipe for a big move. Someone is going to lose big. If I knew the direction I'd be happy to tell you. I'm just going to respond to what happens.
*Adding this after seeing the Sunday night open with the ES now up 10pts. It should be noted that this is options expiration week, and there's been a lot of puts purchased during this selloff to suck premium from in a classic crush-the-VIX, squeeze-the-shorts, transfer-the-wealth type of move. Just something to keep in mind.
Oil has a nice triangle to play, but it looks like it will be forced to make a move before Thursday, though, so it could be tricky if the dollar makes a huge move. It would be nice if it breaks to the downside early in the week but holds the horizontal support at $43.20s and then moves back up to breakout to the upside on the Fed. Just a thought. More info needed.
Bonds weekly. In No Man's Land as far as I'm concerned. Nothing I'm interested in. Not until it breaks this giant triangle.
The dollar just put in my favorite reversal formation where it breaks down from a range, finds support, and then reverses back into range. It even closed in the middle as a weekly hammer. In fact, the level it found support at was the level I was tracking in the Spring at $92.50 which was previous highs on the monthly chart.
I still think the safest way to play it is to wait for the breakout which will likely happen along with the Fed on Sept 17th, but I snuck early this week as a starter position and I'm looking to buy pullbacks. I'm hoping for a spike down on NFP day or the next ECB day to around $94.70-ish. If this does breakout and the Fed raises rates, my target for the dollar would be somewhere between $115-$120.
Dollar monthly. $92.50 support.
Dollar weekly. Hammer time.
Dollar daily. Hoping for a pullback to add.
EUR/USD daily. A pullback would test the upper trend line of the triangle.
ES weekly. The degree of carnage on Monday was a bit shocking. I had no idea it would get that bad. It made me regret posting that dancing video because I'm sure some people got caught on the wrong side, so it probably got misinterpreted. I was just trying to express the emotions of both sides of a trade in a humorous way. Not the best timing. Sorry about that.
I still think we're going to test near the neckline of the breakdown around the 2020-2040 area, then we need to see how aggressive the sellers are and the degree of the pullback they can accomplish. We'll likely pullback first before going higher to test that neckline though. I'm flat now and will likely take some time off after last week.
I need to see the bears prove themselves before I have any conviction in the sustainability of the short side. I could explain with lots of words but this 20 second video sums up my concern:
ES weekly.
Bonds weekly. You have to be concerned that they didn't have much of a bid while equities were in freefall. And the whole China devaluation forcing them to sell treasuries is potentially trouble too. If the Fed actually hikes that could worsen the China unload as the dollar soars and they struggle to keep their currency down. So it's possible that bonds, which would normally be bid due to the fact that the Fed is tightening a slow economy and will cause a recession, might selloff due to China pressure. Not interested in either side of this trade until it becomes clear.
Oil daily. Oil finally saw some short covering from the Yemen invasion news and knocked out all the trailing stops beyond the 10 and 20-day MAs. I'm thinking oil will test the downtrend line off the highs around $51/$52. It might even poke through and get rejected. IF it does manage to establish itself on the other side, we'll talk. But until then I expect oil to roll back over once the weak shorts are flushed out, and especially if the dollar breaks out to the upside.
Oil weekly. No doubt it's a serious reversal candle. It's just a matter of why and how much staying power it can have.
Gold daily. Not much to say about gold. I'm hoping it strengthens into Sept so there's a better shorting opportunity. I caught a piece of this pullback but I'm just going to wait now. There will be a lot of excellent opportunities coming out of the Fed meeting in Sept.
Big bad bull fall down go boom. I think the official term inside the Fed is: uh-oh spaghetti-O's. Is there anyone out there who is still in denial about the value of technicals? Because there is no greater example than what just happened to stocks. And I'm not here to pick fights with anyone. There's a lot of different ways to trade. All of them can work with the right risk control and trade management. It will forever and always, with no exception, be about position size. Everything else is a guide to help you make decisions and give you confidence to make a trade, or stay in a trade, or cut it loose. Using technicals is not some holy grail of trading, but it IS grounded in the psychological positioning of the underlying players and it helps with timing and risk control because there are spots on the chart where your idea is either working or it's wrong. Essentially, it helps to protect you from yourself.
There are people who subscribe to all kinds of traditional philosophies that involve numbers and data points and all kinds of information like valuations and cash flow and earnings per share, and I'm not criticizing that approach in the least. I've always maintained that it's all about how you're wired and finding a method that works for you. But disregarding technicals can get you in serious trouble. In terms of using fundamentals, the biggest advantage of having a strong fundamental conviction is that it will keep you in a trade far longer than you would be normally. But the biggest disadvantage of having a strong fundamental conviction is it will keep you in a trade far longer than you would be normally.
There's a lot of people who have a conscious or unconscious belief that equity prices will always go up in the long-term, so they just keep dollar cost averaging every week of their lives. This belief gives them an insane tolerance to hold through vicious pullbacks and even market crashes. It's kinda the philosophy of the entire industry. And if you're looking at an equity chart a hundred years from now, they will likely be right to have that belief because the world's capital base grows over time as technology evolves. But thanks to the loss of restraint in the money supply when the dollar lost its gold backing, and the Federal Reserve's ignorance of its own policies, we don't live in a buy-and-hold world anymore. We live in a boom-and-bust world. And while all the major stock indices just put in major technical topping patterns, I'm not suggesting this is THE generational top because most likely next year the Fed will be back in QE4. However, it certainly could be, which is the whole point of respecting technicals in your decision making. Nobody knows.
If you want to know if you're talking to a perma-bull or perma-bear, ask them at what price they consider their idea wrong. If their eyes glaze over and steam comes out their ears like they never considered that possibility, you have a perma-view on your hands. Those people are heroes when the market is moving their way because they hold through all the crazy pullbacks, but when the market turns they never see it coming. And I'm not trying to be critical of perma-people either. Whenever I talk in universal terms there's always someone who sees their reflection and thinks I'm talking about them, but what's actually happening is a subtle form of mental vanity, which is in everyone, that maintains the illusion of separateness by solidifying the walls of the ego through the perceived and self-created feeling of being personally attacked. For the most part, I save all my criticism for politicians and central bankers. Fuck them. Other than that, what people do is between them and whatever you want to call the spiritual force that pervades this world. My point about perma-people is those temptations exist within us - to be seduced by an idea of forever-ness, so you don't ever have to change or make hard decisions. It's helpful to at least be aware when you might be under the influence of that temptation. Sometimes objectivity is hard. When you're under the influence of perma-thinking, you end up rationalizing away all the signs that were there all along if you weren't so blinded by your conviction. Ideally, the place to be is right in the middle of self-doubt and conviction, constantly holding up your point of view to any new information that threatens its validity. And have I mentioned in the last five seconds that it's always about position size?
I would also like to point out that the options market is always wrong when it matters most. AFTER Thursday's big selloff (after!), which took us to the psychological edge of the technical cliff from an 8-month trading range, the expected move for the ES on Friday was 14 points. And I'm also not trying to be critical of options pricing either, but it doesn't factor psychological inflection points into the prices. And I get the whole systematic approach that over time the implied expected move will end up bigger than the realized expected move and you can capture the difference and moments like Friday are the outlier events on the distribution curve. My point is there are times when you can reduce the number of outlier events you have to absorb by being aware that certain situations have a higher likelihood of blowing out the expected move because they are driven by the psychological pain point of a technical breakdown. None of the approaches to trading refute any of the others. Actually, I think combining them all creates a synergistic effect that puts you in the best possible position to maximize your chances for success. However, even by combining fundamentals, technicals, and the expected move priced into options, all of that is only like 20% of the recipe for success. At least 80% is the psychological battle of managing your emotions, which usually boils down to applying the proper position size at the proper time with the proper level of conviction.
Zero sum markets (futures, forex, and options) are essentially a wealth transfer mechanism from the weak hands to the strong hands. And I'm not suggesting that account size is what determines the weakness of your hand. It's actually leverage. You can be a billion dollar hedge fund and turn yourself into a weaker hand than the guy with a ten thousand dollar account by using too much leverage - the wrong size at the wrong moment that creates a small window to be right and forces you out of the trade when it moves too much against you. The wealth transfer happens as the market moves from one pain point to the next. In order for the winners to make money they need to washout the losers. What happened on Thursday and Friday in equities was a wealth transfer from the people who were long to the people who were short. Less dramatic moves happen every single day to the short-term traders. That's what stop runs are all about. It's just a bunch of liquidity in one spot for profit taking by knocking out the weaker hands. From what I read, that's how the pits used to work, and that's clearly how the algos are programmed. That's why the market often reverses after a poke to a new high or low that runs the stops. The sellers, or buyers, often cease because they just took profits by hitting those stops.
To illustrate how the psychological challenge is always what's most important, I'll tell you why I only did "ok" on this equity breakdown even though I saw it coming. The reason can be boiled down to two words: options expiration. For the last year and a half, the vast majority of my equity profits have come from OPEX short squeezes. There's been at least 8 or 9 selloffs right before or early in the OPEX week that predictably reversed sharply, cut the heart out of the bears, and fed it to them with a side of fava beans. It's been my favorite thing to do. So, out of the 4 weeks of possible trading days both before and after this cycle, this breakdown HAD to come the last two days of options expiration, which totally messed with my mind. Since I wasn't short from near the highs like I should have been, I was only emotionally capable of getting on a small short and every time there was a weak intraday bounce - that any other time I would have pounced on - I couldn't force myself to do it because I was afraid of being a victim of my favorite trade from the other direction, even though it was obviously not going to happen this time. When I said think of the nastiest thing that could happen because that's likely to happen, I didn't think I would be included in the trickery. Even if you controlled every tick of the market, you couldn't have designed a nastier unfolding of this breakdown than letting price spike up after the dovish Fed Minutes on Wed and then slamming it through major technical levels into a waterfall decline the last two days of expiration. But that's trading. Well done Shorty and the Shorters.
When I reflect on how I could have done it better, I feel like it was like one of those hands in poker you just can't get away from. Have you ever lost with a 4-of-a-kind? Or maybe more commonly, losing with a full-house? When you think back on it, you realize there's no way I could have folded that hand. It was "in the cards" that I was going to get knocked out. So, the people who got PAID the most during this breakdown were the ones who've been suffering on the short side waiting for their ship to come in. And good for them. I could never trade that open-ended way myself because that kind of unending generalized anxiety would ruin my life. I'd be walking around scowling at everyone, kicking puppies, and telling old ladies who want to cross the street to pound sand. But the downside of the way I trade, which has to be more surgical in its timing, is instead of the constant annoyance and anxiety of wondering WHY people are STILL trading opposite of me and what the HELL are they thinking, my pain is more localized to moments when I don't get the timing right, whether that is missing the trade altogether, or being early, or just getting it wrong. Then it's over without a single puppy kicked. Big hedge funds can't trade like that because they're too big. It takes days or weeks to build their positions, which greatly affects how prices move, so it's worth thinking the implications of that through, btw.
Regardless of the style, I would describe trading as the daily management of anxiety and disappointment with the occasional moment of pure joy and satisfaction, which is likely just the temporary absence of disappointment. Not to mention the constant battle with the subtle force inside you trying to get you to go bigger, or just wait that loser out a little longer... Greed and fear. They will always be there, lurking. Kinda like being an addict. It's not something that goes away. It's something that must be disciplined. So, in that regard, I've come to respect the more systematic ways of trading with strict trade and money management rules. I used to see it as too restricting, but I've come to realize it's like using technicals in the sense that the rules are there to protect you from yourself. There are trades you're going to miss because they are outside your rules. If they happen often enough and the risk/reward profile is favorable then you have to expand your rules to include that kind. I will add, though, that there are moments when your rules should allow you to go big. But it should require all the stars aligning in a special way. If this wasn't options expiration week, this would have been one of those times for me. What I've learned in my style of trading is that out of ten trades, 90% of the profits will come from one of them. If the rest of the time I can just hang in there and scratch out a positive number, I'll do fine. So it's not a big deal when an opportunity isn't maximized as there is always another one around the corner.
Not sure where that came from, but onto the charts. Let's start with the ES. In my opinion, the game just changed from BTFD to STFR. I'm thinking a mechanism just got put into place that needs to work itself out over several months, unless, of course, the Fed realizes they're living in fantasy camp and commits to no rate increases for the rest of our time on Earth.
Most likely we need more selling first, but I'd bet my life once the first short covering rally comes that we test just shy of the neckline, which is at 2032-ish, or 2040 SPX, probably in the 2020s. That's where Shorty and the Shorters will be looking to defend plus anyone who wants to get out from the long side. If the panic selling continues on Monday, I'm looking to get to the 1930-ish area as a potential spot to be watching for bottoming signs because that's the range extension, but I don't really have a level per se. What I'm looking for is a low to get put in and then a failed intraday test that creates a higher low, or preferably a stop run reversal. The worst thing that could happen from the bottom is a big gap up and run. That would make it hard to size up because you can't have confidence they won't run it down to the lows one more time to shake you out.
ES weekly.
The Fed has me all coiled up about this dollar/Euro trade. If I believed the Fed was actually data dependent in their decision, then it wouldn't be hard to say they're never going to raise rates. But it just hasn't sounded like that's what is driving their thinking, so it's way harder to figure out. It's like trying to measure how crazy someone is. There's no gauge for that. I'm thinking if they have ANY intention of raising rates in Sept, they will signal those intentions at Jackson Hole this Thursday and Friday. I originally thought Janet Yellen would do it, but it's going to be hard for her to pull off when she's not scheduled to be there, so maybe one of her minions will drop the hint one way or another. Just f-ing commit to something. That's all anyone wants. If nothing comes from there, then they've done the worst possible job at communicating that I can possibly imagine, so you would have to think it's not gonna happen.
Dollar daily.
As for this dollar/Euro trade, I'm not surprised the Euro made it to the upper trendline of the triangle. I grabbed a solid piece of it but the early Minutes release caused me to miss sizing up on this too. Can we at least stick to the schedule people? A guy can't hit the gym anymore? Can I go to sleep or will NFP be released at some random time during the night? I'm sure nobody benefited from that.
Check out this interesting difference in the Euro futures chart and the EURUSD chart on the weekly. The futures show the Euro not breaking out yet but the forex shows it is.
Euro weekly.
EUR/USD weekly.
I don't know what to make of that, but I'm going to stick with the futures charts due to that's what I usually trade and both the dollar and Euro are in sync. It's at an inflection point that will likely be resolved soon.
Gold hit its first downtrend line and backed off like $9. Like the Euro, this is right where I want to short it, but with the Fed at such a critical juncture, it distorts the risk/reward, so I'm either going to wait, or keep it really small. I would think there should be at least a small pullback this week. The point of all these dollar related assets is they are all shaping up for a big move based on what happens with the Fed in Sept, which could be indicated earlier than that, but once there is some kind of catalyst these "should" all act accordingly and run. That's why I don't think there's necessarily a hurry. I'm usually talking on here about bigger moves to hold. There's always short-term trades available.
Bonds are approaching the weekly upper channel. I think the reason bonds didn't rally more on the equities selloff was because the dollar selloff kept them in check. I can't see myself getting involved in bonds again for a long time. There's just more technically sound charts to trade because it's too close to resistance that I don't want to deal with and I'm just not all that interested in the short side. It's just not my thing.
Oil daily is still using the 10-day to keep the pressure on. It should be noted that the Large Specs have liquidated somewhat but they are still heavily long oil. I don't understand it myself, but it is what it is. More downside fuel to shake out. So if you're not already short, the Commercials aren't lifting their hedges and the Specs are already longed up, so there's no one to buy to create a bounce other than spec shorts covering.
Check out oil on the monthly forming an RSI divergence, which is just noteworthy at this point and could take awhile to play out, but it is something to keep an eye on. I'm thinking oil will break the 2009 lows and force a capitulation, but I am concerned about a possible dollar breakdown causing a short-term rally first. It should be noted, though, that oil hasn't flinched with the dollar coming off nearly $4 lately.
This is what it's like being on the wrong side of the trade, every time you look at the computer screen:
And this is what it's like being on the right side of the trade. Stole my moves:
I kinda had a feeling it was a little early for the dollar breakout. I wouldn't be surprised to see this bang around for several weeks, even getting below last week's low to run some stops. But the bottom line is I will trade the breakout in whatever direction it chooses. I believe it will be up. Ideally, it will be driven by a news event like the Fed raising rates. Btw, another non-economic reason to raise rates is that they don't even know if the new policy tool of using Reverse Repos instead of Fed Funds will even work, and there's only one way to find out.
It's entirely possible the Euro makes it to the other side of the triangle. This is very much like the oil range from earlier this summer. The downtrend line is from the highs last year. It should not go through there if this is going to eventually rollover and breakout to the downside. The closer it gets to there the smaller the risk.
Gold is currently using the 10-day to keep the pressure on it, but if the dollar comes off a little, this could certainly backtest the breakdown. I have no interest in this right now. I expect it will go lower, but I'm not shorting it here. If it bounces and tests the downtrend line or the breakdown area around $1130 then I'd be interested.
Oil is also using the 10-day to keep the pressure on. I'm thinking we could see some profit taking near the March low.
Oil weekly. If we get the dollar breakout, most likely oil will trade down to the 2009 low at $33, however it would be nice to see a bounce at the March $42 low and a test of the downtrend line. That would create some buyer exhaustion profit taking and a low risk entry. If oil just barrels through $42 full speed ahead, I'd wait for the retest of that low and look to enter there.
When trying to figure out what might happen next, I find it helpful to consider the nastiest thing that could possibly happen, and that's probably going to happen. In the case of the ES, the big line in the sand that would knock a lot of longs out of the market is 2032-ish, or 2040 in the SPX. So it wouldn't surprise me to see a washout below that area that gets bought up like crazy. The key would be when it happens. If we're crashing through that level early in OPEX week, I'd be looking for signs of the bottom to buy. This could very easily turn into a bear trap. Also, don't forget the uptrend line thru last Oct's low is a monthly trend line, which means it's all about the close.
I'm liking bonds to test the upper channel line in the 160s, then it depends on whether stocks are sustaining a downside technical breakdown or whether it was a bear trap.
