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Thursday, March 23, 2017


“Cricket Fevahhhh sweeps the world!!”

And we wait some more, as “cricket fever” sweeps the entire financial markets arena from greasy wool in Sydney to the Chuckleheads in Asia trading [well, watching really] our favorite pet yellow rock; after almost 12 hours of the trading day gone, I’m starin’ at an HVALUE in gold of a whopping $2.54. And we are waiting for what exactly? Oh that’s right, Pols, pols, and more Pol Pie Holes to guide us in our journey to serfdom; on soooooo many levels this is just so pathetic I can’t even find the appropriate words to describe how “FUBAR-ed” society in general, financial markets in particular, have become.

I’ve written many times over the last months on the blog the number of hedge funds that have gone bust, the significant declines in FX trading volumes across the major Dollar pairs and crosses, and the near paralysis that grips financial markets on too many days; “thank you FED, and the other central banks as well, for the delusional hopelessness you think you can engineer by attempting to rid the world of volatility and thus determine financial outcomes; as anybody with a working brain would tell you if you would listen, you are destined for failure with volatility spiking to unprecedented levels and then staying there”.

Turning to today’s trading in gold … it would be good for me to better explain exactly how & when to trade the version 3 algorithm … in other words, how I do it, and what decisions I make when setting up and then making a gold trade. First the HVALUE; HVALUE = higher of the two values [OPEN OF DAY – LOW OF DAY] or [HIGH OF DAY – OPEN FOR DAY]. The first trading rule in gold is that coming into trading at 8 A.M. EST [fall or winter] or EDST [spring or summer] there has to be a greater than $5 HVALUE; no $5, no trades, and I’ve gone through the rational in prior blogs.

Once the $5 HVALUE has been achieved, the next important criteria is the 50% retracement level of the day’s range; if you have to [and I do cuz it’s easier than remembering] create a horizontal line on the M1, and as the day’s range expands, simply move the line when not in a trade; takes like 3 seconds. Now, this 50% line is a “threshold” line; anything close [like 50 cents or something like that] to that line on any kind of retracement is worth watching closely. As a general rule, the first time down [from a previous rally] or first time up [from a previous decline] will see the 50% line hold. If the market is above the 50% line I want to look for and initiate “buy” signals on the M1 on corrections from going up; if the market is below the 50% line I want to look for and initiate “sell” signals on the M1 on corrections from going down. If I get in a position I want to liquidate on spikes in my profit direction that are larger than previous spikes since I entered the trade and/or the market price hits or exceeds the SDEV lines [exhaustion lines]. As an “option”, for those that want to, if the market is hitting a low and the day’s range exceeds $12 with this low, a good, clear bullish engulfing pattern and/or hammer immediately after the low can be bought and most likely is good for a scalp trade; this does not work in reverse on the upside.

If the market is above the 50% retracement threshold, I will NOT be selling to initiate, and if the market is below the 50% threshold I will NOT be buying to initiate; the reason can be seen in today’s action directly below in 3 charts. When price is above the 50% threshold, you have a much higher probability of spikes “up” than down [white arrows chart one], and when price is below the 50% threshold, you have a much higher probability of spikes going “down” than up [orange arrows chart 2]; what that means is simple, your stop is likely to get “run” for a loss at the extreme of the spike. And if the spike goes to the exhaustion line [like yesterday], your fill and loss will be a lot larger than you were planning on taking. The third example chart shows what can happen when the HR1 momentum changes from positive to negative; again you are susceptible to a down spike. What to take away from these charts? Flip them around and notice that when price was going up there weren’t any down spikes of size; when price was going down there weren’t any up spikes of size.

In summary; step 1) greater than $5 HVALUE, step 2) above/below 50% threshold for day’s range to initiate, step 3) liquidate of spikes larger in size than since you were in the trade and/or the SDEV lines, and step 4) [if applicable as an option] a clear, good bullish engulfing pattern and/or hammer formation immediately after the low on the M1 as a buy signal if the day’s range exceeds $12; most likely this will be a scalp trade; this last step is not applicable to the upside.

I would note, that on reversal days, once the market reverses course and makes a new high/low in New York, make sure your signal in the new direction comes from a “good” signal and not an “iffy” signal; if you can’t look at it and say, “oh yea, that’s a clear engulfing pattern and/or sure, that’s a clear hammer formation, then don’t initiate the trade just to make a trade”. Our risk on reversal days is the market reversing and then not giving anybody the satisfaction of going anywhere; this is what became affectionately known on the trading floor back-in-the-day as “The Flying Wedge of Death”. And believe me, they have hurt more professional traders who have gotten caught in this then you can possibly know. After a reversal, and you get an M1 signal, keep a very short leash on this trade and do not let it go against you very far at all if it doesn’t work out; you cannot afford a $3 - $5 trip back to the middle of the day on no movement but a slow grind against you. And what does a slow grind look and feel like? Directly below, all the makings of one:

That’s it; simple, effective, and a proven money maker cuz when you follow these rules, the statistical significance of the M1 signals goes through the roof.

From earlier today, there were 2 buy algorithm signals that were generated after we broke through the $5 HVALUE; directly below the chart with the 2 signals the white arrows; so, why didn’t I “buy” these?

Gold has been up 7 days in a row; USDJPY has been down 9 days in a row; USDJPY is hitting new lows at the end of a 100 PIP range, and gold can’t rally. Add to this, there is no follow through to the signal in the next minute, which tells me the trade is suspect. The second trade almost got me in, and if the market price had gone another 20-30 cents I would have been long via follow through; as it was, even if I had gotten long within 10 minutes it’s a scratch trade at best. Again, I’m not looking for exact correlation between markets, cuz they don’t, but when you start getting streaks like this [these aren’t mutually exclusive events like in gambling] you have to be very, very careful of reversals, and today set up almost perfectly to pull the retail public into gold on the long side above 1251; we’ll see what transpires, but as I write it doesn’t look good.

And now, here we are at Noon in New York, the “slow grind” off the bottom drifting higher and giving heartburn to any and every trader looking for the “big reversal” day with a shot below 1240; can’t be long cuz the risks from spikes lower have you selling the break either on a stop loss or a market sell, which guarantees a rotten fill, and if you’re short the agony of the drift higher it has cause for concern also, cuz time is slipping away and the “short mojo” from earlier at the low is totally gone from the trading scene. Truth be told, this is the “classic” tell tale sign of the “Flying Wedge of Death” [FWD].

As it happens the shorts got bailed out with a small break down to test the low, which held, and then immediately caused panic by those greedy enough to look for more with the ensuing mini melt up; so maybe they made a few pennies maybe they didn’t. In any event, here at about 1 PM in New York, what’s really transpired today?

We’ve been $5 higher at the high, and $3 bucks lower at the low from the New York open, and a lot of “chop crap” around the 50% level; below a quick look at the daily candlestick for some perspective on today.

And lo & behold, what do I see here; why a pair of small “doji” days right next to each other back-to-back. EXIT QUESTION: “Since all algorithms, trading models, systems, what ever you want to call your ‘code’ have limitations & deficiencies, and the version 3 volatility algorithm I know what that is, why what do you suppose has the highest probability of losing us money? SHORT ANSWER: “Umm, doji’s”? YOU WIN A COOKIE.

The last 2 days have seen gold languish while USDJPY decides to party, and true enough coming soon USDJPY will languish and gold will put in $20 ranges; trying to figure out the “what, where, when” angle of this is impossible, and only leads me jumping around and missing everything. In the long run, gold is the best market there is in getting you to your “escape to success”, despite what anything else is doing or not doing; the algorithm’s main weakness, as best as I can tell, is the daily doji and these last 2 days have been doji’s. If I didn’t follow the rules, I wouldn’t be doing my job.

One last bit of perspective for today; take a look again at the 10 year VIX chart in gold from the St. Louis Fed, directly below:

Today, gold VIX is quoted at 12.40, which if you look at the gold VIX chart from above for the last 10 years, puts it right at the bottom. So ask yourself, “which market is best positioned going forward for higher volatility and price movement”? Notwithstanding we’ve had 2 days in a row of “nothing burgers” in terms of price movement, remember that losing money doesn’t do any of us any good either; seriously, what are the New York bullion banks supposed to do when Asia does nothing they can fade?

So, while I’m not that thrilled with another day of watching paint dry, put it in perspective and realize it’s A) just one day, and B) we’ve had 2 doji days in a row on the daily candlestick. This too shall pass.

PAMM/MAM Spreadsheet directly below.

Half an hour to the close, both longs & shorts get clobbered today, and right now the market is … dead. Beach beckons … I’m so outta here … until tomorrow mi amigos.

Have a great day everybody!


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