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Wednesday, April 19, 2017

THE TRADING DUALITY PARADIGM OF STOCK INDICES


“Just follow the road to the end of the rainbow!”

Perhaps in no other trading pit anywhere in the world, Newbies would wander out at the end of the day from the SP500 futures pit completely bewildered and baffled … wondering in one second how to come to grips with the insanity of the place, and the next second wondering if there was room for them in this insane asylum where their wives/girlfriends/mistresses sent them everyday cuz they didn’t want them messing with a babysitter at home.


“I don’t know man … all F-ing day the market was offered … every time I bought it went immediately straight down, and couldn’t rally 2 ticks to save my life … Ok, so I get short … immediately throughout the known universe the call goes out via trumpets blaring, and within seconds Squid, Morgan, Merrill, and all of those other a-holes start bidding and never stop ‘till the close, where once again I take it in the donkey”. You seriously want to know how many times I heard something like this from stock indices trading?

“You begin … and the key word here is BEGIN … to learn successful stock indices trading when you first understand and accept that ‘life is trading – trading is life’; everything you learned from the jungles of Kindergarten to third grade is in play … always has been, always will be … you’ll never even get out of the starting blocks until you embrace this. After that comes an even harder paradigm to swallow; namely, stock indices go up approximately 80% of the time, and are flat to down 20% of the time, over long periods. What makes the ‘Yin” & ‘Yang’ so difficult is that the 20% happens so fast, so viciously, and hurts so badly if you are long, that it leaves emotional scars that many traders can’t overcome. And in the truest sense of a ‘cruel and unforgiving’ universe, your emotions and senses of where prices are headed will be exactly 100% out of tune with market reality at exactly the wrong time”.

And each time I would hear these kinds of lamentations from traders up in the clearing house locker room, I used to look at them and say [paraphrasing], “You want me to sprinkle fairy tale dust over the pit tomorrow and make it all better for you? How about I bring Mommy in and she can lecture those nasty institutions to play fair? Is that what you’re lookin’ for? Cuz it sounds to me like you’re a kid wandering around the suburbs of Chicago looking for Disney World; hey, it ain’t here! There’s a paradigm at play here, do you understand the macro play? I think not, and even if you did, what do you do with it? Do you know what the micro play is”? And on and on it would go until inevitably they would say something totally inane and stupid like, “well yea … easy for you cuz you got 800 gabillion dollars in your account and money doesn’t mean anything anymore … and … and me, I got rent in 3 days … blah blah yada yada”.

“Right, each trading day the Valkyrie look over the pit and spare me death cuz they know it doesn’t matter … sure … the universe has decided to ‘cut me some slack’ … you realize how stupid you just sounded”?

Fast forward to today … nothing has changed in the stock indices from the long ago distant futures pits … only thing that’s changed are some names, but the collective behavior of “the crowd” is exactly the same … if Zero Hedge had been around back-in-the-day, they would have had a newsletter telling people daily of the imminent crash of the stock market to damn near zero, along with 20 top reasons that are “sure fire” warnings of the impending implosion.

“YOU WANT TO KNOW THE FUTURE? STUDY THE PAST”!

I will admit, it’s hard to study the writings of the great masters of trading; none of them make it easy and they are often contradictory in some isolated cases. As far as I can tell, Sokyu Honma was the first real documented market “genius” that came; maybe there were others before him, but the written record prior to the 18th century is extremely sketchy and incomplete for obvious reasons.

Although I didn’t know it at the time, cuz my main focus was from my mentor Bert and Gann, trading memes I picked up on in the early days of indices trading were written about and practiced by Honma; not completely, and of course we had different names for things, but some of Honma’s main premises’ for both macro & micro events I recognized immediately as things I had thought about as well.

And what it all boils down to are 5 “macro” themes; 1) bottoms, 2) tops, 3) gaps, 4) continuations, and 5) consolidations. And when you take these 5 Honma themes and project one of them onto anything Gann is saying or writing about, and you suddenly got a whole big picture that is much clearer than before; especially regarding stocks, and by default stock indices.

The “micro” events are “the code” from the candlesticks; Bulkowski identified, compiled, and analyzed 103 different candlestick formations [individual & combinations] over 10 years using data from over 4 million candlesticks. I took his work, went back to my mathematical algorithm code for stock indices, and realized almost immediately that I was missing some valuable formations from those I already was using; what you see in the manual is the result of that analysis.

The upshot for me as a trader is that “the code” of the candlestick formations [individual or in combination] is as fast as any HFT, and doesn’t leave me at a distinct disadvantage waiting for confirmation of a signal because of the time limitations of the MT4 platform; that time lost is costing me money. While my “code” is good, I can’t run it on a tick chart; I’m limited to the M1, and in this day of super fast “speed of light” trading, the only way I get valid signals that have significant statistical probability of profit in real time without delay is via the candlesticks and what they tell us.

Turning to today’s trading … IBM disappoints with earnings overnight for like the 20th quarter in a row … initial move down in the Dow30 late yesterday, but market recovered last night into this morning … “did you really think Big Blue was going to tank”? Before the open Morgan Stanley beats earnings estimates, giving the banking group some hope after yesterday’s Vampire Squid drubbing.

An hour into today, and we got … crickets… I’m wondering if the world is holding its collective breath on Korea, another GBP stop hunt debacle yesterday which further clouds the FX arena, another manipulation “gold hit” out of nowhere [2 in 2 days], and the French elections this Sunday which look at the moment like a 4 team clusterfark as the elites got their panties bunched up around their collective throats. In all of this, where is the appetite for trading anything? Maybe it’s the Fed Pie Hole speaking at 12:30 or even the Beige Book later at 3, I dunno, but if that doesn’t get the ball rolling what does tomorrow and Friday look like? [Hint: sleepy time tea”.]

Noon time in New York, and trading has taken on that “it’s midnight in the graveyard” feel to it; totally zero going on. That may change here when the Fed Pie Hole speaks at 12:30 & when the Beige Book comes out.. we’ll see. Signals don’t mean anything when it gets like this.

Ok, we finally get a decent break down to a “third” low from the open, and then a retest of that low that goes marginally lower … from there we see a “three white [only I use green] soldiers” formation off of the low, which is one of the highest statistical profitable formations off of a low you can get … problem is it doesn’t go anywhere. First trade of the day directly below; blue box with boxed white arrow is the “three white soldiers”.
 





As you can see, I eventually get in minutes later, but almost immediately I don’t like what I see, which is a market that slows down and has no “trade flow” to it, and more than likely is awaiting the Fed Pie Hole. At this point I just want out … give me any profit and I’m gone. I should have taken the “three white soldiers” when it happened … instead I get “cute” waiting for a slight pullback that doesn’t come and I have to pay up. Still, if this stuff was “good” that “three white soldiers” formation, with gaps higher I might add, should see the market at least 20 – 30 higher, not sitting here up 5 points after 30 minutes.


And my caution bears fruit … minutes later the slam. Looking at the daily candlestick, I don’t really want to be picking a bottom here in the 20420 – 20440 Dow30 area; below here are no doubt some serious sell stops. While most likely we bounce from this level into the close, what that bounce is isn’t going to be very great, and my risk/reward ratio getting long in here completely sucks given the looks of the daily chart; let the signals be what they are, they don’t know what I know, and what I know is that if this stuff starts rolling lower into the close in the last hour, there’s going to be hell to pay with the sell stops. If that’s what the big boys got planned, catching that falling “knife” from that plane above is gonna cost you some fingers; “thanks, I like my fingers”!

On the other hand, we just hit a new low for the day in the Chicago Noon hour, and we all know what that means; it means about 90% of the time no new lows after 1 PM Chicago time. Now, the other 10%, when they come, usually are in situations like this, where you’re staring at important support/resistance levels either on the daily or weekly candles, and when those happen it’s usually fireworks. Not predictin’, just sayin’.

Here at 17:15 server time [Turnkey], a nice bullish engulfing pattern off of the low of the day; I’m not taking it because of the risk/reward I talked about above; I buy it here at 20446 with a stop below at 20430 and I run the risk of getting filled 30+ points below that stop at the bottom around 20398; no thanks, there will be other opportunities.

And here we are 25 minutes later, and the market is barely a handful of index points above that bullish engulfing pattern; granted, you could have made a few ticks no doubt. That’s not the question, though; the question is what was your risk to get that few ticks? 100 out of 100 times, I would avoid this trade, because 1 – 10 of those times sees your sell stop filled a mighty long ways away from where you thought. It’s simply not worth that few ticks of gain.

Ninety minutes to the close [30 minutes to the Fed’s Beige Book], and I’ll give the bulls credit, they’ve tried on numerous occasions over the last couple of hours to rally off the lows with bullish candlestick formations … except for the bullish engulfing pattern mentioned above, all of them have gone nowhere, the last “three white soldiers” a few minutes ago off the fresh new low that took out said bullish engulfing pattern is going nowhere. Out on the horizon, plenty of risk both technical and geo-political, and that is mainly [I think] keeping buyers away right now. We’ll see what the Beige book does, if anything.

Nothing to the Beige Book we didn’t already know … crickets. Another bullish engulfing pattern on a new low sub 20400 … 9 minutes later it’s barely up a tick if that… some days gotta go down no matter what … my key for trading the indices is the New York open; price stays above that you can hold for higher highs and buy every correction signal you get; price goes lower than that, every signal is a scalp. Today, you see why this is important and has to be followed. There isn’t any over riding “sell the market” on news today; granted IBM stunk up the joint last night, but nothing other than that, and they been doin’ that for at least 5 years every quarter. Now, all of a sudden IBM matters? No, just a down day that not many people except die hard shorts made money trading from the short side, although I’m a little surprised the sell stops going down weren’t more violent & vicious in scope; and if it’s any consolation, there weren’t any sell signals but one, at 15:44 off of a correction up that saw the Dow30 within about 35 points of a new high; other than that, nada [Isn’t hindsight wonderful?].

All in all a tough day to make money from the long side; outside of Monday’s “kinda of a trading day Holiday” up, the Dow30 has retreated about 350 index points in 7 market days, and today looks like the close will be the lowest in about 2 months. Still, up money is better than down money, and I’ll leave it at that. Tomorrow sees unemployment claims, Philly Fed index, and another Fed Pie Hole speaking, all before the market opens at 9:30. Tomorrow’s another opportunity.
 

PAMM/MAM spreadsheet directly below.




Time for the beach, the dog demands it! … I’m outta here … until tomorrow.


Have a great day everybody!
-vegas
OUR ‘TURNKEY FOREX’  PAMM/MAM  IS NOW OPEN AND OPERATIONAL; SEE “PAMM/MAM MANAGED MONEY PROGRAM” IN “DOWNLOAD LINKS” SECTION IN RIGHT HAND COLUMN FOR DETAILS [VIEW ONLINE AND/OR DOWNLOAD] AND START YOUR JOURNEY FROM WHERE YOU ARE AT TO “ESCAPE TO SUCCESS”!
  



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