“SITUATIONAL AWARENESS”: WHEN SHTF

“Good advice for trading too!”

“Honey, I’m just looking at the ‘big picture’, Ok?” And boy-oh-boy did we get some “big pictures starting Tuesday night as the election returns came rolling in; “everybody ready for some RM=4 trading?” For you newer traders out there, those that have been following markets for less than 3 years, whether you have made money this week or not isn’t the material question for today; the important question is “what have you learned about ‘situational awareness’, your ability to recognize it, properly assess it, adapt to it, and then potentially profit from it?”  My guess is “not much”.

That isn’t meant to be a “knock” on any of you; in fact, for many of you, you have been fortunate enough to witness in the last 5 months two “earth shattering” political events that have absolutely rocked the trading world; first “Brexit” in late June, and now the U.S. elections for President. Two out of five within 5 months; normally you wouldn’t see but one every 5-10 years. So, for you Newbies, count your blessings you get to see and learn from this first and foremost; opportunity always exists in trading, but if you’re not around because you got caught doing “stupid shit” and no longer have a trading account to trade, then all the opportunity in the world doesn’t matter much.

People die all the time from car accidents on the highway that easily could have been avoided; hikers die all the time from exposure when hiking in the mountains in summertime, and people also drown out on the lake or at the ocean every summer; so, what most likely happened that primarily caused these tragic events? Lack of situational awareness.

And, as I have always maintained, “life imitates trading; trading imitates life”, this transition into trading is also totally applicable. Going into Tuesday night, as a trader waiting for events to unfold, or simply waiting for Wednesday to start, you had to be aware of the enormous trading risks associated with the U.S. elections; if you weren’t, then this should be a “wake up call” to you to start paying attention to events happening around you that can potentially destroy your trading account. And while you should always be on “DEFCON 1” even when trading is relatively normal at RM=1, when you know events are in place to shake things up, you really have to sit back and ask yourself how you are going to 1) process the event in relation to trading, and 2) do I in fact trade any of it?

Remember, the algorithm has 4 risk models; RM=1 covers about 85% of market action, and RM=2 covers about 10% of market action; the additional 5% is left to mostly “tail risk” at RM=4 or greater. When you get to RM=4 [or greater, which I don’t measure], you are witnessing market action that is not only “bat shit crazy”, you are also witnessing market action that cannot be maintained for any length of time or the market breaks and will be destroyed! The energy needed in price moves at this extreme level simply will burn itself out in short order because there are only so many institutional players that are panicking at one time before other institutions come in and restore order [and here in the last few years, the FED’s “Plunge Protection Team” that waits for you to panic and then when you’re done and you’ve sold the lows, comes in and bids prices higher in short order to punish you for your selling.]

So, coming into Tuesday night you had to know that RM=1 was not going to hold anything going forward into Wednesday; that in fact SHTF was to going to happen one way or the other, and that the safest mode to be in would be RM=4. how long it would last at this level is anybody’s guess, but at least initially this is the mode you had to be in when results started hitting the newswires.

Anytime we find ourselves going into this type of trading scenario, whether it’s political [Brexit, elections], or economic [NFP, interest rate decisions by the FED or other major central banks], you also have to have a sense of where the “mainstream expectations” are for the event; in and of themselves, nobody gives a shit what the actual results are or the actual numbers of an NFP report; what matters is where the results fall on the “expectations bell curve” of the “expected” result by the market. If there’s a wide discrepancy between what was ‘expected’ versus what actually happened, you now got a huge ‘dislocation’ with the ‘big money crowd’ and you can expect fireworks!

There are 3 aspects of panic you have to be cognizant of when trading; 1) which side of the market is the actual panic on, and more importantly is it correlating with other asset classes at the same time, or is it in isolation, 2) among the ‘big money’ set, the adage “he who panics first, gets the chance to panic again in the future” is very much in play, and 3) large hedge funds get caught and the “quants” [the Ph.D. math, algorithm numbers guys in the back room who tell the manager this “can’t be happening” probability wise] feel the squeeze when “gamma”  [the change in the delta (price change)] goes exponential quickly, and the very rapid rise or fall in market price has TO BE MET WITH MORE BUYING [MARKET PANICKING UP] OR SELLING [MARKET PANICKING DOWN] by them to avoid a total wipe out of their fund, thus adding fuel to the already hot fire and becoming their own worst enemy when getting out.

And so, you sit there and watch as prices “waterfall” farther and faster than you have ever seen anything in your life drop; like the SP500 and DOW30 late Tuesday night and into Wednesday; then near the NYSE open, here comes the “Plunge Protection Team” and the DOW30 rockets 250 points straight up in about 13 minutes, and then keeps going after that. In other words, given the context of what is actually happening and having some sense of situational awareness, it all starts to make some sense; not every squiggle on the M1 to be sure, but overall yes it does make sense. If you just got off the “Pudding Business” turnip truck and wandered in as a total Newbie, then yea, you’re going to thinking along the lines of, “what the fuck is this craziness … Whoa, did you just see that move … how do you trade this shit and have any of it make sense?”

Even though the “risk models” are explained in the manual, I want to make sure everybody that has the algorithm up on their screen knows how to change the level [1-4] of the RM’s. Place your mouse on any colored line of the algorithm on the M1 and wait a second; you’ll see a box pop up; on that line double click your mouse; the algorithm parameters box pops up >> go to “inputs” section of this box >> on the first line it says “risk model” >> go over to where the number is and double click your mouse on the number and delete it and put in a value of 1 – 4 >>> go down and double click “OK”; on your M1 chart you now have the new RM level. Bottom line is that you can easily switch back and forth in about 3 seconds when needed.

I could easily post about a dozen beautiful charts of the higher exhaustion moves from Tuesday night into Wednesday [gold & DOW30 and there were some great moves]; don’t worry, they’ll be in the grouping for November when they get posted to the exhaustion archive I’ve set up for your viewing, at the end of the month.

Instead, in my opinion, I think it is much more valuable to all of you to focus your “mindset” on what I have laid out today in spotting these “one off” events, preparing for them when you know they are coming, and then look for the key aspects of what “consensus” says versus “what really happens” and having your screens ready should panic set in and take over the market.

In both instances, Brexit and the election, “consensus” got turned upside down on its ass; the stock market was expecting a Clinton victory and that it would be positive for stocks [gold I think was neutral on this aspect], thus insuring that ‘big money’ was long and would have loved to see the market go higher; when it became obvious that Trump was surging and Florida and Ohio turned in his favor, SHTF and the panic to the downside was on. Gold, on an historical basis, mostly being negatively correlated with stocks, took the cue and “blew the hell out of gold shorts” taking the market up, in what can only be described as a total “melt up” past RM=4 for a good 3 hours.

Ok, now that the event has come and gone, and you get to see the panic “up close and personal”, you still have to have “situational awareness” because you now have to determine when to go back to “regular programming” and take the RM level back to RM=1; my general rule is to wait at least a few hours and see if trading norms are coming back and if there is anybody else left to panic or it’s pretty much done with and gone. Since a lot of this happened in the “wee hours” of Wednesday morning, long before New York trading was to start in gold, I pretty much left it alone when the market started backing off the highs up in the 1330’s and started going down. Besides, it’s like 2 A.M. and I need some sleep, so if I miss further action so be it … it’s a long day and this was just the first few hours.

Once stocks “melted up” near the NYSE, I switched my focus to the DOW30 for the rest of the day [and lowered the RM from 4 to 2 after the melt up], figuring gold would only go down or “chop” with stocks strong; so again, having some sense of “situational awareness” allowed me to make the seamless switch to a better market and not stay and get chopped around in gold. And now you know why I have algorithms in secondary and tertiary markets [DOW30 and crude oil, respectively]; I’m not a “one trick pony”.

Turning to today’s gold trade … of course the Chuckleheads traders in Asia bid the price up into the 1290’s … and we now see it at … anybody? … Bueller? … Bueller? … the mid to high 1270’s, proving once again there is no rally these idiots won’t buy, that can’t be “undone” when they are finished by the bullion banks and dealers later in the day … some days I just shake my head at their collective level of stupidity when it comes to trading. So, you kow what this means, right?

First thing I notice this morning as we approach the New York open at 08:00 is that we just had an RM=1 down exhaustion move in the DOW30, which then subsequently bounced higher, and during this time the action in gold is … crickets. So, unless I’m badly mistaken [“nahhhh, that never happens right boy? … shake your head up & down if you want a Beggin’ Strip … ahhh, so you DO agree with me!”] an inverse correlation with gold enjoyed yesterday is G.O.N.E., so I’m not looking for it the rest of the day. [And of course it shows up when the DOW30 sky rockets on the open! Oh well.]

I got gold on RM=2, given the total panic we say yesterday and the fact there should be some “aftershocks” [aka heightened volatility] in price either today or tomorrow [Friday] from those who need to adjust their positions going forward; in short, it’s just to be safe from sudden quick moves that are a total fake out. First trade off the day directly below.

A little over $1.50 profit on the up move; liquidated with market sell order when I saw 1266.00 bid hit my screen, and got filled right at 1266.00 [high was 1266.15 and that’s why LP gave me this price. You know the drill, sell on the way up!] Quite frankly, I don’t care if it rallies further from here, which I think is likely at some point given the fact equities are on an insane rally which can’t be maintained and at some point stalls and back tracks some which given the correlation of gold lately means some rally from the low point of today. Also, with this move the market has almost a $30 range for the day and statistically this has a very, very small probability to go even further.

I would show my DOW30 trades today, but you don’t have the manual yet; that comes this weekend when I’ll get it finished and posted up on the website. Things are fluid and crazy right now, and I expect them to stay like this for a good long while; maybe not as nuts as yesterday and today, but higher than what you saw in September & October. Trump’s win, has added “uncertainty” to the markets mix [gold & equities] and that means volatility because nobody knows what he’s really going to do. With Clinton it would have been easily “status quo” and use the White House for her own enrichment and the public’s expense. There’s a new Sheriff in town; things are going to be different for a long time, and that spells great opportunity for us as traders.

It’s been a long day; time for some vitamin C therapy on the beach.Dog and I are sooooooo ready; we’re outta here … until tomorrow.

Have a great day everybody!

-vegas

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