I'll start by saying that guest content has been very sparse lately, so this might be the only post for most of the day. That's fine, because after a week like we've had, you should probably rest up!
There are a couple of bromides that get tossed around in the world of trading that I've never liked. The first is something along the lines of: "The market wants to prove as many people wrong as possible." The second is: "If it's obvious, it's obviously wrong."
The first one is silly because it anthropomorphizes the market into this weird, sadistic beast that gets its jollies out of embarrassing people. That's just plain dumb. The market is made up of people (and, errr, lots of computers) all out to make a buck. Sometimes – – like most of the 1990s – – the market just climbs higher and higher, and the market is certainly not proving most people wrong. On the contrary, it's making most people really happy. I think this notion also sets one up psychologically for an adversarial attitude toward the market, which is often deleterious to one's trading.
The second one is one that bothers me as a technician, because in my lengthy experience as a chartist and a trader, I've often seen "obvious" patterns that did precisely what they were supposed to do. For me, even though on rare occasions I am faced with "losing my religion", I always come around to the same conclusion, which is that technical analysis works. Prayers delayed are not prayers denied, and although sometimes a pattern may fiddle around longer than you'd like, it will ultimately either work out of demonstrate, within a reasonable loss, that your premise is no longer valid.
Over the past several weeks, I made two very specific conjectures as to where the market would go, and both of them have been correct. The first one, back on April 26th, was very detailed and much more speculative, but it painted out, pretty much move for move, what was going to happen.
The second one, made after the "flash crash" on Thursday, May 6th, was much simpler and – there's that word again – obvious. I mean, anyone with even the most elementary experience with charts would recognizing a topping pattern, a retracement, and a subsequent fall. Too good to be true, right? Too easy? Well, that's what has happened so far.
Now I will be the first to say that, at current levels, it's higher-risk to be short than it was a day ago. When one has a horizontal line like the one above, it's the lowest risk/highest opportunity place to be, which is why I loaded up on shorts. I remain loaded up on shorts, even though the /ES could very well decide to push 40 points higher while still remaining under that important line. 40 points would be very painful, but on a chart by chart basis, I am comfortable with my positions. So I stay put.
At the moment, I have a large quantity of mostly small positions. I have 192 shorts, 7 ultrashorts, and 1 long. That long is GLD, and it's a big position. I am ambivalent about this one, to be honest, since gold's behavior (and its public saturation) is getting to be worrisome. However, in the event of an equity panic, experience has shown that gold has represented a flight to quality. In addition, in the face of triple-digit drops in the Dow, precious metals are just about the only things holding up.
I'll close by saying that many individual charts are being as "obvious" as indexes. Take Visa, for instance. The chart below is simply magnificent. V broke a major trendline, and then it gapped down after a nice topping pattern. When it pushed back higher, it closed the gap with one cent (!) to spare, and the very next day, it plunged nearly 10%. That is poetry in motion!
My big picture is calling for a fall of nearly 25% from peak levels by the end of July. I'm really going out on a limb by even suggesting this, because a fall of 25% from the peak would obviously be earth-shaking. But the fact is that my big picture is still quite intact, and that's the next stage.
Have a good weekend.
