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After watching the completely bizarre action on the /ES last night – – where hoards of short positions were "swept up" within a matter of moments at 1:40 a.m. – – this video sprang immediately to mind.
Just to be clear – – since it seemed to have eluded a few the last time I did this – – the text below is written by a reader of this blog, who was kind enough to share it here……………
In a former life, when hormones and beer lust ruled the roost, I traded currencies in London hours out of Sydney. Staring at the screens from my monastic cell today, reminds me of those misbegotten days trying to guess where the squiggles are going to turn next…
A comment from a broker in London comes to mind, we are in the casino playing craps…"You play with fire sometimes"…he wasn't talking about my expertise at rolling dice but a mean reversion trade that I'm prone to putting on.
And that is where we are now. The market is running hard. It has all the hallmarks of the blow-off top. To be short at the wrong level hurts. Do you cut the position or add to to it?
What does a blow-off top feel like? When will exhaustion set in? And where will a retracement, assuming there is one, take us?
Going through them in turn…
What does a blow-off top it feel like?
1) It hurts – not only is the price running against you, the market scorns your views.
2) It's fast – adding to a position, at what you think is a good level, quickly runs against you.
When will exhaustion set in?
1) It's parabolic – prices can run, and typically do run, further than you expect.
2) The popularly accepted target level – the market psychology is one of trying to catch the last x% of the move. There is a feeling of certainty that the market will reach the given level (in our case, XJO to 5000). The buyers at current levels are looking to capture that last x% and then get out. The sellers are already set or too scared to jump in. The exits will be overcrowded as we approach the 'target' level.
Where will a retracement take us?
1) Buyers of the dip – the blow-off top will have sucked a lot of these reluctant buyers in for fear of missing the big trend. They will be the first to sell on a break of the up-trend.
2) To the last level where long term buyers were left hungry – Support will first appear where the under-invested but cautious investors are waiting. Logically this will be at the top of the head of the 'head & shoulders' that shall not be named.
So back to my broker, my response was that I'm looking for the market to come back to the trend.
I will add to the short as the 'popular target' approaches. At its simplest, the short trade is looking for a move back to longer term support. If we break lower from there so be it. If, against the wash of fundamental data, the market finds legs, I'm happy to go with that too. My experience suggests there is a trade to be made from betting against the parabolic move…