Trading Psychology

Glenn Beck on the radio this morning was talking about the Hindenburg Omen and maybe even specifically quoting parts of that article that referred to percentage chances we get a crash.  I briefly turned on CNBC a few times in recent days as well and the crash and depression talk is pretty thick.

It is a concern that mainstream media is talking so bearish and they may help to identify the bottom of this drop, but for now I am shrugging it off. To a certain degree we have a bull market in reverse that makes picking up on sentiment hints from the major media a bit more difficult.

We have been in a long term bear market since 2007 and now appear to be entering the next phase of this long term bear.  The news from major media has been quite persistently negative or bearish about the economy for a long time now.  It seems to be getting worse now.  This is consistent with the idea that sentiment would get more extreme negative at the most bearish phase of a bear market.  During a very long bull market sentiment reaches many levels of bullishness and the market continues to trade higher even during persistent bullish sentiment.  So we may be in that situation now where persistent negative coverage of the market by mainstream media just leads to lower prices.

If this was a ‘shot gun’ type bear market where bearish price trends only last for short periods of time then I think the recent bearish talk would be much more concerning.

I suppose this bear market has become so popular at this point that a lot of people have a vested interest in seeing the market collapse so that they can add a notch on their belt to say they ‘predicted the crash’.   It has me thinking that the market will not get a 1 day 10 or 20% drop to prove them right.  The market can still drop 10 to 20% from here but make it seem like it is an orderly correction down and then get another big 3 to 4 month rally from the lows.  That would still keep people hoping that the bottom is in.

It will be interesting to see if the market gives the mainstream what they want this time . . .

This market is sick.  There is absolutely zero doubt about that after today’s price action.  Not only is it sick but it is extremely costly!  Especially during the last 7 or so trading days.

I have flip flopped my calls about where this market is going repeatedly for the last couple of weeks and it has been extremely frustrating.  Right now I am into analysis paralysis and I don’t have a clue if this market is going to crash next week or whether we will make another feeble attempt at a rally.  I just have to be honest about it.

Everything was lined up for the market to continue higher today after forming what seemed like a clear Adam and Eve double bottom pattern and a bullish MACD cross.  But the MACD cross has turned into a failure KISS and now at least potentially warns of a cascade decline that shows more lousy bounces and flat trading days for the next month or two.

The weekly chart is still extremely bearish and it does show much lower prices in the month or two ahead.

So I guess I have to go back to what I was originally saying about how the best way to trade this market is to just position trade it!

Perhaps others have had better success than I have but I would really like to meet the traders who during the last 7 or 8 trading days have bought near the lows and sold near the highs.  It has been extremely difficult and to be honest the technical analysis has not helped me much.

Whether you look at the sp500, the DJIA or the Nasdaq there appears to be a variety of patterns that could be rising wedges, symmetrical triangles or flag patterns.  All of these can have eventual bearish resolutions.

Again I have to emphasize that my weekly charts are looking extremely bearish for the next 4 to 8 trading weeks, so position trading is king here!

But the caveat with position trading is that one needs the ability to sit through the VIOLENT market rallies which depending on your stomach and ability to take draw down is no easy task.. You just got to believe… and sit tight… trusting that the weekly charts will eventually play their hand.

Perhaps the whole world was looking for the sp500 to rally back up to the 1150 range including myself.  But now that seems like a distant dream.. or is it ?

You know I was going to do a post here on how the current market structure has a decent resemblance to the 2008 period in September – October.  There was also a period there where the MACD seemed very overextended and was ready for a bullish cross but then turned and got even more oversold somehow beyond belief.  That move led to the 2008 October Panic.

But the key point about that decline phase in 2008 was that it was really sloppy price action and price was all over the map.  But still it did have the waterfall type persistence that seems evident now.

Any previously held fantasies I had about 1987 occurring again seem like a remote possibility at this point.  1987 was just too easy. It was so sudden and had such a full price move so fast it was like a 5 course dinner all at once.

The this market is all about frustrating the heck out of everyone and then making the big move.  Perhaps that is the definition of a waterfall decline.

But the question is, was 6/4/2010 ending action or beginning action ?

Ending as in the end of the decline and final cleanout or beginning action in terms of beginning a new multi week leg down.

The acceleration in volume today was interesting on the SPY ETF.  However compared to the two previous tests down at the 105 level it has a descending slope to it.  So whether or not that means we are headed for a short term triple bottom I don’t know yet…

Sorry for being so inconclusive on this post, but I am feeling like a deer looking into headlights after today’s action.

The following post is not suitable for all audiences. Viewer discretion is advised.

I don’t know what it is about stock market crashes that so fascinates me.  I think a lot of it has to do with the fact that they are exceedingly rare, at least on the daily time frames.  And of course I am talking about stock market indices crashes.  There are always individual stocks that do crashes throughout the year.  But to get a stock market index to do a crash is all too rare.

I was not trading during, before or after the 1987 stock market crash so I cannot tell you what it felt like.  What I have done however is spend a good amount of time looking at the price action that marked that period.  I have also looked at the 1929 time period as well.  But I have to admit that the 1987 period is more fascinating because of the sheer size and persistence of the move.  It is simply jaw dropping.

From a technical standpoint the aspect of the 1987 experience that is the most interesting is how price was able to drop so fast and furiously after having already touched the 200 day moving average.  The drop was so strong and so relentless that it pulled the relative strength index (RSI) indicator to an unbelievable low reading of 11.96.  That is an extremely low reading for RSI for any stock market index.

On October 15, 1987 when the market price touched the 200 day moving average, the market was supposed to bounce off it higher because RSI was already oversold and at the 30 level.  Probably most good technicians would have told you that is what is to be expected.  If I was trading at that time that is probably exactly what I would have told you as well.  But the lesson out of this is that real crashes defy all normal reason and laws of traditional support.  If both you and I and a million other people want to get out of whatever we are in and get out now no matter what price we get then RSI is not going to stop for anyone.  It will just follow the panic selling.

The current market right now just feels like it is trading like a wounded animal.  That is the only way I can describe it.  I have watched tape action for a long long time and I like to think that I can pick up on all the little nuances of daily and intra day failures and confirmations.  But again, the feel in recent days has been of a very sick or wounded animal that is retreating back to its den perhaps to recover in time… or to die… 

It may seem absurd to talk about the market in terms of ‘dying’.  But to a certain degree the market is a living breathing being.  It is built upon money or energy and the confidence of the people who buy and sell it.  If there is a total loss of confidence all at once then one might say that what was previously a healthy living entity can approach near death pretty quickly.

What fascinated me about the May 6, 2010 mini crash was that the trading day started out quite calm and the candlestick was simply showing an ordinary DOJI candlestick.  I watched that candlestick all day long and I saw it bouncing up and down just changing the shape and size of the doji and it seemed pretty harmless.  And it seemed indicative of a turning point for the market to turn back up.

But then all of a sudden the price started to turn negative and then just cascaded into the mini crash.  It was astounding how quickly everything unfolded and it really caught everyone off guard including myself.  But why?  The reason why is probably because the market moves from a state of almost complete tranquility to a DOJI candlestick for half of the day, but then without warning and almost instantly collapses.  That is shocking market action and very unpredictable.

That is why my sense right now is to really NOT trust the seemingly calm and orderly price action of recent days.  It looks so calm and harmless.  But a small doji that forms in the morning can evolve into a 1000 point big red candlestick by the close.

So now we sit just 3 days from a weekend and a Monday just like that time frame in 1987.  Not only that but we have this big astro weekend of May 23, 2010 of the very significant Saturn Jupiter Opposition.  The 23rd is a Sunday.  The last time this opposition occurred Iraq invaded Kuwait and the USA was going to WAR.

So now we have this seemingly similar setup to 1987 we have two trading days before the big astro weekend and a Monday to follow the astro aspect.

So if the cards are right and the stars are aligned correctly then we are about to see a close repeat to 1987 during the next 3 trading days that may strike unprecedented amounts of fear and panic.

I don’t wish to see it happen and this post is only speculating that it may happen based on the setup and pattern similarities and other important hints the market has been giving us.

I am also astonished to tell you that two market veterans whom I listen to regularly and whom I have very high regard for are not predicting such a vicious stock market crash.  In fact they recently have been looking for a minor bounce from the 5/19/2010 price close.

Everything is set up for a repeat of an 87 scenario.

Update: 5/20/2010  Given todays gap down doji we are following the path of 1987 and now RSI is near the 30 level so it is right at the level where a mega crash can develop.  And at this point you have to ask yourself WHO is going to hold their equities TOMORROW FRIDAY going into the weekend of the Jupiter Saturn Opposition ????  I have seen stranger things happen in the market before, but I would be completely dumbfounded to see the market up very big on Friday tomorrow.  Now one could argue that the market could somehow be up tomorrow on short covering, but my sense is that the shorts missed their chance today given today’s immediate weakness and so they may be somewhat ABSENT on Friday tomorrow to do any big short covering.

Congratulations to Yahoo Finance!  Have you noticed this yet?  Yahoo Finance on their homepage has included both the oil price and the gold price on their main quote summary section on the top left of their site.

Previously there was just the Dow, Nasdaq S&P500 and the 10 Year Bond, but now they have included these two commodities on their main page.

I believe this occurred near the time when gold hit above 1000 per ounce.  Perhaps it was some time before that (I don’t have the exact date) but still I find it to be a fascinating psychological trading imprint of sorts in the history of the gold/commodity bull market so far.

By putting oil and gold on their main home page finance section they have legitimized this market sector and maybe opened the doors for more mainstream investors to come into or at least follow the commodity market.

But I consider Yahoo Finance to be more cutting edge and on top of more subtle market trends.  But still, it took them until 2009 to finally acknowledge gold and oil on their main quote page.

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Did you ever use to watch those nature shows on PBS where they showed massive herds of animals in Africa?  I used to watch those shows as a kid and it was always somewhat fascinating to see those large herds of animals feeding there but then suddenly get spooked and almost ALL at ONCE start moving like a wave in all different directions at once in fear.

Check it out:

Well the Leapard in this video in my opinion is the US Dollar Index and it is ready to hunt.  The Wildebeest in the video represent complacent traders and the unaware public.  So note in the video the Leopard decides to start his hunt and the SECOND the herd is tipped off to its presence they start moving big time in all different directions.  What a superb example of herd mentality.

It would seem we are at that point now in the market or very close to it.  The tape action so far this Friday is HORRIBLE.  I went short again about 10:30 am today and expect NEXT WEEK to be extremely volatile with strong bias to downside price action.

So far mid day the volume on the SPY ETF is coming in very heavy and it is telling me we could maybe get close to 270 million shares today? If we do, it is going to be a big big problem going in to next week in my opinion.

We are set up extremely bearish going into next week!

The SPY slammed down through first trendline support today on substantial volume and once again confirmed the bear case that I have been talking about this week.  It was really bearish action today and the dip buying that used to work so well in recent months clearly failed this time.

Right now I am thinking that we will probably come to a ‘resting point’ at 1010 on the SP500 as soon as tomorrow, or maybe by Monday.  That level should hold for some kind of reactive rally to the upside.  This is what happened on the previous touch of support about 4 trading days ago.  It led to a very low volume bounce that led to the severe decline we are in now.  So my thinking is that I will close out the TZA position at roughly 1010 on the SP500 and then wait for a multi day bounce and get prepared to go long the TZA again and find other ways to short the market at that time.

I am also thinking that I would like to hold a core position of TZA throughout this entire decline because I think we have plenty of room on the downside.

I have already said many times that it is still somewhat of a mystery to me what the speed of this decline will be.  When I first started reading BAMInvestors posts on twitter it opened up my mind to the possibility that this could be a very fast and sharp decline. I hate to use the word crash, but it might resemble that type of pattern at least on the weekly price charts.  Up until this point I have been assuming that this decline will be orderly and somewhat slow as it was during the 1975 period after that similar huge automatic rally that occurred. 

But then I started thinking about market psychology, the nature of rising and falling wedges and I have come around a little bit to the camp that at least considers a rapid down price move as at least a decent possibility.

From a psychological perspective think about the average investor or even the pro investor who has been in the market for the last few years.  They have had to endure a huge severe bear market decline in 2008 that was fast, vicious and relentless in its price decline.  If you look at the 2008 bear market on the monthly or quarterly charts it clearly looks like a crash.  If we start to get rapid price decline peoples memory may trigger and cause them to be a bit faster on the sell button this time as compared to last.

But still, I think 1010 is a possible resting point for this market as soon as tomorrow and then a reversal for several days, maybe a week in the form of a low volume bounce.  The leg down after that should be able to break the long term uptrendline in force since the March time period.

By the way there is a full moon this Sunday, so a bounce occurring either tomorrow or Monday at 1010 on the Sp500 seems quite probable.  The closing arms ( indicator which points out extreme oversold and overbought levels) today hit 3.6 which adds to the idea we are ready for a bounce in the next couple of days.

Today’s action in the SP500 has decisively turned the weekly MACD signal line down and closer to a convergence point.  So the longer term bearish picture remains intact and I suspect we are looking at LEAST 1 to 2 full months of downside price action here.

If we do pull back to near 1010 tomorrow on the SP500 it would possibly set us up for a somewhat small head and shoulders topping pattern with the head portion completed either tomorrow or Monday.

Automatic Rallies

Ever since the BAMInvestors talk about a crash I have become interested in the automatic rally concept.   If the rally from the March lows of this year actually is a true automatic rally then it does not bode well for the follow price action after this automatic rally is over which appears to be the case in the next week or two.

I have seen a few automatic rallies in the past.  Some of them have been in individual stocks and the most famous one was during the 1929 crash period.  Here are a few charts that depict what I believe to be automatic rallies and the end result of them (click on chart for full size):

After you have an extensive price advance that peaks in a significant climax, price moves into a fast price decline move that marks the bear market leg or ‘crash’ if you will.  But price gets so extended to the downside that just the simple forces of physics cause an ‘automatic rally’ to occur.  This automatic rally is an expression of the extreme bullishness that marked the price climax and the automatic rally can be EXTREMELY persistent. 

I think we can say that the rally that has occurred since the March lows has been extremely persistent.  I believe there have only been two other times in market history since the late 1800’s where there existed 7 straight monthly up closings.

And I should add that this automatic rally in the SP500 has been on lighter and lighter volume right into the top of the rising wedge which is not a good sign.  You had a very severe price decline into the March 2009 lows that was on huge huge volume, then this automatic rally on lighter and lighter volume…

The volume that comes in on the down leg in the months ahead is going to be the clue as to whether this is going to be a really severe decline that gets enough momentum to smash us to the March lows.  Or whether it will be a decline that eventually finds support in the 900 to 950 area before eventually resuming higher in a longer term bull run.

By the way I should mention that even if we do get a downward reaction in the current market similar to what happened in 1929, it should be noted that it will probably take plenty of time to unfold.  We are talking many weeks here.  I doubt very much that we are looking at a 1 to 3 week severe plunge.

Stay tuned! The month of October is going to be a potentially wild month in the market!

In a word. Thoroughly confused.  I can still see the broad market trending higher maybe even for the rest of September.  The price action continues to show little interest in breaking down.

What is bothering me is that I started following Larry Pesavento’s forecasts recently and he keeps talking about a big market drop that is supposed to happen soon and happen suddenly and that will eventually break the March lows.  It has screwed up my own psychology of the markets because I have been generally bullish and am still seeing enough bullish setups in individual stocks.  The market still has not given signs it wants to start a major downward trend change yet.  So why try to pick a top?  It just seems fruitless at this point.

The monthly SPY price bar so far rejected the lows and now appears to want to expand topside.  To be sure, when the REAL correction comes it will come suddenly and a good portion of the damage will happen in a matter of hours.  But until that point comes I am still bullish on this market!

The entire rally we have had since the March lows has been on lighter and lighter volume.  This is a warning that eventually a nasty correction will start but the problem comes in trying to pick a top.  Low volume rallies can seemingly last forever sometimes.

There is a gap on the SPY ETF that would be filled if the SPY hits 107.41.  It is possible we are going to go up there and fill that gap in the days ahead and then turn around from there.  107.41 is not that far from where we are today on the SPY.

I am also seeing a possible triple bearish divergence developing on the SPY ETF.  It will probably take another week or two to develop but it is worth keeping an eye on.

In the meantime I am still focusing in on ABK because I think ABK at least has the chance of being a blockbuster trade, maybe even better than the gold and silver breakout.  I like gold and silver but the problem is those markets can take forever to move.  I want to try to find something that moves soon and moves big.

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It took me a long time to learn this and to be honest I still have not 100% learned this principle.  What am I talking about ?

I am talking about that feeling you get when you enter a trade, it starts to go your way and you sell ‘early’ taking your 5 or 10 percent only to see the stock zoom higher onto much bigger gains.  So then you might start the ‘coulda shoulda woulda’ syndrome where you start to regret the fact that you jumped out too early or made a mistake in your judgment.

This has happened to me many times and each time it happens I almost have to pinch myself so that I remember that THERE IS ALWAYS ANOTHER TRADE OUT THERE.  There is no reason to feel bad about making 5 or 10 percent even if a stock goes on to make 200%.  Why? Because there will always be more opportunities for other entries and setups that are just as good or better.  Sometimes they do not show up that often, but eventually they will come and you will be there to pounce on them.

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On a risk to reward basis which is the better trade? The gold trade or the natural gas trade?  I think they are close to equal ground, but the more I think about the more I think that the UNG ETF Natural Gas trade is the one that has more merit in terms of maximum risk reward.

But let me be clear, the UNG ETF potential move is still a much different animal than the gold market.  I don’t think it can be said that natural gas is in a long term bull market.  It is an entirely different animal.  But nevertheless it has had a massive bear market crushing decline and now looks like it wants to get started on the ‘busted pattern’ setup that I had mentioned a couple times before.

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I started a new category here called ‘Trading Psychology’ so that I can occasionally talk about aspects of trading that are more intangible. I can tell you with zero doubt that one of the most difficult aspects of trading that has challenged me time and time again is the tendency towards over trading when there really are not any good trades to be had.

That’s where patience comes in, and that is why I posted a picture of a cheetah in this post waiting in the tall grasses of (Africa?) to scope out its target and see if if can find something interesting to chase.  I don’t know how long cheetahs wait in the fields before they scope out a target and attack.  But I doubt they just run into the field paws flapping everywhere and then just chase and jump on the next moving zebra over the hill. 

They take their time, they scope out a target, they are extremely patient.  Heck most animals and pets I know of are very patient.  Certainly not all of them are, but I would say most of them are.  So it is not just cheetahs.

So most traders can probably learn a lot from the cheetah and most other animals and pets.  Try to avoid rushing to find a trade during the trading day, and then in panicky fashion buying something because it ‘looks good’.

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