Educational use only. Never intended as advice.
I was really fortunate to have my best month ever in January, which upon further review (as they say in the NFL) came about because of two simple facts: 1) I had an analytical edge and 2) I adhered to the discipline of using that edge, sticking to a few strategies.
Worst trade 'miss' (not taken) of the week:
Clean miss. Here's ILF, price chart. ILF made a narrow range bar Wednesday (narrowest range of the past 7 days) and was hugely overbought. As everybody here knows, I'm not a 'full-timer', and I just missed the trade. The stock sold off hard. As Todd Harrison reminds us, "it is easier to make up opportunities than losses." If you trade a lot, then you hit some and you miss some. Mickey Mantle struck out 1710 times in 18 seasons, but when he wasn't striking out, he hit 536 homers, batted .298, had a Triple Crown, was MVP three times, and was on seven World Series champions.
The most important charts are weekly charts.
Here's the Paris CAC, weekly, making a Connors 'Undeniable' pattern, a minimum of a six-week high with a close below the open for the week. When Larry Connors described this, he reported that it had (as I recall) about 60 percent reliability as a reversal marker. Of the ETFs trading at least 400,000 shares a day, 14 show this pattern, while 1, TLT, shows at least a six week low with a close above the open. From an intermediate-term perspective, this is a negative...as trader-investors SEEM to be seeking the safety of bonds versus the risk associated with equities.
MDY (Midcap Spyders) shows the same pattern. The weekly chart with 10 week (orange) and 30 week (blue) moving averages, and Bollinger Bands set at 10 periods, 1.5 standard deviations. This prompted me to buy some March MDY puts (which I considered ridiculously cheap) as a hedge (against my long positions). I also sold off my DIA puts on the Dow weakness as I considered the Dow too likely to stage a reversal short-term, and my puts were short-dated. In effect, this was a rollout.
Why did I think that way? Well, technically, the financials are incredibly important. Here's the XLF, with five days of lower highs and lower lows, although there's one day in the middle that closed above the open. My son's work shows that the financials often lead the SP500. When the financials turn, then the SP500 follows. "As the twig is bent, so grows the tree." The market manipulators will do everything in their considerable power to keep the market from going down, and protecting the financials is first on their agenda. So, even with gold spiking, hourly wage pressure rising, and productivity falling, all of which are big negatives, 'they' will try to prop the financials. That's how the game is played.
So, Friday's tells were Citigroup (C) and Bank of America (BAC), that both closed down and are hideously oversold. They are due for a bounce (not advice), and Monday being the best day of the week, that's what I'd expect.
Okay, so maybe the market is saying that insane bipartisan government spending (choose your poison, er programs), deficits, massive ramping of the money supply, and a slowing economy aren't so 'robust'. That only matters when it matters, and many of us play day to day. In the NFL we might call it 'salary cap' problems, but they play the game Sunday, and salary caps are year to year problems.
As always, I hope to be back throughout the weekend, with charts and looks at where the 'mean reversion' opportunities might be.
Thanks for reading and have a great weekend.
Ron
