A Trading Myth, Dispelled
Both major markets closed higher
this week with ES closing up 16 and the
Nasdaq tacking on 32, or in other words “same old, same old”. And while life
for the moment remains good for the bulls as asks are pulled with reckless
abandon, traders should take note that the week closes with the first
combined weekly and daily ES price vs. momentum divergences since January.
Actually, January’s combination was so marginal, that you have to go back to
pre-2002 to find a truly similar combination, yet we’ll stick with January to
err on the conservative.
Combine these multiple divergences with a SOX.X sector that has been lagging the
broader market a bit in recent days, along with the completion of this week’s
often-positive witching bias, and next week — as Arte Johnson would have said
— will be verrrrry interesting for the bulls.
From an intraday perspective, the 13-minute and hourly trends have been stellar
in recent days, as noted in the charts below. Frankly, the intraday market
rhythm has been about as smooth as it gets, and it’s certainly nice to see
summer trading in the rearview mirror.
Let’s get right to the charts and then get back to the current deafening
“bull-speak”.
S&P 500
src=”https://tradingmarkets.com/media/2003/Don/dm091903-01.gif” width=”573″ height=”616″ />
Nasdaq
100
src=”https://tradingmarkets.com/media/2003/Don/dm091903-02.gif” />
Moving Avg
Legend: 15MA
Larger Timeframe 15MA
See https://www.donmillertrading.com
for Setups and Methodologies
Charts © 2003 Tradestation
They’re Back
The plague appears to be back with us as
the “I Told You So” disease has once again set in. We see it every time
the market breaks into a strong trend where mortals (although last I checked, we
do all need to sleep every night) use such market behavior to fuel their egos
and self-serving interests. Then again, maybe “plague” is a bit drastic as such
behavior is really as typical as the common cold in this industry — it’s just
that the voices get just a wee tad … oh what’s that word … oh yes —
“LOUDER”
when the market goes on its occasional runs which it does from time to time.
Now this isn’t to say that there aren’t educated and experienced folks who can
“accurately” predict likely market movement and try to assist folks with sincere
intent. Patterns based on market participant behavior do occur and such folks
are a blessing to the retail public, and you can find many on this site. And
before we call the kettle black, I too try to help folks anticipate
probabilistic market movements based on sound market behavior dynamics. And as
should be the case, sometimes the move works, sometimes it doesn’t … for none of
us have tomorrow’s paper … thus the reliance on probability and effective trade
and size management.
Yet, as we did during the last time when the dominating side of the market
exercised their vocal cords (circa fall 2002), perhaps it’s a good time to
revisit the issue of probability before we get too caught in the ’02 “The Sky is
Falling” and ’03 “Everything’s Coming Up Roses” pied piper mantra.
Let’s start with Myth #5 of the QQQ and E-Mini instruction
videos.
Myth: Trading is about
finding the best system or indicator.
Reality:
Every method will have some
probability of success, the probability of each being closer than
you think.
Yes, there’s that nasty (for some) word again
— probability — a term that likely stirs very uncomfortable feelings within
the chest-pounders’ souls. Yet I suppose as long as there are markets,
analysts, and others who contribute public views and opinions on the market,
we’ll get the whole spectrum. Of course, right now, we’re hearing it from
breakout and trend traders from the long side, and we can certainly set our
clocks forward at some point to hear it from the reversal traders, those trading
larger timeframes, and the shorts. Further, it’s likely that I’ll even slip
from time to time and forget my own preaching. As I’ve said before, if and when
I do, please slap me … hard.
And while such shenanigans merely reflects life in a dynamically moving
environment and every trader and “analyst” has their moment in the sun, here are
just a few industry snippets I’d like to see more of:
“I told you the market would go down (or up) and I was wrong.”
“I told you the market would go down, and it did based on probability and not
any rocket science at my end.”
“I told you the market would trend and you should enter here. And here’s my
phone number so I can fulfill the second half of my ethical obligation with
guiding you with a profitable exit into the retail hype or a stop if I prove to
be wrong … call me anytime.”
“The market curtailed my expected move not because of some external event out of
my control and therefore leaving me blameless and faultless, but because I lost
sight of the extremes of the extension. Simply put, I screwed up.”
“Red Sox Win the World Series” (Oops, wrong column and too early.)
We could go on, but we’ll save on the virtual ink.
The other alternative would be for us to simply join the crowd. For example, I
have this basement light that occasionally blows out a bulb, yet works most of
the time. The next time I pull the string and it goes on, I think I’ll open my
front door and shout “Eureka, my light bulb that usually works and which I
predicted would light just DID and I knew it!” Uh-huh.
Yes, one can effectively anticipate market patterns. And there are those who
both trade and anticipate (ah, the sample size narrows) successfully enough to
make a long-term go at it. Further, one pattern will sometimes dominate for a
longer period of time than another, which reflect times when astute traders will
lighten their sizes on any new entries as the move progresses because the time
will end … it always has and always will. Markets oscillate, trend,
reverse, and repeat based on participant behavior just an ocean tide rolls in
and out, occasionally with Isabel-like force. Lest we forget, that’s simply
nature’s rhythm, whether it be human or mother nature, and our job as
individuals is to effectively navigate.
Final Thoughts
My sincere thanks for the overwhelming
feedback to the last two columns. While a miniscule few felt that one component
of the discussion didn’t belong in a trading column, I’ll continue to speak from
the heart in terms of makes this trader tick, specifically those areas of life
that have a direct impact one’s trading performance.
My goal ever since I accepted Larry Connors’ request to begin this column a few
years ago has always been to educate by sharing one person’s ongoing trading
odyssey. And if doing so means occasionally stating the “uncomfortable”, then
just maybe we’ve made some small strides in getting at real issues that are
too-often dwarfed by hype. For as is often the case with effective trade
management, doing the “uncomfortable” is typically the right thing to do.
Good Trading and Have a Great
Weekend!