Here’s a bullish pattern that’s still valid…

Stock index
futures opened Thursday’s session slightly lower as market players digested some
of Wednesday’s sharp gains.
A quick move to fill the gap was all the higher
we’d see for the day as the futures headed south and never really looked back.
As I said yesterday, it would be interesting to watch if the market could still
withstand inflationary news, which was reflected in the noontime Philly Fed
release. However, while the weakness could be chalked up to inflation,
weak earnings, or tight shoes, I would attribute it to the “anything goes”
scenario that is characteristic of options expiration week. With the past
2 days’ wide ranges, I heard “this is just like the good ole days” more than



When Not Knowing Really Is Knowing!

When someone says “I don’t know” it usually means they are expressing their
own lack of knowledge or ignorance about a subject or about the answer to a
Ignorance is generally looked
down upon by society, while appearing to “know” is typically a response that
attracts confidence from other people. When you hear a politician speak,
you will rarely hear them say, “I don’t know” because this would lead others to
believe that the politician is either uneducated on the subject at best or
downright ignorant or uncaring at worst.

But what about in the markets?

Does saying “I don’t know” mean that you are ignorant when
you are talking about the markets? Is this necessarily bad? If you “know”
the market is going up, does this knowledge really lead you to bigger profits?
Or does the “knowing” fill the mind, shutting out the ongoing signals of the
market from your perception? Is a mind full of “knowledge” regarding what may
happen, able to perceive what is actually going on? Is there a difference
between the following?

I know the market is going up.

I think the market is going up.

The market has to go up now.

I want the market to go up.

Why isn’t this market going up?

It looks like the market is going up.

I’d say that the most valuable statement above that will
help the mind stay detached is the one that starts with “it looks like.”
This is the only statement that refers to actual price action, above knowing,
thinking, wanting, needing and questioning. The “it looks like” statement is
very powerful in centering the mind where it needs to be centered, which is on
reality rather than on internal needs to be right. A trader who is in this
right frame of mind will often answer the question, “which way is the market
going?”, with “I don’t know, but it looks like it is going up.” Not only is
the trader who makes the above statement able to see what is actually going on,
he is open to new market action, and rather than being committed to a statement
about the market going up or down, the trader is committed to what he is seeing
without becoming closed off from what is actually going on.

The statement, “I don’t know” is a way of telling the ego
to butt out. When you are in an “I don’t know” state of mind, it is difficult to
become emotionally attached, and that is a state of mind that can prove
profitable. Granted, observation can be mistaken, but unattached observation
lends itself to clearer pictures and quicker reversal.

So, those who don’t know, know, while those who know,
don’t know.

There is a fine line between thinking about what might
happen, and then entering just as it starts happening and thinking about what
might happen, and entering BEFORE it starts happening. Let’s look at a
hypothetical example of a simple “line in the sand” type of system. The system
buys on bar close when it crosses above the line, and sells on bar close when
price crosses below the line (on a closing basis). A chase parameter is set of 1
point above/below the line where entries may be taken via limit orders.
Now let’s assume for the sake of argument that a given line is typically crossed
5 times per day on a closing basis, and that of those crosses, on average only 1
of those crosses makes money, but enough to cover all the other small losses and
secure a small profit. After trading this system for some time, the trader
begins to see unfilled entries, where the bar closed more than 1 point beyond
the line and didn’t look back, and would have been profitable had they been
taken. Now bear in mind that the original system is profitable, but just not as
profitable as it would be with those missed entries.

Can you see where this is heading?

So the trader changes his rules. He starts
anticipating the fact that the bar is going to close beyond the line, and takes
a pre-emptive entry. The first thing the trader notices is that the vast
majority of these anticipated entries are false signals. He starts noticing just
how many bars actually poke through this line on a non-closing basis that never
trigger a signal based on his original rules. He finds that his total number of
daily trades more than doubles on average, and that almost all of the newly
added trades are losses. These losses are really starting to add up.
The trader further notices that his method is now losing money because he has
taken too many losses to be made up by the 1 or 2 big winners on a given day.
The trader also starts to notice that he is hesitating in executing some of the
trades now, and that those trades that he is missing are turning out to be
overwhelmingly profitable. So the trader starts to work on self-discipline
by trying to follow the rules, including the anticipated entries (I hope you see
the irony of trying to follow the anticipated entries in a disciplined manner).
Meanwhile he starts looking at various filters to know when a poke through the
line is valid or not, and so he gets into various oscillators, moving averages
and other technical indicators. Before long, the trader has a complex
trading system that might make money if he could only follow all the signals,
but in the end is only marginally more profitable (or even not as profitable) on
paper than his original simple system. You know the old adage, “If it’s not
broke, don’t fix it.” Ultimately every person has to answer a single
question that determines what they get out of trading. Unfortunately, most
people don’t answer the question truthfully (at first).

Daily Pivot Points for 10-21-05

Symbol Pivot R1 R2 R3 S1 S2 S3
INDU 10322.00 10391.88 10502.65 10572.53 10211.23 10141.35 10030.58
SPX 1182.82 1192.28 1206.77 1216.23 1168.33 1158.87 1144.38
ES Z5 1185.17 1195.08 1210.92 1220.83 1169.33 1159.42 1143.58
SP Z5 1185.10 1194.50 1209.90 1219.30 1169.70 1160.30 1144.90
YM Z5 10335.67 10410.33 10530.67 10605.33 10215.33 10140.67 10020.33
BKX 96.15 96.89 97.90 98.64 95.14 94.40 93.39
SOX 440.73 443.92 448.04 451.23 436.61 433.42 429.30

Weekly Pivots for the Week of 10-17-05

Symbol Pivot R1 R2 R3 S1 S2 S3
INDU 10255.64 10354.82 10422.30 10521.48 10188.16 10088.98 10021.50
SPX 1183.76 1199.33 1212.08 1227.65 1171.01 1155.44 1142.69
ES Z5 1188.75 1205.75 1221.50 1238.50 1173.00 1156.00 1140.25
SP Z5 1187.73 1203.47 1217.03 1232.77 1174.17 1158.43 1144.87
YM Z5 10280.67 10383.33 10464.67 10567.33 10199.33 10096.67 10015.33
BKX 94.45 96.04 96.85 98.44 93.64 92.05 91.24
SOX 444.27 455.44 468.18 479.35 431.53 420.36 407.62

Please feel free to email me with any questions
you might have, and have a great trading week!

Chris Curran

Chris Curran started his trading career at the
age of 22 with a national brokerage firm. He combines fundamentals and
technicals to get the big picture on the market. Chris has been trading for 15
years, starting full time in 1997, and has never had a losing year as a
full-time trader.