Lose The Crowd, Don’t Become Part Of It

And while the DAX virtually stood still on a net basis for the week with a mere
gain of seven, the German index also provided outstanding intraday volatility to
open and close the week, taking turns with the U.S. in fluid “you lead, I lead”
fashion.  In fact the DAX may have actually tipped Thursday’s morning’s U.S.
hand with loss of key support well before the pits opened here in the states as
noted in our lead chart below.

Around the globe, both the 13- and 60-minute timeframes — cornerstone
timeframes for our trend-based intraday scalp and swing traders alike —
provided outstanding backdrops following Thursday morning’s trap.

I finally started reading “The Purpose Driven Life” this past week. 
Having been at the top of the New York Times Best Seller List for what
seems like eternity (pun intended), the book has been on my list of to-do’s for
some time, and so I finally stopped putting it off.  As always, when I read
non-trading books, snippets are plentiful for those reading between the lines
that reinforce the concept that trading indeed mimics life.  One such early
excerpt was “Those who follow the crowd usually get lost in it”, which
immediately reminded me of several market “predictions” made after Wednesday’s
FOMC action and Thursday’s resulting trap.

As I’ve said many times in the past, I usually do my darndest to avoid reading
any industry press, but especially anything that doesn’t assist in establishing
a proven method — system or discretionary — or otherwise guide self-sufficient
trading.  That’s not to say the rest may not be helpful, I just prefer to
place trading accountability with the guy in the mirror.  Like I’ve said, if
this piece doesn’t help, don’t read it.  Yet I do tend to glance around at
Fed time, and I also wanted to check into recent rumors of manipulation in the
S&P Pit for some comic relief.  (We’ll get back to that one in a second.)

In scanning the press, I noticed what seemed to be a rather heavy “Buy
Tech” bandwagon that seemed reminiscent of the late 1990s “day late,
dollar short” crowd.  Many of the themes tended to be based on the markets blip
up following Wednesday’s FOMC announcement, where we closed a bit higher in a
whopping 90 minutes of trading and above a few key supports.  For whatever the
reason, the “It’s safe to go in the water” signs were in abundance by
Thursday morning, providing the unsuspecting “crowd” the opportunity to line up
their buy orders.  Fast forward to Thursday evening where the Nasdaq proceeded
to lose 1.5% for the session, with the SOX doing its best Red Sox implosion
impression by giving up a whopping 3.7%.

Now my point isn’t to point figures at the pundits … we’ve had a field day with
that one in the past and so we’ll let it rest this time.  My point also isn’t in
“look who screwed up” as we all make bonehead mistakes — just look back to

last week’s column and brain cramp at this end.  Plus, the market could have
turned everyone into “I Told You So” geniuses (of course, we always hear
about those in bold print).  And finally, I also stuck a trading toe
in the “Long Pond” — Cape Codders will get that one — on a midday DAX
pullback to 13-minute support before reversing hard in both the DAX and U.S.
markets upon DAX support loss and U.S. market implosion.  So the pundits’
intentions weren’t all that bad from a momentary technical perspective.

Ah, but the market isn’t a static snapshot and can change violently on a
heartbeat.  It has and always will be a think-on-your-feet and
adapt-on-a-moment’s-notice business — even for longer term swing traders.  And
while Thursday’s morning early loss of key intraday supports and resulting bear
trap should have been clear to anyone half-decent at reading the tape, the
problem is that most don’t learn to be self-sufficient tape/chart readers and
continue to rely on someone other than themselves.  We’ve called this the “roach
motel” trap in the past … others can get you in, but usually aren’t around to
get you out … at least not until significant damage has been done.

Here’s the scenario — it’s going to be a corny one, but stick with me.  Jack
and Jill Trader both spend Wednesday night reading publications and watching the
tube where it seemed like 90% of the industry press (that’s the
so-called experts, gang … many of whom don’t trade as their primary job)
was screaming “Buy Tech”.  Jack, who might even be a half-decent chart
reader, figures it’s got to be close to a sure thing, and buys early Thursday. 
Jill, who happens to read the tape very well, checks her charts and also fills
her buy order based solely on her setup and trigger.

The difference is that Jill sees the loss in support, knows her next move, and
reacts on her own accordingly while Jack freezes as he double checks what
was printed, videotaped, or logged by his chatroom horse race caller to make
sure he read it right.  After all, they’re the “experts”, right?  The next thing
you know, Jack is losing money, ticked off, trying to locate the pied piper,
pointing fingers at the rumored manipulation accusations (I said we’d get
back to this … but hang on one sec.), and generally blaming everyone but
himself.

OK, I said it would be corny, but the cornerstone issue of success in this
business remains hard-earned self-sufficiency and accountability … period. 
Last week, I said I screwed up a chart sequence that I shouldn’t have.  This
week, suffice it to say that the pitch after Thursday’s early “high and inside”
brushback (in the context of long setup test and quick failure) was not
fouled off.  In both cases, the trading buck has to stop with the man in
the mirror.

Back to the manipulation rumors, I of course have no clue as to whether they’re
true or not.  And frankly, I could care less.  I certainly don’t condone such
activity, but does it really matter as a trader what’s driving the markets??? 
Yet I still see far too many traders trying to figure out “why” and not taking
action, or taking action far too late, when 99% of the time the “why” is totally
irrelevant.  We read the tape and charts, and react.  Period.  Over and over and
over again.  Whether a move is due to Johnny Rookie mis-keying an order by three
decimals, Trader XXX pushing the bids or asks, people blindly following Joe
Guru’s crystal ball “predictions”, or the capturing of Osama’s pet fish doesn’t
matter.  The tape is the tape, the trend is the trend, and it IS readable and
tradable for profit just about every dang day of the year.  You simply have to
work harder, get up earlier, and stand farther from the crowd than those relying
on others.

Otherwise you’re simply renting a room at the roach motel.

—-

On Tuesday, I experienced (and thankfully survived) my first hard drive crash. 
Fortunately, I was able to update backups of my key data files, some of which
include more than two decades of financial data, before losing the drive
completely.  Installing a new drive and operating system, and reinstalling all
of the trading hardware and software took about six hours after a frantic late
night run to Best Buy to get the drive.

Yet again, we as traders have two choices in running our business: Rely on
someone else and wait for the appointment — thus incurring trading profit
opportunity cost, or learn to do it yourself, spend the night doing it, and get
right back to work the next day.  It was a pain and I lost some sleep.  But no
one ever said this business was easy and we didn’t miss a market beat on
Wednesday.

Oh yea, and use the start of the third quarter as a reminder to back up your
files.