April 11, 2013

Logical Market Update: DJIA – S&P 500 Post Additional New Highs – Volumes Drop – Volatility Upticks – Correction is Near

DJIA, S&P 500 Post Additional New Highs – Volumes Drop – Volatility Upticks –

Overbought Indicators Flash Caution – Signals a Correction is Near


Here we are pushing to close out the second week of April and still no pullback to speak of in sight.  Haven’t the bulls checked the charts – mulled over the stats?  In the past three years, the markets have hit a high in April, which promptly started large corrections of 10 to 19%.  Don’t the bulls read the Wall Street Journal or Barron’s, or the numerous other bloggers and articles giving their best to warn of an impending slide lower.  In spite of dire warnings the DJIA and S&P 500 have continued to grind higher as they have since November 2012 without anything more than a four percent correction.  Are there signs of exhaustion?  Is the rally past its prime? 


Logic sides with the bears but reality seems to favor the bulls – for now.


As much as I have written recently regarding the necessity to toss out most if not all of your old trading ideas and join the ranks of algorithmic trading I haven’t as many of my friends believe gone over to the Dark Side.  On the contrary, it is a technical analysis tool that I learned over 25 years ago, the Elliott Wave Principle that shows me the ultimate highs are not in yet even if the markets throw a 10 to 20% correction our way over the next few months. 


It took many years but I now embrace the philosophy that markets move to “maximum pain thresholds” forcing the weak hands to finally give up and run for the exits.  But deep in the markets historical psyche lays the deeper truth to this statement. 


Markets exist to facilitate trade – to provide a place where buyers and sellers can transact.  A well-run exchange (market) creates an atmosphere, which allows price to become a volume seeking mechanism.  Is this not why the markets tend to gravitate where the majority of people will be forced to trade whether or not the trade is a winner or a looser.  Would this not be more logical as to how the view began that the markets actually seek out these “pain points.” 


Yesterday I discussed how the use of overbought/oversold indicators and momentum oscillators indicate where money is flowing, where an imbalance of buyers or sellers occurs and a  “bull trap” or a “bear trap” forms.  It is also when the market will continue to move (in the direction creating the pain) to find the maximum volume where the trapped traders or investors are forced out of their positions.


Add to this that recent reports show that in the first quarter of 2013 there was a more than $74 billion inflow into equity funds as a longer –term upward pressure continues to thrive on those that don’t want to be left behind and “miss the rally.”    Balance this against the many who look at the shorter-term picture and have been preparing for the “sell-off.” 


My longer-term analysis continues to show that the “mother” of all bull traps is in the making and will continue to pull in more unsuspecting late comers to the party who unknowingly are blinded by conventional wisdom theory and can’t see that the bull is very old and will ultimately give up the ghost.  These poor investors will be caught like deer in the headlights as a significant correction slaps them down.  But don’t be fooled the market gods will delve out additional pain over the short-term and trap the bears with a few more thrusts to the upside. 



Restated from Wednesday’s Blog (as it remains valid)

Trading profitably will require the use of a trading system that has been built using algorithms that have been tested and tested again.  The Diversified Trading System has been designed and built by traders for traders of all experience levels, from novice to expert.  The DTS Hawk, Falcon, and Eagle (the birds) are the best trading platform available for use on the Ninja Trading platform.  When used together with Trade Manager all of the guess work of risk management and entry and exit strategies has been removed, allowing a trader to – trade well.  

Observations From Thursday’s Trading Action Are Unchanged From Wednesday. 

Trading ranges continue to supply ample amounts of opportunities in the major indexes, treasury markets, precious metals and many equities. such as Apple Computer (AAPL), Amazon (AMZN), Google (GOOG), Netflix (NFLX), and LinkedIn (LNKD) to mention a few.  Many ETF (electronically traded funds) are also trading in expanded ranges with sufficient volume to provide for the most part a smaller spread between the bid and offer.  In precious metals – GLD and SLV, treasuries – TLT (long bond) and TBT (short bond), equities – SPY, DIA, IWM and the QQQ will move in lock step with their broader index counterparts – the S&P 500, DJIA, Russell 2000, and NASDAQ 100 respectively.  


Earnings season will be in full swing starting next week.  I continue to suspect that a correction – (down in equities, up in treasuries, down in the US $/Euro, up in Precious Metals) is due and may kick in next week.  Bear in mind that the harder prices are driven to an extreme the more likely the correction will be sharp and precipitous in direction.


Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

  • DJIA future (e-mini available)
  • S&P-500 future (e-mini available
  • US$/Euro futures (e-mini available)
  • GS (Goldman Sachs)
  • AAPL (Apple Computer)
  • GOOG (Google)
  • LNKD (LinkedIn)
  • NFLX (Netflix)
  • 30-yr Treasury Bond future
  • 10-yr Treasury Note future
  • TLT (Treasury Bond Long ETF)
  • TBT (Treasury Bond Short ETF)


Risk Management using Trade Manager (Repeated from this week’s blogs) 


Position sizing is likely the most important element of successful trading; it is the part of a system that determines whether or not you’ll meet your objectives.  This element of risk management determines how large a position should be traded based on account size (cash available), the current volatility of the instrument being traded, and your trade objectives.   Most if not all successful traders use an automated (algorithmic) system for determining position sizing and to be frank it is what separates winning traders from losing traders. 


Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. 

Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.