The Big Should

I look out my window and think to myself, it's summer, there should be sun- but there isn't. I look out at the tree across the street and think to myself, the leaves should not be turning color or falling- but they are. I look at the five day forecast indicating rain and think to myself, I should be somewhere else. Everywhere I look today I'm not seeing what I should be, but...

...in the market this does not seem to matter.  Traders begin the slippery slope of telling the market what it should or should not be doing and probabilities take a back seat to prediction. Price should be going to 14. This trade should be successful. Tomorrow the SP should hit 1250 and bounce. In reality however, everything in the market is in its proper place and in its proper order and not only is everything doing what it should be doing, it's doing what it ought to be doing. So if everything is doing what it ought be doing, why should it be doing anything else?

Everyone trades their personal market. Every participant comes to the table with a different story and while over time and in aggregate market participants begin to get bucketed and bracketed, each individual story is nuanced;  however, the larger historical narrative has given each of us enough similar traits to play a role on this stage whether it be greed or fear- perhaps envy, so while we trade a different market there are tendencies to trade the same way. I have found myself challenged by these roles, particularly as of late where I've felt out of sync with this market, but I was truly out of sync with was myself. There's a fine line between a market not being tradeable in accordance with my style, and me not being able to trade well and rationalizing and reinforcing why this is so. The current environment has not been the kindest to the style of momentum break out trading I employ and in an effort to avoid altering this during a challenging period and suffering style drift I held firm.

However, not only was I finding a lack of trading opportunities during the past few months, my frustration was beginning to rise and I was not even finding the opportunities to continue to find learning experiences and lessons to study and to be more constructive with my time. I was locking my mindset to the market and not listening more clearly to what the market- myself- was telling me. I was becoming antagonistic and angry every time I looked out the window and saw a gray sky with rain, a constant reminder that I might miss the entire summer and I knew I was not where I “should” be.

So, considering I've been applying myself to understanding the markets I decided it was best to take some time away from the markets. Having played tournament chess, I am acutely aware of my cycles of stagnation and peaking. Applying myself thoroughly to the subject of chess for extended periods of time I would gain knowledge and experience and increase my strength, but I would also plateau and appear to be treading water for extended periods as well. I came to realize that during these times it was best to simply step away for a while, digest, and let everything sink in. Even though I developed a plan of approach for earnings season I realized it was in my best interest to step away and let everything sink in.

Another lesson that I've taken from chess is understanding my place. There's a class and rating system that makes it clear where I stand. I know how many points I receive from a win, loss, or draw and how many points I've earned or lost, my standing, and any prize received at the end of each tournament. In the markets however this is not the case. The main metric of performance is my equity curve, but that does not always tell me whether or not I've improved as a trader, just as increasing my market knowledge may not have an effect upon my equity curve. I can learn everything there is about markets and conceivable trade worse for it. Although I know I have increased my knowledge considerably, and I have maintained a profitable equity curve, I was struggling with the belief that I was not doing well which was in dissonance with what was occurring- another reason to step away.

In a couple of days I have an opportunity to camp near a hot springs in the high Sierras and sit under a canopy of constellations and should I see a shooting star I'll make sure not to think of candle sticks and if I see a bear make sure not to think of market cycles, for that is one thing I should be doing right now.

Since I am not there yet, I wanted to quickly glance over the landscape this past week and what stands out is the $USHL5. Two weeks ago the SP closed at 1353, .61% higher than Friday's close, yet the New High/New Low cumulative is 1200 lower, which to me looks like I was not the only one taking the week off. 

$USHL5 07/22

Back Where We Started

It's been a few weeks since I've been doing a weekend analysis of breadth readings and what is forming is a composite of a range bound market. Each weekend I've been highlighting the ups and downs and each swing up offers the possibility of an uptrend continuation while each swing down weighs heavier and suggest the floor may be cracking. Through this I've noted a lot of frustration brewing and pessimism in sentiment.

The indexes continue to fluctuate. Over the past 5 months the majority of price action on the SPX is within 1256 to 1344. During this time there have been windows of opportunity to swing trade, but they have been as fast as an ignited match burning out. Blink and they're gone. Last week it did look like there was some broader based participation on the rally but in retrospect it looks like a mirage. During the last two weeks the cumulative High/Low moved from 25 to 1850 and as it now it's 303.

$USHL5 07/15

During this time there the $BPNYA crossed it's 10 day moving average giving a bullish signal, but as of yesterday it has pulled a smidgen under.

$BPNYA 07/15

Looking at the Market Monitor, there was a breadth thrust during this time as well with the 10 day ratio, the third column after the dates, moving from 1.61 to a high of 2.92 before pulling back. As it now stands at 1.35 and all things being equal, will drop to 1.19, breadth has deteriorated quickly over the last 5 trading days. I consider periods above 2.0 and periods moving from below 1 through 1.5 tradeable periods. Dwindling downward, in this particular case from 2.91 to 1.83 is when I put on the beaks. A lack of breadth indicates to me a more challenging swing trading environment and decreasing candidates. 

From my perspective, of a short-term 3-5 day swing trader aiming for 10%+, I've found this to be a very challenging environment. Even though my time frame is short, the period for profit extraction in this market has been even shorter consisting of a day or two and 5% if lucky before gains evaporate. Unfortunately this has caused some hitches and I've been quick to pull the sell trigger missing out on some excellent gains, as well as taking a few less than stellar candidates to begin with.

With earnings season blooming and a number of heavy weights coming up in the next couple of weeks along with a number of macro issues my expectation is clearer market direction as participants have clearer information to process. Sideways markets tend to suggest balance and this has definitely shown this characteristic as every opportunity for the market to crack has still been bought and each opportunity the market has had to challenge the top of the range has been sold. I would classify this as dynamic equilibrium. Either this is a coiling spring ready to pop to the upside, or a bucket under a leaky faucet waiting for the one drip to break surface tension.

Ruh-Roh?

If it were so easy, a cave man would be doing it and probably a lot worse being so much closer in time to the inner monkey. Today I could not help but remind myself of thinking in levels: “I know that you know that I know that you know that I know etc...” It works up to a point, but only in so far as one goes as far as need be. Today was the last day of POMO and I knew it was the last day and you knew it was the last day and I know that you know that I know it was the last day; I should have probably stopped my thinking there. Today's market reaction did seem highly plausible on the last day of POMO, after all.

However, it being so obvious I thought that it would not happen today simply because knowing this date is the date I believed this action would have occurred much sooner. It may have and I just wasn't reading the market correctly or maybe I didn't really care because there was a tradeable breadth thrust occurring in the midst of it. Maybe POMO propping the market really was that simple and the buy until they don't strategy was Occam's razor.

Regardless, what I thought coming into today is no longer particularly relevant to what I am contemplating now. What I thought yesterday is best to reassess today. From the open things were bleak and the blood letting did not cease as the SP sold off for the entire session, closing down 1.81% and the NASDAQ down 2% for the day.

SP 5 Minute Chart

Further, today's sell off also comes on an ominous looking 30-1 down side volume. I look at this as very significant particularly when taken in recent context with the market having a 10-1 upside volume day 4 sessions previously. A potential clustering of 9-1 upside days further supporting this leg has been dismissed. A concept I have not fully incorporated into my breadth assessment but have been observing lately is the Zweig Breadth Thrust which popped above its overbought zone on 06/30 through 07/08, an even that has not occurred during this entire range.

Zweig 9-1 and Thrust

As seen in the image, the SP did push through its range, and obviously returned to the zone after biting on granite in the form of over head resistance. With today being the official start of earnings season it remains to be seen if this will be the catalyst that assist the market through this 5 month long range. Additionally there are a number of macro news events on the near term horizon that may have an effect upon market participants as well such as what is occurring through Europe and Washington D.C. These news related event driven catalyst are beyond the scope of my understanding- nor do I even believe I can make any more heads or tails out of them through flipping a coin.

When I thought by the end of the week there may be some interesting developments I didn't expect them to play out on the first day. With increasing volatility over the past 10 sessions and a downside thrust such as today, I no longer consider the market tradeable on my time frame and with my risk considerations, so I'll simply watch how these events unfold over this week and continue looking for clues.

Home on the Range

Although the scenery has remained much the same, from the current perspective things do look much different however. Over the past 9 sessions a very strong thrust has occurred as evident by the SP being up 5.94% over this time with 4 1%+ moves. The NASDAQ during this time has galloped 7.8% with 5 1%+ moves during this period. This brings the indexes within their 52 week highs and in a slightly longer time frame, the top end of the range that began on 02/18. In this context the SP is up .06% and the NASDAQ .91%.

SPX 07/08

It remains to be seen how this will play, but from the vista point I use to look out over the landscape for viable periods of swing trading, things have aligned and the underlying breadth is looking quite strong. This move is being supported by increasing New Highs/New Lows which is a positive.

$USHL5 07/08

Using the Market Monitor, the underlying breadth become clearer when viewed in context of the 03/16 to 05/02 period. Although visually this period shares similarities to the current move, the recent numbers support the view that there is broader participation in this rally; additionally the washout that occurred before this rally was much deeper.

Market Monitor 03/16 to 05/02

Market Monitor 06/09 to 07/08

 The current market is exhibiting signs of strength across numerous gauges of market breadth and general characteristics attributed to strong markets such as the maxim pertaining to weakness on the open and strength at the close, exhibited by the action of Friday 07/08. By the end of next week it will be interesting to view how this plays out and whether or not there will be upper resistance for the time being or will the market power through and establish new highs.

Are you QID'ing me? Excerpts of a Mad Man.

It seems like just yesterday because- well- it was yesterday and those are the worst seems likes of all. I'm still not 100% certain how I arrived at the conclusion I did, but I recall allowing myself to be influenced upon reading a tweet of another trader who was going long QID and this made sense to me considering the NASDAQ was up 7 straight sessions. Crunching the numbers quickly I saw for a nominal risk of .25% I could have some downside protection in case the index did indeed pull back.

Up until this moment I had for the most part traded per plan even if not as well as I thought myself capable. This decision however was going against everything I had prepared myself for. After two months of review, study, and tweaking my rule plan to be in better accordance with the metrics of my trading style while waiting patiently, for the most part, until there was an upside breadth thrust to implement this new plan of action, taking this trade amounted to a crushing body blow followed by a fist to the jaw of everything I put effort into.

Immediately upon taking this trade I was aware that I was not abiding by my plan and I jotted a few notes down:

“Now I'm gambling- took a spin on the QID. .25 risk- what is my edge on this hedge? Granted the market is up 7 days in a row and a pause is plausible- but really, what is my edge? Silly silly- this is a gambling mentality- there is no edge there!” Strike 1.


I was aware from the get go that what I was doing was poor, undisciplined behavior and yet I continued and made no attempt to correct this by selling the position. Strike 2.


For my game plan the next day I noted:
“will be alert to any shift in the index over the evening- this is due to having an open QID position- any downside gap or morning sell off will assist this position-” The first thing that stands out to me is that there is no consideration what-so-ever for a gap up. While I believe it fine to keep a positive attitude and believe every trade will work out, my thoughts amounted to pure hubris. I furthered the insult by being so biased to market direction that it did not even occur to me to plan for the possibility of a large morning gap, after all the market was already up 7 days! Strike 3 and I'm out.


Further into the morning I jotted down:
“I noted yesterday and will go through this carefully as to not repeat this error- I took a hedge- index up 7 days and expecting a pull back- hedging my longs- well, the market gapped major on the open and never looked back- the QID however did, and I could have escaped the positions with a lighter loss, but ended up talking about pull backs, and over extension and things that had nothing to do with the trade nor the trade thesis- I let my ego get in the way- should have cut early- “


The main point I take from this is that any trade that is not in accordance with the plan results in a bad out come.


First, it shows a lack of discipline and breaking of form which are both extremely detrimental. Once this occurs, the as strict as possible abiding by the plan begins to lax and once the trigger for entry loosens the defined edge is gone.


Secondly, once an entry rule is broken, none of the other rules apply any longer, such as my keeping the risk. I could have alleviated the loss at .5%, but since I still had .5 to go before risking the standard 1% of account size, I allowed myself to use this “extra” time to let the position play out until it moved in my favor, which it never did.


Third, it results in being in uncharted territory and the lack of continuity to the trading plan may result in poor decision making processes thereafter. When trading in sync, the multiple effects of experience will result in an understanding of price action at any given time and a greater understanding of what is or is not normal and what should or should not be done. The possibility of introducing negative feedback into trade management will also prove to be detrimental over the long haul. The trust one develops in themselves to do what needs to be done may not be there when one needs it most.


I have no delusions that I can trade mistake free, but I can trade error free. The things the mind does while in a trade will never cease to amaze me. I'm convinced I could be haggled into buying a bridge over a desert while in the middle of a trade. This trade turned out to be a grave mistake from the get go, but it would be graver if simply shoveled over and forgotten.

A Breadth of Fresh Air

Over the past few weeks I've been addressing market breadth and timing methodologies. In my two previous post I queried whether or not the market was putting in a near term bottom and whether or not there is the possibility of a broader topping formation as correlated with the O'Neil model as explained in “How to Make Money in Stocks.” The main intention was to keep aware of what the market is currently doing in order to increase my understanding of the underlying market breadth and where money was being positioned. Being in touch with the market on a daily basis and attempting to deduce what the market participants psychology was kept me focused and prepared as I awaited indication that I would find my rhythm and be able to participate in the next leg to the upside.

Over the past week the indexes have logged 5 straight upside days, with 3 of 5 up 1%+ on the SP and 4 of 5 up 1%+ on the NASDAQ. In addition 07/01 was a 9-1 upside volume thrust, an event that hasn't occurred since 12/01/10. What I'll be looking for over the next week is whether or not there is a secondary 9-1+ upside day indicating a cluster of buying pressure is supporting this move.

07/01 9-1 Thrust

Another indication that I was looking for to confirm an upside rally break was the $BPNYA which crossed the 10 MA this week.

07 01 $BPNYA

Additionally the 5 day accumulation of New Highs/New Lows is increasing and has eclipsed the previous peak of 721.

07/01 $USHL5

Lastly a look at the market monitor which is my primary market timing tool shows breadth increasing from .49 to .53 on 06/17, followed by buying pressure on 06/21 with a 366 to 26 day. The ratio has increased near daily since. Within the past three days all indicators have aligned indicating bullishness and a thrust of 2+ occurred. Using this indicator I began actively buying on 06/21 when the thrust peaked above 1.5.

07/01 Market Monitor

Across the board these indicators express the same sentiment, but in slightly different ways with nuances. Regardless of what my thoughts are about the movement of the indexes, the lack of volume, and whether or not there is a bottoming process to a near term correction, or if this is part of a greater topping process is moot. The simple fact is, I use a timing indicator as part of my trading methodology and when it triggers I take it. It just so happens that in this case there is confluence from a number of other breadth indicators as well.