Followers

Saturday, November 24, 2018

The "Controlled Selling" Phenomenon

Hey folks! 

It's now been exactly 8 weeks since the market topped out, back in the 3rd week of September... 
The market has been rather tricky to trade lately but it's becoming increasingly clear to me why that's been the case. The markets are usually most volatile and challenging to trade at major turning points as the balance of power slowly shifts from the "old guard" to the "new guard" ..... 
Picture a gigantic cargo tanker ship doing a 180 degree turn in the middle of the ocean....


 
These "major market turning points" takes time and effort to accomplish and along the path, there's going to be a lot of brutal battles ardently fought out between the bulls and bears, each side fighting it out for every twist and turn, support and resistance levels on the charts.... 
but after a little while, you take a step back and look at the chart action, a more clear picture starts to emerge of what's happening.... 
I think we are at major crossroads here and i find this extremely fascinating since it's been over 9 years since the "FED induced" bull market was born in March 2009.... and now the FED seems intent on reversing their course. 

A famous hedge fund legend from the 1980s, Marty Zweig was famous for saying: "follow the fed". 

In my humblest of opinions, I believe we're in the early phases of a bear market here... 
Now, bear markets come in all sorts of shapes and sizes, some are swift and dramatic and some are of the slow motion downwards grinding, "Chinese water torture" types. 
Will this one be another 2008?! I have NO IDEA!... nobody knows! Nobody can tell you with absolute certainty how far down we go? or how long it lasts? 
All this will be known in hindsight once we look back on it! 

Having said that, as traders, we do not care about terminology... The actual terms "bear market" or "bull market" isn't important since we only care about trading price action, up or down... all we want is a trend to trade. In an up-trending market, most of your trades and gains will most likely be focused on the LONG side and in down-trending markets, most of your trades and gains will be focused on the SHORT side. 

**Expect to see more and more AOT trade alerts being made in ETFs(such as that XLE short we made earlier this week for example). 

At any rate, these are just some quick thoughts on the current market conditions I've seen up to now and if proven wrong down the road that this recent big pullback ends up merely being a bull market correction and the bull market resumes down the road, surely the charts will lead us down that path and we'll shuffle our feet to readjust! 

Trade the charts, not opinions! 

So the main purpose behind this weekend post was to discuss how come despite the big pullback in the last week or two, why is it that the NYMO(NYSE McClellan Oscillator) is nowhere near oversold?!  The Dow Jones fell almost 1,200 points this week, the Nasdaq fell almost 4.5%!! 
So how is it that the NYMO and NAMO are still stuck in "neutral" and not closer to "oversold levels"?! 






Now, that's a GREAT QUESTION! Does the NYMO work in bearish markets?! 

The answer is YES!!    NYMO does work and works well actually! 

However, since the tape has turned decisively more bearish, we need to look at the NYMO(or NAMO) in a slightly different angle. 

As far as I'm concerned, the more meaningful signals we're going to get from the the McClellan Oscillators isn't necessarily from looking for "oversold" readings to go long, like we did during the last 8 to 9 year bull market..... in bearish tapes, the more meaningful signals will most likely come when the NYMO overshoots into "over-bought" territory and hence start looking to increase SHORT positions. That's when this tool is going to become quite useful. Just like what we saw in late November during that very strong market bounce and the NYMO went into "extreme overbought" territory and we started to look for short positions accordingly.
 
As you can clearly see in the above NYMO/NAMO charts, the market has pulled back quite aggressively ever since early November as the bears reasserted their dominance since that "extreme over-bought" signal. 

Now, that doesn't mean that we're not going to get some useful signals when the NYMO get into "oversold" but since the tape has turned decisively bearish, the better signals will have to come on the rare occasions when the NYMO and NAMO get into "extreme oversold" and then start looking for hints of a snap back bounce(short squeeze rally).... 

The NYMO might not get into extreme oversold often, even though, the market can and and has gone down big for multiple days in a row. 


A great example of this phenomenon took place this week actually!! The markets took a BIG hit this week, Dow Jones fell about 1200 points, Nasdaq fell almost 4.5% yet the NYMO and NAMO remained in neutral and barely budged?! Weird huh?

This happens for TWO reasons, in my humble opinion... 

1: This bearish trend is taking place via ROTATION. So basically the exact opposite of the phenomena we witnessed that kept the bull market going strong for 9 years, sector ROTATION! So for example, Energy sector tanks yet the Semis bounce. The Financials take a hit one day while Retail sector rallies.... it is this type of action that makes the market go down without affecting the NYMO much. The NYMO will usually make a material move one way or the other when we start seeing BROAD BASED moves in one direction but obviously when the selloffs are happening in a ROTATIONAL manner, the broad based aren't taking place... it is this very phenomenon that kept the bull market running, STRAIGHT UP for many years and that's what's made the market so impossible to short in any consistent manner in the last few years! 

We are now witnessing ROTATION type selling, organized, controlled selling(distribution basically) without seeing much panic in terms of big mega spikes in the VIX(fear gauge).... it is this type of "controlled selling" that makes me think that we are for a prolonged pullback in the stock markets.  

2: And this second point, just comes from years and years of watching the tape and seeing multiple bull and bear markets through out the years... I have been telling AOT members in the private twitter that "in strong downtrends, the bulls control the open but the bears control the close" .... and this week was a perfect illustration of this! 



Notice in the above chart, the 5 day, intra-day charts of the SPY... notice how the market does NOT go straight DOWN.... (if it did go STRAIGHT DOWN, that's when the NYMO is most likely to get into "oversold" territory)... instead what we see is the market makes early morning or mid-day bounces, the market makes these almost pathetic attempts at rallies/bounces, usually at the open via a big gap up or early morning bounces but most of the time, these weak bounces end up dumping hard into the close..... these weak bounces in downtrends, only help to relieve oversold conditions from the previous bout of selling which only helps the bears sink their teeth in deeper just a little more each time... 

It is these weak bounces that allows for the "controlled selling" to take place... these bounces will often make traders believe that the market is bottoming which sucks in longs only to pull the rug from underneath them and leaves them sitting on failed long positions. 
All that small these small intra-day bounces end up doing is help relieve "oversold" conditions just enough from the previous bout of selling before stock prices roll over to the downside again... it is literally the EXACT OPPOSITE of what we witnessed during the +9 year mega bull market. We are now seeing this happen on downside. If you literally flip your charts upside down, it will be as clear as day light! 



This "controlled selling" phenomenon was present during the 2007 market top and thru out the 2008 vicious bear market as well... the NYMO only got into "extreme oversold" only 2 or 3 times in 2008!! 



Important to emphasize, that this does NOT mean we're in for another 2008!! I'm not claiming this at all! But we appear to be in some sort of a deeper and/or perhaps even longer stock market correction phase than we've come to get used to in recent years. Trading opportunities, on long side and short side will be abundant and many opportunities will be created for traders and investors of all sorts in due time!   


I hope you found this post helpful! 

Happy trading! 

Thursday, November 15, 2018

How To Regain Your Confidence After a Slump

Hey folks!

A fellow AOT member asked me earlier this week, "how can i recover mentally after taking several losing trades in a row?" 





As we know by now and especially after the recent vicious market downturn, losses and the act of taking losses is a "necessary evil" in trading. 

Bo Yoder, one of my favorite traders whom i used to follow religiously in my earlier years as a trader wrote some very good stuff in his book "optimize your trading edge"... he discussed that ALL trading systems will go thru a "pay-out cycle" and a "pay-back cycle".
 
The PAY-OUT cycle is when your system is winning and making money consistently
The PAY-BACK cycle is when your system is going thru a losing streak and losses are becoming more frequent. 

A trader's job is manage himself as professionally as possible thru BOTH these cycles. 


Here's the way i look at taking losses while trading: 

Needless to say, the hardest part about trading is TAKING A LOSS, closing a trade for a loss. It's hard not only because it means that you will have to incur an actual loss to your equity which obviously will decrease your account size but also because as emotional, rational, thinking human beings, as traders we all want to be RIGHT! .... Nobody wants to be wrong of course..... but as we all know, this is NOT the reality of trading! 

You have to get into head, that there's ABSOLUTELY nothing wrong with getting into a mistimed trades: 

That happens to EVERYONE regardless of experience. It's an inevitable part of this business. Trading is a business, just like any other business. 

There's nothing wrong with making "mistimed" entries in trading but the biggest mistake one can make is stubbornly REFUSING to obey the stop loss of a trade. When human ego is on the line, as traders, we sometimes do things we otherwise wouldn't do, especially when money or "reputation" is on the line. 
Again, there's nothing wrong with losses as long as they are taken within your system's or within your specific trade's game plan. 
It's much easier to recover from a 2% or 3% or 5% LOSS rather than digging yourself out of a big -20% draw-down(we've all been there, done that and we all know the horror of it).  

Recovering from a large draw-down is a challenging and frustrating. It messes with your head and creates all sorts of emotions like anger, despair, hopefulness and so on. It will affect you psychologically and affect your personal life too in some cases. 

All traders will learn this the HARD WAY unfortunately(maybe even a few times before it really sinks in) but rest assured everyone has done it and it's not fun.  

The best thing to do, I've found is to respect the stop loss, take the initial LOSS. Think of trading as a business like any other business. Every business will sooner or later have to incur a "loss".  For example, a grocery store that's carrying expired inventory, an Auto manufacturer who recalls a faulty car part or maybe even a bank that's made bad loans and now all have to incur these losses, as "business expenses".

Taking losses in trading, has to be seen as a routine "business expense". It's part of doing business we are in. 



But now comes the tricky part of this business, how can i recover mentally when i just had a disaster week and made several losing trades in a row? My confidence is shot, I'm disgusted, I'm angry, I'm frustrated and I want to make that lost money back ASAP! 

Oh boy, don't we all know the feeling of that?! 

After many years of being in this business and making tons and tons of mistakes of all shapes, sizes and colors.... I've implemented the "3 losses in a row" rule. What I've noticed over the years that for my style of trading and using my system of trading, that any time, i took 3 losses in a row, regardless if they were big, small or routine losses, i automatically know that something is wrong and i need to STOP TRADING completely. Do a "time out" in whatever you're doing and take a big step back.... The "3 losses in a row" rule forces me to sit out the ENTIRE day and not trade at all. I will shut down my twitter, CNBC and any other source that could tempt me from making a knee-jerk reaction trade.
The goal is sit out the entire and do nothing, walk away completely and do something else... once the market is closed and i feel a little more relaxed, I'll now want to see what triggered the 3 losses in a row and what could i be doing wrong? What am i missing? Is there anything that needs to be tweaked? Are the market conditions changing? Which trades worked and why? Which trades did not work and why? Have i done something different or deviated from my system? Am i being "honest" with what I'm seeing(or think I'm seeing) versus what's actually happening in the market?

Over the years, i realized that most of the time, whenever i take 3 losses in a row, it's due to a change in "market character" and my positions were caught on the wrong side of the tracks... so that requires immediate attention.


As i mentioned in that blog post from 7 years ago: Things I Learned After 15 years of Trading  : "get aggressive after you make 2 or 3 good trades in a row, get very defensive when you make 2 or 3 bad trades in a row, often times traders will do the exact opposite, self-destructive behavior". 


Naturally emotions are going to be higher than usual at this moment, so you should instinctively know that any trade you make on this day after taking 3 or more trades in a row, these trades are most likely gonna be emotionally driven and chances are high, these trades will not work out well. 

The ideal thing to do is shut down completely and walk away for 24 hours... give yourself one full day off from any trading. The market isn't going anywhere, it'll still be here tomorrow so relax, you're not going to "miss out!" 

Make this a MUST-FOLLOW rule! No exceptions, no ifs, ands or buts. 

Shut down and walk away for at least 24 hours. 

Once you've cooled off a bit and you're ready to get back in the saddle the following day(or 2 or 3 days later ideally), you have to instantly eliminate from your thinking the idea of "i'm gonna make back all my losses in this next trade!" This way of thinking is 100% flawed and is a very typical amateur thing to do. We've ALL done it before and we all know it's silly and a self-destructive way of thinking. 

Trading is a marathon, not a 100 meter sprint! 

Relax, take a deep breath. You will make back your losses but it will not happen in ONE trade, it could take several trades and that's TOTALLY FINE .... the world will not end today if you don't make back that loss from yesterday. 
This is not how professional traders approach a "recovery phase". 
so for example, the last thing i want to do is get back to my desk the next morning and go long a stock like TLRY on margin to make back the losses from the previous series of trades. This will only add more emotions back into the mix and you will make more mistakes and trading losses will pile up quickly.... 

You have to focus on rebuilding back up SLOWLY. In a cool, calm and controlled manner. 
What i like to do is come back the following day and start looking for SAFE and EASY to trade ETFs and take the next series of trades using only 1/2 size positions. I'll often focus on taking only the HIGHEST QUALITY setups in ETFs. I want to focus on doing the "small things" and getting the absolute basics done right. Waiting for the absolute best and easiest setups, my "bread and butter" setups and executing this trade properly, raising stops, booking gains. I want to focus on the basics and doing the basics right. The goal is not to "make up losses immediately".... No, that's NOT the goal right now. Right now, i need to make sure that I slowly build up my trading confidence because i know when I am doing the small things correctly and focusing on find good setups, waiting for the good setups and then EXECUTING the good setups, then this is what's going to rebuild up my confidence for the next series of trades. You'd be surprised what ONE small little green trade can do to your confidence.

ONE DAY AT A TIME, ONE TRADE AT A TIME... 


Another important point to keep in mind: traders have a "breakeven mentality" when it comes to losses. Some traders will even refuse to sell a position that going against them in a very dramatic manner simply because they just want to "breakeven" and then they'll sell it. You have to be very careful when you start catching yourself thinking like this. This will land you into deep waters and into some very painful trades sooner or later. 

Traders focus too much on PnL to the point that it hinders their progress and often times just end up trading purely based on their PnL's fluctuations and not based on actual setups and their system's trades. Totally failing to understand that if you're focusing on trading well, stop looking at your PnL, only focus on finding and executing the best setups and doing all the simple things right, the PnL will take care of itself. 



Stop obsessing about your PnL and start obsessing about trading your process, your trading system, and executing your trades well... the PnL will take care of itself.  



I hope you found this post helpful! 

Happy trading! 

Blog Archive