Home > psychology, stocks > More Dangerous Than 2008

More Dangerous Than 2008

I would like to start this article with a warning to readers: the views and opinions I express in my blog are my own. I am not paid by anyone to do this, and is in no way meant to be viewed as financial advice for your own trading positions.  You and you alone are responsible for taking on extremely high market risk, especially in this environment.  Throughout the week, I post not all, but many of my trades in real-time. They don’t always work.  Before following any of my trades, please realize that the only one that can protect you from loss is yourself. Be sure to stick to your own rules, and be full aware of the downside and stop loss point BEFORE entering or exiting a trade.  I felt the need to write up the aforementioned warning especially after watching @bclund’s video on following people on Twitter.

At the risk of looking like a complete fool last Sunday, I decided to go ahead and post my “Psychopathic Market Still Sucks” article before the Packer game.  I am satisfied with the fact that my market synopsis was ultimately correct and ended up coming to fruition by week’s end.  But it is also important to note that Monday through Wednesday, the market almost appeared to be ready to break out.  It could have been very easy to buy near the top last week and become quickly trapped as things turned ugly in a matter of hours.  This brings up the point that you should not focus on being right, you should focus on doing the right things to put you in a position to make you a CPT, a Consistently Profitable Trader.

Earlier this week I promised an update to the market’s reaction Post-FOMC. Immediately after the meeting, the market experienced severely volatile knee jerk reactions to the news. Many people, including myself, looked for a severely powerful push forward to finish Wednesday green.  If you did not stick to your own stops or mental stops, you likely got poleaxed holding longs into the close on Thursday.

$SPY – A Market of Gaps and Landmines

I cannot stress this enough: this is not a market for swinging large positions. I am not merely saying this about swing longs; this goes for swinging short positions as well. Take a look at a daily $SPY chart since August, and you’ll see gap after gap after gap.  Waking up to a gap, having held a medium to large position of any kind, can put your trader’s brain into a poor state of mind to make good trading decisions.  If you suffer a large loss overnight and are not able to cut losses quickly, your mind may prevent you from sticking to stops that are now so far away.  Traders often fall into the trap of doubling down, waiting for gaps to fill based on what happened 7 out of 9 times in the past, or turning 2-3 day trades into long term positions.  There is no guarantee that the price you got into a trade will ever return again.  This is why I tell followers to know the downside price of the trade before placing the trade.

The only way to make money in this psychotic market, as in any market, is to take on risk in order to earn a profitable reward.  When the $VIX (or $VXX if that’s your poison) is persistently high, you should be taking much smaller size on a position. If you normally buy 500 shares of a stock, buy 250 instead.  If you normally trade 10 $ES_F contracts, trade with 5.  Do not use stops that are so tight that you’ll be instantly booted out of your position, but don’t become so lax that you let a trade run away from you. It is far too easy to “zoom out” of a short term 5 minute chart to justify your “stuck long/short” position with a 30 minute or daily chart in order to be “right” on a trade “eventually”.
Next Week Trade Preparation: Let’s take a look at the carnage in the markets last week.

The technical damage done to the charts over the past week is tremendous. Most sectors have lost long term support with the bear “whoosh” sound that came on Wednesday afternoon and didn’t end till Friday morning.  I watched as markets around the globe sold off assets hard, and nothing was spared, including precious metals.

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  1. Basic Materials Still Suck $X $AKS http://twitpic.com/6qnh6z http://twitpic.com/6qnh8f
  2. Transports Still Suck $DJT $CSX $UNP http://twitpic.com/6qnjet http://twitpic.com/6qnjfy
  3. IPOs Still Suck $P $LNKD $DNKN http://twitpic.com/6qnkam http://twitpic.com/6qnkcv http://twitpic.com/6qnkdp
  4. Non-Cyclical Still Sucks $OC http://twitpic.com/6qnklx
  5. Oil Servicing Still Sucks $OIH $HAL http://twitpic.com/6qnkuy
  6. Autos Still Suck $F $GM http://twitpic.com/6qnldq
  7. Chemicals Still Suck $DD $DOW http://twitpic.com/6qnllz
  8. Financials Still Suck $XLF $C $JPM $GS $MS $BAC http://twitpic.com/6qnlyr
  9. Aluminum Still Sucks $AA http://twitpic.com/6qnm64
  10. $INTC is approaching decision time. Squeezing under price compression, lifted by $QQQ
  11. COPPER STILL SUCKS $HG_F $JJC $FCX This got OBLITERATED last week. Support not here.

My view is that the $QQQ is still holding up the market.  Sentiment continues to be extremely bearish, and counter-trading is guilty until proven innocent. There are so many trapped longs in this market, that every time we appear to be breaking out of this consolidation, the reality of the sharply declining 50MA in the $SPY and daily VWAP proves to be too much of a force to get through.

The $MACRO picture is not bullish either, obviously.  This weekend has been full of rumors, panic reactions for what to do on Monday, and people “preparing” for events that have already occurred. Greece will default. Whether it is going to be “planned” or not does not matter. The reaction in the market will be important, not what you think happens going forward.

How do you trade this market?  Wake up an hour earlier than normal. Prepare for your day with a written plan in hand.   Know what happened in Asia and Europe overnight.  Watch for what the market is telling you. Know your price exit and entry points before you get in the trade.  Without a plan, your own position becomes an influence on your mind, taking your eyes off the action around you and causing tunnel vision. As @smbcapital often writes, it is important to know how to be prepared, know your pivot & pre-market price levels, trade your plan, and stay consistent.

Over the course of the next few weeks, I truly believe the market goes lower.  The economic conditions around us are more uncertain than in 2008.  In ’08, we were surrounded by a government that was willing to step in and backstop the market at any cost, and the actions were supported by the majority of people holding a brokerage account, roth ira or 401k.

Today, SOVEREIGN banks of Greece, Italy, Spain, Portugal, Ireland, France and even Germany are in SEVERE CRISIS MODE. Do not trust anyone in politics to give you the truth or make your heart feel warm and fuzzy.  THE ONLY ONE who can protect your capital is you. The only plan you can trade is your own. There is almost NO PRECEDENT on which to base your medium and long term investment decisions on.

As economies around the globe remain in crisis mode for an extended period of time, we will continue to see decreased liquidity, seizing credit markets and increased risks of severe loss.  These types of environments cause countries around the globe to err on the side of caution by leaning towards protectionist government policies, circa 1930s. Nobody, and I mean nobody including myself, knows exactly what is going to happen based on Technical Analysis or Fundamental Analysis.  In markets this nervous, fear and greed take over as rational thought gets tossed to the wayside.

That said, I can honestly see chances of @ReformedBroker -style “Rip your face off” rallies and @StockSage1 -style disaster sell signals.

PLEASE BE CAREFUL OUT THERE. If you are not able to day trade and be nimble enough to get in and out of positions immediately, please do not trade these markets.

 $SPY Weekly

Categories: psychology, stocks
  1. September 25, 2011 at 11:16 pm

    Good advice!

  2. September 26, 2011 at 12:10 am

    I agree with a lot of what you’ve said – I actually wrote a similar post a week or so ago looking at world markets. It doesn’t look good, does it?

    However, I find your idea that day trading is the only way to trade these markets is probably a little naive. There are so many ways to trade this market safely, you probably just don’t have a good understanding of them. And I don’t mean that unkindly – we all have our niches.

    I think the key here is to trade your niche, and if you’re getting smashed sit out and wait for your optimium trading market to return.

  3. Michael
    September 26, 2011 at 12:10 am

    AAPL is propping up the market.

  4. September 26, 2011 at 12:18 am

    One thing that has always bothered me about the stock market especially lately is how a Greek bank has anything to do with Principal Financial Group in Des Moines selling insurance policies. I understand that some global companies do have interests in Europe. But people say the markets are already factoring in a Greek default. I call b.s. on that because I guarantee the S&P will plunge even more when that happens. I can see what you mean about the volatility, but it makes it even harder for someone like me that wants to get into investing but doesn’t have the money to day/swing trade. Or people like my parents that had their shitty 401k go down the tubes 2 years ago and still not really recover. It’s not speculating when it’s your future you “invest” in these pieces of paper.

  5. Steven Christopher
    September 26, 2011 at 2:48 am

    Amazing that there is so much talk of ‘technical damage’ caused by last week’s big move down, yet I am unable to find anyone, I mean ANYONE, who even seems to be aware of the significant bullish divergences in RSI on the retest of the August lows in some of the major US equity indices. Even right now, at 10:45pm Sunday, Sep 25th, there is nothing but bearish-sounding news on Bloomberg’s News page, yet SPX futures +.55%. Everyone seems to have a very strong opinion right now, and the bears are now stacked up against very, very few bulls. Two sides to every story.

  6. PositvePsych
    September 29, 2011 at 5:21 pm

    Very well written. Wow. I particularly was struck by
    “It is far too easy to “zoom out” of a short term 5 minute chart to justify your “stuck long/short” position with a 30 minute or daily chart in order to be “right” on a trade “eventually” … which, i found myself rationalizing to myself just earlier today (on a bearish position that gapped up) thinking if it works out “hey, i’m a brilliant mastermind for figuring this out” …. it sounds foolish outloud… but honestly…. that’s exactly what i was thinking…. goodness… like i was reinventing the wheel and creatively navigating the markets while “rationalizing” and circumventing da rules.

    Thanks for really illuminating a mindtrap i caught myself engaging in —- again…. , now I’m remembering a few of those times where i was on the wrong side of the trade, when in hindsight… had I flexed and reveresed my opinion/bias/position… and done the opposite… ah yes, the mind and hindsight… can have a rough go

  1. September 27, 2011 at 6:08 am

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