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Friday, April 30, 2010

TO TRADE OR NOT TO TRADE

I’m going to throw out a few ideas for those of you who aren’t emotionally suited to be investors and have to take the traders path. First off realize that miners are volatile. That means position sizes will necessarily have to be small. As a trader you never want to lose more than 1-2% of your total portfolio on any one trade. So you probably aren’t going to be able to trade more than 20% of your account in any precious metal position. Even the ETF GDX can easily swing 10% in the blink of an eye. If you have a 20% position and it goes against you by 10% you have hit your -2% maximum loss on your portfolio. Also be aware that taking 10 mining positions isn’t really diversifying as the sector tends to move in concert.

What you absolutely can not do is take a 100% position with the intent of trading. Locking in 10% losses in a bull market just isn’t going to be a profitable way to make long term money. If you are going to trade then your main concern, actually your only concern will have to be limiting losses (risk control). Let the profits take care of themselves all you care about as a trader is limiting losses.

Next I want to point out something that is or should be obvious but probably isn’t for most traders. Trading isn’t about getting the direction right. Hell that is easy. No trader has any business trading against the cyclical trend. It just doesn’t make any sense to handicap oneself to that extent. This business is tough enough even with all the odds in your favor. Trading against the trend is like playing poker and having to show your hand to your opponents. Sure you might win a few hands now and then but the odds are really high you are going home to tell your spouse you lost the mortgage.

If you are going to be a short seller in a bull market then you better be digging into the fundamentals of the companies you are shorting. If you are shorting in a bull you had better be selling sick or broken companies. Let’s face it that is the only way you are going to get any kind of advantage and even then the pull of the bull can still mask the disease in many unhealthy companies. The financials are an excellent example. Most of them are for all intents and purposes insolvent but because of accounting changes and free money from the government along with implied protection one would have to be crazy to sell short any bank stock.

There were only 10 new lows on the NYSE yesterday. Trying to short high flyers in a bull market is a fools game and as you can see there aren’t a heck of a lot of potential short candidates in bull markets. So unless you are willing to do the due diligence needed to find cancer patients one really should bypass shorting selling. Wait till the bear returns. That is the time to sell short.

No, trading isn’t about getting the direction right, like I said that one is easy. Trading is about getting the timing right. What a trader wants is to time a swing and then get out. If a trade goes against him it’s not because he’s picked the wrong direction it’s because he mistimed the trade. If the trader is willing to be patient the bull or bear will eventually correct the timing error. When a trader stops out he is admitting his timing was wrong not direction, and he thinks he can exit the trade for a small loss and enter another trade where he hopes his timing will be better.

So if one is going to trade understand what you are doing. You aren’t trying to pick direction you are trying to guess timing. Know that history has shown this is very hard to do on a consistent basis and you certainly don’t want to handicap yourself by trading against the large trend unless you have intimate information about the companies you are trading counter trend.

54 comments:

  1. We are finding it more and more difficult to reach any conclusion outside of “Europe is Toast.” A deeply ingrained German fear of hyperinflation, coupled with forced austerity measures at the periphery all but guarantee a sustained economic deflation. Currency devaluation was the primary escape valve for reflating these economies in the past. What hope do they now have for escaping the powerful forces of debt deflation?

    Consequently, it appears that we have the exact opposite dilemma in the states where our monetary policy is driven by The Son of Greenspan who will stop at nothing to hyper-inflate us out of the Great Depression Part II. While our transition to double digit interest rates will take longer than most market watchers expect as a result of ongoing deleveraging and credit pressures, it is simply a question of timing. At home, we’re reviewing two playbooks – Deflation Now and Inflation Later. Our European peers only need one playbook.

    http://www.viewfromtheblueridge.com/2010/0...t-term-fix-but/

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  2. The problem is that it is turning out the exact opposite. Inflation now, maybe deflation later.

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  3. Jay,
    Draw in your channel lines today and you will see what I mean when I say these technical tools are worthless in this kind of environment.

    Hey they are just lines on a chart, nothing more. There really is no rational reason why a line on a chart should have any effect on stock price unless everyone is basing their decisions off them...and I can guarantee that the vast majority of market participants are not governed by lines on a chart.

    An image of the chief investment officer at the Bank of China sitting in a room studing lines on a chart in an effort to determine whether he should buy more gold or not comes to mind.

    How ridiculous does that sound?

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  4. This comment has been removed by the author.

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  5. LOL. Yea, I'm a chump to look at these lines. You never use them in your reports or blog posts either, right? ;)

    I think price levels are good to watch for support & resistance and to gauge if the move has the power to bust through. I'm gonna take the Chinese CIO approach from here on out, I promise.

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  6. PS, I was the guy who pointed out the hanging man candle stick on the WEEKLY SLW, SLV, SSRI, PAAS, etc charts back before the painful correction. Pretty sure you mocked me back then too! :) Whatever. I'm just some dumbass guy out here trying to protect my family from an asinine government.

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  7. That sounds pretty ridiculous all right. But imagine now that this same Chinaman is studying his charts naked. Kinds makes you think, doesn't it?

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  8. LOL I'm not saying one shouldn't use technical analysis just that it's probably not a good idea to let it prevent you from buying into a secular bull market.

    I personally think TA is best used as a confirming tool when the rest of my tools are pointing in the same direction.

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  9. @Jayhawk:

    Jay, I can understand your hesitations. Really though, as for PM's, ask yourself: Do you believe that PM's are in a long term Bull market (5yrs more minimum)? If the answer is yes, then don't be afraid to exchange some of those FRN's for some Physical Gold/Silver. yes quite possibly the price will decrease right after you buy, but so what? You're buying for 5 yrs from now or longer. AND, you will feel really good when you KNOW you are in strong hands. Can't help you with the miners. I picked a 4 or 5, just bought and held on. It is a bull market. However, I am NOT investing/trading for a sole means of income so your circumstances may be different. Still I think everyone should have a core position in physical Gold and Silver. preference for Americans is Eagles. JMHO.

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  10. N-

    I agree with the physical move. I'm guessing you like taking delivery vs. Goldmoney or one of their competitors?

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  11. To me this looks (at least) like a short term top in both stock markets and PMs; and it could very well turn into something more severe. And I say that even though I am a long term believer in the PMs and even though I am going to keep holding my physical silver and gold. I am out of all stocks. If in a week or two I change my mind so be it; right now this looks bad, and I would not want to jump in here. If I look at SLW it looks like a crazy spike today that I believe will be followed by downside. I know I'm going to annoy some here with this, but this is just my humble opinion.

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  12. P.S. The spike in SLW is of course not today, I meant the last entire week. I say that SLW will see 14 again before it sees 21; and to me SLW is the front runner in the sector.

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  13. Basil-

    I'm with you, I think next week will give us a correction in the PM stocks.

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  14. SLW's weekly candle puts it right at it's all-time high (actually slightly above, both intraday and closing). A little consolidation here wouldn't be out of order, but prophesying 30 percent correction at this point just because it has shown persistent relative strength doesn't strike me as compelling reasoning by itself. Volume looks orderly. RSI looks overbought, but that by itself doesn't suggest a plunge.

    PMs have been outperforming the market since the middle of the month, and GDX:SPY is back above its 200dma for the first time since January. I'm curious to hear why any dip in the miners going forward would not be a buy.

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  15. Anon 1:25 PM:
    Some great observations. Thanks.

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  16. Jay,
    glad to know you share my view. Check out this chart: http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
    it's a 10 year chart of gold (2000-2010). The last few months of chart leading up today look a lot like the last months leading up to July 2008 when the big drop began. Now, of course I'm not saying you can copy and paste a piece of chart and expect the same outcome. However, I view the last week or so as a negative precursor of what is to come in the stock markets, and with the PMs entering a potentially difficult season, I see a top rather than a potential for a break out to new highs.

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  17. Also, part of the reason SLW's weekly candle might appear to be a "crazy spike" is likely the successful conquering of the previous 52wk high at 17.80. That happened last Friday, and this week was one long breakout.

    I believe it is traditionally taken as bullish for a stock to break out to new 52wk highs and confirm it with follow-on gains.

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  18. Jay,
    glad to know you share my view. Check out this chart: http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
    it's a 10 year chart of gold (2000-2010). The last few months of chart leading up today look a lot like the last months leading up to July 2008 when the big drop began. Now, of course I'm not saying you can copy and paste a piece of chart and expect the same outcome. However, I view the last week or so as a negative precursor of what is to come in the stock markets, and with the PMs entering a potentially difficult season, I see a top rather than a potential for a break out to new highs.

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  19. PS: btw, I'm NOT suggesting a crash, just a steeper correction.

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  20. Basil-

    I noticed that pattern too on GLD...Gary will point out gold was entering a 8 year cycle low back then, so it was due for a major correction.

    GLD 2008

    2008


    GLD 2010

    2010

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  21. @Jay,

    yes I like physical coins for long term holdings. No messing with taxes, reporting, etc. I have not used Goldmoney, but I really like the concept. Seems very safe. I also will trade gold/silver contracts. Very small amount of money in miners and CEF. maybe 10K?. I do that with my kids. So if I time wrong, no big deal..they have a good 65 years to make it up..haha..anyway, I guess the main think is I don't touch or worry about my long term holdings. The way I see it as I think Gary does, is that their will be huge gains in the miners, specifically good mid/juniors producers. I can't time weekly/daily moves.

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  22. I don't think I would try to superimpose a chart of 08 on anything at this point. That was a once in a generation crash in the credit markets that isn't likely to happen twice.

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  23. "Trading is about getting the timing right."

    Bollocks!

    Most (real) trading works off of spreads, differentials, or ratios - NOT "timing."

    Remember the big oil contango last year. One could buy January oil futures (simultaneously selling the more expensive December futures), take delivery in January, store the oil either in tanks or boats, and deliver the oil in December. That provided a completely risk-free return well in excess of ten percent (yes, after taking storage and financing costs into account).

    I know several people who making their living in index and ETF arbitrage. Very simple - when the future is above the (adjusted) spot price, sell the future and buy the stocks. When the future is below the spot price, buy the future and sell the stocks. No timing there.

    Banks don't make most of their FX profits making directional bets. It's all about buy it now, sell it forward, and pocket the difference (after interest).

    Well over forty percent of NYSE volume now is high frequency trading. That's not about timing - it is about capturing a fraction of a cent a very large number of times.

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  24. "I don't think I would try to superimpose a chart of 08 on anything at this point. That was a once in a generation crash in the credit markets that isn't likely to happen twice."

    As I said, you cannot copy and paste a piece of chart and expect the same outcome. Nevertheless, it is worthwhile to take note that what might look very bullish now to some, might have looked very bullish to some in 2008. That's the mere conclusion I would draw from the chart link that I posted.

    PM stocks are in a long term secular bull market today, and they were in the summer of 2008, just before many of them dropped 90%. Pretty much the same people who were bullish back then are bullish today. Only today there are even a few more bulls on board.

    You say that the crash of 2008 was a once in a generation crash. That's what 'they' said after the crash of 2000-2003.

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  25. That was hardly a crash. Just a normal 2 year bear market.

    08 was an implosion of the credit markets. I thinkn it's probably safe to say every central bank in the world is prepared to print as long and hard as need be to prevent that from happening again.

    So all in all I kind of doubt we are going to see the credit markets collapse twice.

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  26. On the other hand this could very well be the top of an A-wave. If it is then I will be forced to ride a B-wave down and hold through the tedious consolidation before the next C-wave takes off.

    I am prepared to do that if need be, and so should anyone else who is taking investment positions here.

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  27. Gary,

    I mentioned earlier that I am NOT suggesting a crash.

    To say 2000 to 2003 was not a crash, just a normal bear market, I don't know. Tell that some one who held pets.com and the likes. Also, just by looking at the charts you see how similar the 2000 to 2003 and 2007 to 2009 periods were. Just different protagonists that's all.

    As for a collapse of the credit markets. Of course they can collapse again; that's usually what cheap credit and money printing ultimately lead to. It did last time, now we're just in the third and final act.

    Also, a hypothetical crash, which I am NOT suggesting, can be triggered from so many sides. I don't believe that money printing makes the world economy immune against a potential domino collapse in Europe (an Argentinean style crises times 3, 4, 5?) or a potential crash in China, or whatever else might materialize. I am not saying one or the other will happen, but potential sources for systemic shock are abound.

    Just so I am not misunderstood, I very much hope that the world economy continues to recover, that this recovery is real, and that in some miraculous way, out of control money printing or anything else will not lead to another implosion.

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  28. BTW I took a look at the HUI during the entire bull market, the hanging man candle signalled a significant correction only 44% of the time. Worse than a coin flip.

    As with most technical signals that appear at first glance to have meaning the reality is that few actually do.

    Most of the obvious stuff has been discounted by the markets by now. It's why price usually moves past support and or resistance before reversing. It's why trend lines are often broken before reversing. And it's why many patterns morph into something else.

    Eventually the market finds a way to take away every tool sooner or later. One of my favorites, the COT reports, has become worthless for timing index movements.

    Now the flood of liquidity may be stretching many cycles.

    Lately the money flow data has proven to be a rather poor timing tool.

    And sentiment has gone right out the window lately.

    Like I said this is one tough business.

    About the only thing one can count on to never change is human nature. We can always depend on human emotions to go to extremes. Ben is going to print too much money. Stocks are going to rise to high just like they fell to far.

    Ultimately the stock market will reach ridiculously cheap valuations before this secular bear is finished.

    And finally the secular bull in gold will continue until people become convinced it is a sure thing a run price up to astornomical levels.

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  29. Well let's hope for at least a tiny pull-back here so us straglers can get back in fully. :)

    On a 10yr chart of $hui:$spx, the trend is up. This means, as Gary constantly preaches, that PMs are outperforming the general stock market - the printing presses are running. True, this is NOT the case since the March '09 low as the two have been running neck and neck, but I think this is due to the special treatment given to the banks of late - they've got free money to play with and only one place to put it... they wouldnt' dare put it into gold as that would collapse the system even faster (too small of a market).

    What bothered me, until now, was the credit event in '08 and how PMs went down with the general market. I don't think this will happen again with the up-coming sovereign debt defaults (Greece being first). We've reached the phase where people are starting to question the stability and safety of fiat money systems and they're going to flee to PM's.

    It seems like cycles, sentiment, TA and many other tools are starting to break down as they happens and general fear is taking hold. There's not much to do but hang on.

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  30. The fall of 08 was a very special circumstance. A once in a lifetime selling climax. Everything was being dumped to raise cash.

    Let's face it there was nothing rational about dumping miners when the product they produce really didn't drop all that far and if you take into account the premiums that were being charged for physical at the time it made even less sense.

    The gold:XAU ratio spike to levels never seen before. Like Newton said for every action there is an opposite and equal reaction.

    Miners more than practically anything else got destroyed during the crash. What's more they got taken far far below even what could have been considered cheap valuations. It's no wonder we've seen them explode higher and lead this bull.

    The same could be said for the stock market. The once in a generation crash has spawned the second most aggressive rally in history so far.

    Action, reaction.

    I doubt we are done going up just yet, although we may have hit a short term top. After the second greatest bear market in history it would be very unusual to see a bull that toppped this quickly. The shortest lasted almost 2 years other than the 1938 bull.

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  31. Gary -
    I'd like your input.
    With the rising oil prices and now BP's blunder in the gulf, as well as the upcoming backlash that I think will further dampen oil exploration/development. I'm convinced oil is going to $100+ soon. This should stunt any further "economic growth", "corporate profits" or real consumer spending. (I used quotes because I think these are imaginary anyway.)

    So, if as a result of higher oil prices the economy stalls and stock prices fall. Do you believe gold and miners will also fall in sympathy? Asked another way, what is your strategy, if you believe the above is true?
    Thanks, KB

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  32. I do think this bull will come to an end, either because rising energy prices destroy the economy or we will have a currency crisis that will collapse everything again.

    If it's oil it could unfold over an extended period. Let's face it the last time everything was magnifided by the credit markets collapsing.

    I'm not convinced we will see another semi-crash in gold (in real terms the price of physical gold hardly budged). The 8 year cycle low is past. And I think we all know that any deflationary trend at all will restart the printing presses which would be a big fundamental driver of gold.

    Richard Russell thinks the blow off top in gold will occur within the next three years. I find myself starting to lean in that direction too.

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  33. Friends, Romans , Countrymen - Lend me your ears!

    Beware of the B-wave! For it cometh!
    pH

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  34. I'm prepared to hold through it if need be :)

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  35. ph, I believe you have been calling this an A wave ending at 1186? If you get this one right, I'm going to be impressed.

    How long do B's last and what type of retrace to we typically get?

    I think this is a C that will top out in the next month or so.

    JH

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  36. Gary,
    What do you think about the rise in Treasuries over the past month?

    I think it's a sign that the market is getting nervous and money is moving into safer havens. Thus PMs are rising and decoupling from the dollar.

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  37. Oh one other thing Gary, the rebound in terms of price/time has happened twice as fast as the previous rebound in 2003. So wouldn't a comparison with the length of previous rebounds take this into account and point to a very near term top?

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  38. I don't know that I would read anything into it at this point. On a long term chart it just looks like yield is building a base from which to break higher.

    I do think bonds have entered a long term bear market.

    Anyone in the bear camp would probably do well to ask themselves what they think Bernanke will do if we see any kind of serious weakness in the stock market.

    Hint the initials are QE :)

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  39. I think the aggressiveness of this bull is purely a reaction to the magnitude of the preceding bear and the monetary response from the Fed.

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  40. One theory on the A wave side would be an announced bailout plan on Sunday night/Monday easing the panic into safe haven gold plays causing the B wave to start. Then, the next C will be the epic wave we have been dreaming about when all of the crap comes crashing down. (Gary, you have said the USD is in a cyclical bull, so upside surprises should be coming)

    Some of the other PIIGS can start to have their problems during the later part of the year causing the next C wave to get started. We can then have the USA and dollar get crushed at the very end of this C wave in 2011 with the moster blow off top. :)

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  41. The only problem is that any hint of a resolution to the Greek tragedy has been positive for the Euro and negative for the dollar.

    I'm guessing once the bailout is wrtten in stone we are going to see the dollar resume the secular trend.

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  42. Gary:

    Does Gold closing at an all time weekly high mean anything?

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  43. I'll be darn, it did make a weekly closing high.

    For the purposes of a C-wave continuation we are still going to have to see new highs before we can say with any confidence the C-wave is back on.

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  44. Well the weekly close might just bring in some more fresh buying..who knows eh. I think it is a good sign.

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  45. It does seem like gold is going to at least attempt to test the high.

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  46. I noticed GG no longer posts here. He went off on that only physical tangent and has not come back.

    No one here is of the mind that we could have a sovereign default domino starting with the Piigs, then spreading to the USA. All paper would be in big trouble and only those holding physical would be protected.

    I was doing the math on taking delivery if I went with 1/2 my port and decided to go with silver. 500 plus pounds???!!! Totally unrealistic. I guess that's why folks like gold, but every says silver is the play.

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  47. You will make a lot more in percentage terms with silver but like you said it is heavy.

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  48. No physical for you? Seems odd knowing what you know is coming. Just in case the SHTF, I think a couple ounces in hand makes sense.

    Do you know of the Aden Forecast or the Dines Report? I'm looking into these 2 investment letters. Of if anyone else knows, let me know. They are both focused on pms.

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  49. Another interesting perspective... Downey suggests that gold has to break above its current short and long-term price channels/triangle, in order for new highs to be made which is unusual for the 'spring season'. Personally, I would not become a gold buyer until either (1) the price breaks out of its current channel/triangle, or (2) the B-wave is over. Also, I completely agree with Gary that it's dangerous to short in bull markets (*fundamentally, gold is in a bull market and may even outperform the S&P).
    pH

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  50. The Eden sisters are very good. Don't know about the Dines report.

    I'm not sure what the obsession with physical is. If you have trouble holding on to positions it's a great way to buy and hold as most people aren't tempted to sell.

    But lets face it no country is going back to hard currency so the only way yo are ever going to be able to buy anything is by exchanging your physical for fiat.

    There is always going to be a large spread with physical so it's not going to be the best choice unless like I said you have trouble holding on to positions.

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  51. What do you guys think of the DOJ looking into silver manipulation by JPM announced yesterday?

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  52. LOL My position on manipulation is and always has been that it can certainly happen short term but no one is going to be able to change the secular trend and any attempt to do so will only accelerate the move.

    What do you think happens when a ton of naked shorts have to cover?

    Most of this hogwash is just traders needing to blame someone for why their trades didn't do what they wanted in the time frame they wanted them to do it in.

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  53. Gary, Just go to PeterGrandich.com and that's all you'll need to know. Really.

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