No selling until everyone is buying.

Keep in mind that the big institutions that own a ton of stocks don’t have the volume to dump everything and take a profit. So he prices might as well be imaginary for them along with their inflated net worth… at least until the volume really comes in and they can sell. But it works in reverse… The institutions flush with cash that want to put a ton of it to work can’t without driving prices much much higher in the process, so much like the high volume capitulation of the credit downgrade crash just over a year ago, any crash may be dealt with buying. If volume goes parabolic along with price, then follow the institutions lead and use the buying pressure to sell into. Institutions don’t have a choice but to sell into it if they ever want to take a profit, because for all they know it is the last chance to liquidate at high, make believe prices.

The “boy plunger” Jesse Livermore said it best,

“If you operate on a large scale you will have to bear that
in mind all the time. A man studies conditions, plans his
operations carefully and proceeds to act. He swings a pretty
fair line and he accumulates a big profit on paper. Well, that
man can’t sell at will. You can’t expect the market to absorb
fifty thousand shares of one stock as easily as it does one
hundred. He will have to wait until he has a market there to
take it. There comes the time when he thinks the requisite
buying power is there. When that opportunity comes he must seize
it. As a rule he will have been waiting for it. He has to sell
when he can, not when he wants to.”

Right now any major institutional investors who want to sell can’t do so in bulk. Anyone that wants to buy can’t do so in bulk. That is just the nature of low volume moves. Collectively it is only after a huge swell of buying demand occurs that the institutions that have been long will have to get out. And when they do it will absorb the buying demand. That means that for things to go higher beyond that, there needs to continue to be liquidity and more and more buying demand to keep the ponzi scheme going. Conversely, those that missed the move that were patient and don’t want to buy until there is the demand will all load up if markets crash. This is generally why a huge volume spike after an extended move in one direction after a huge price swing in that direction will often lead to a major reversal, particularly after the volume starts to decline again for the buying or selling pressure cannot continue at that rate any longer without more and more panic buying/selling than before it.

Should a major turning point occur this info may come in handy to better understand the mechanics of the market.

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INFI,JNPR,ES,HK,HNR,PPHM,TTWO,NTLS,CAS,TAYC,UCFC,
CBM,ACAT,BXG,CAB,CONN,GCA,GPS,GV,IMOS,INFI,JVA,OCLR
Charts

Disclaimer: I got a little JVA today.
GOOG also broke above a nice little bull flag today

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got a TLT hedge today.

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Or at least delayed!
I suspect we will get a new relative high in EWP now as we are very close. The S&P and dow and nasdaq are breaking to relative highs as well. Even though things may appear to be extended, I wouldn’t bet against the market here. You may proceed. So the warning is cancelled unless we close below the highs and then later close below the pattern’s low. That doesn’t mean we still can’t top later, or that this may not give a breakdown or topping signal in the future more credibility, but for the time being all signs are positive. TLT showing a bear flag rather than a tradable bottom (even though it is oversold). FCX breaking out and copper really moving. Gold and Silver ripping to the upside. All signs for the time being are positive again.

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Based on candlesticks, depending on how today closes, it is looking like probably around a 4% mild correction from current levels in EWP, but by the time it confirms, it will be reduced to more like 2%. if you anticipate direction based on the 70% or so probability (based on past data) you can expect a greater decline, but the pattern itself warning of bearishness coming 70% of the time or so will not be complete until the end of the day, Regardless, I think some mild caution should be advised here, but probably not enough to refrain from holding bullish set ups just yet. Perhaps an increase of TLT as a mild hedge instead, raising cash from losing positions, or refraining from adding new ones may be a more appropriate response.

The expectation of a decline in Spain should be bearish for the market and bullish for the dollar, however the longer term double bottom pattern in spain shows that it is unlikely that a minor 5-10 day move will reverse the overall longer term trend and more likely that we will just see a minor counter trend decline.

More on the candlesticks may be yet to come if I find the time.

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The markets cheer of bailout and everything’s well. Suddenly capital is migrating back towards Spain and Europe. Everything is great and the debt problems are cured forever. Debt to GDP no longer matters as investors care not. Any problems would be dealt with a magical bailout and the money will poof out of thin air and magically add growth somehow decreasing the debt to GDP. The inevitable is prolonged indefinitely and no collapse is possible. Investors are patting themselves, and those who provide the stimulus that the junkies need, on their backs. Nothing can stop Spain from launching to infinity at it’s current pace. Forget a 200% gain in a year, Investments in Spain are like magic lamps, you put your hand out, make a wish and you are granted infinite wealth.. Or the Midas touch.

Forget holding anything at all but Spanish stocks. Afterall, The ECB is pumping hundreds of billions of euros in, as Spain has hundreds of billions of euros pouring out. It must be magic and the balancing act is magic. Afterall, Germany with all the bailouts they are making won’t be pulled down with the rest of the mess.

Perhaps this is the calm before the storm, or perhaps all is well again… until it isn’t. I am skeptical about us shooting straight up to 14k in the dow while all is well in Europe.

Of course we all know, sentiment over a supposed solution can change. Capital flows can revert back to their previous trend and the capital flows must continue in order for the rally to sustain itself indefinitely.

Nevertheless, stocks are going up and not many people are long. Everyone’s getting bearish and the market is leaving without them. The major macro factors are like a slow moving, but powerful train moving. You can probably jump in front of the tracks a few times, and especially when no one else is on the tracks…. but you better avoid the big money and not get caught following the hot money at the wrong time and be very quick to recognize when it’s coming. Great time to buy chasing a quick buck, but that train is coming and it will hit hard.

It’s been great following the market, however, tread carefully. The calm before the storm and dark before the dawn lulls those into thinking that the tide won’t move but one direction. The tide drifting out before the tsunami may comfort all those people to look and say “what cool seashells, now that the tide is out, let us all go play with sponge bob.” But before they know it, in comes the flood and they will be lucky to survive.

As swing traders, it’s often beneficial to forget the big picture. At least for 90% of the time. Focusing on what might happen in the long run can scare you away from several winning trades. But there is nothing wrong with gradually starting to keep a larger percentage of cash on the sidelines as we go higher in the face of increasing macro risk, while continuing to trade in and out of the best setups you can find. Part of strong earnings is preventing losses that are difficult to recover from. That may occasionally mean missing out, but as a result you reduce volatility and position yourself to take advantage of the supreme market conditions. Nevertheless, you have to adapt. If we come screaming past new highs and continue roaring forward, and a strong trend emerges, jump on until it slows or shows signs of slowing. But generally you have to be very nimble the more overbought things get.

For now, everything is fine, but I do not expect that to last. Fortunately when it all comes back and the tsunami comes, it will hit Europe the hardest, and capital will migrate into the U.S. of A, particularly into bonds and the dollar at least until the problem has subsided, or until a new problem in the US arises. Remember there was an August not too long ago where the market crashed and the S&P downgraded US debt. Yet TLT skyrocketed and yields continued lower and not everyone shared the same concern. In the short term, it was a huge event, but as time passed, it proved that it was only a short term move, similar to the ’87 crash or flash-crash in that it soon bottomed and recovered afterwards. Why? Because you don’t downgrade the US debt. Not yet. If the US debt is the problem, then the rest of the world should also be downgraded as thy are more of a problem. People will continue to buy US debt as it remains the world’s reserve currency. So bring whatever problems you have, the US debt will continue to be purchased. The concern occurs when other parts of the world collapse starting with most of Europe and other key currency countries like Japan. Soon, the US debt starts to become an issue because the money can only flood into one area for so long. With every dollar that comes the government’s way, they will spend 2, and most of it will be used just to pay off the interest on the debt. That is a huge problem and meanwhile local governments lack the power to keep printing to solve their budget concerns. So although there may be a constant creation of new debt, it ultimately will be owed back–plus interest, and we have gotten to the point where the whole system requires insane spending to even attempt to pay interest and make good on it’s obligations and prevent huge budget shortfalls, huge shortage of capital and economic calamity. Yes bondholders are perhaps understanding how unlikely it is that tying money up in 30 years in bonds will be a good thing. Nevertheless, when the euphoria of a 100trillion euro bailout of Spain subsides, TLT will be a hot place to be. The taxes around the world are being increased to try to pay for the bonds. Both on federal, national, and international level. Europe will triple it’s fines, put taxes much higher, and attempt to keep the people happy. Meanwhile capital will flee. Manufacturing will flee to cheaper locations with lower taxes. They cannot tax any nation high enough to keep the bond holders happy. Hike rates up to 100% and make everyone your economic slave and see how long they stay in your country. Make it illegal to move and see how much of them put in the work. There is a point when taxes increasing become very harmful, particularly when they no longer become competitive globally. This is not about politics. If taxes were stable globally, and not raised whenever the government comes up short, things might be okay. If you sat down to eat and a waiter suddenly decides that his bills are too high this month and the tips today are low and he suddenly decides to add a 40% gratuity or a tip because he needs more money, do you really think this solution would last? Or would you make sure that particular server never serves you again, even if it means going to a different restaurant? Some might resort to illegal evasion of paying the bill. Ultimately though the sudden tax increases are not policies that the various nations can handle or will be happy with.

Perhaps the problems will be delayed because of calamity in Europe will lead to a huge influx of new US bond buyers fleeing the garbage of Europe and seeking safety. That will give the us federal government a false sense of security and they will keep going into debt, figuring at the rate of new debt buyers, they will still make it until next reelection. And perhaps they will be right…. Ultimately though this will come back to haunt us. First, it must haunt the egregious socialized spending in Europe as they are the worse and to make matters worse have one currency, yet multiple bonds for each country, good luck trying to rob the rich countries to pay the poor when the poor spend like drunken sailors promising retirement at age 55 and full healthcare and full benefits that collectively they can’t afford. Certainly the rich countries footing the bill have citizens that want the same and will only vote for those that provide the most benefits. Meanwhile, the governments can’t afford it, and this scam will not be maintained. Austerity of course, must be implimented because you simply can’t pay off the loans and the interest that everyone owes and the obligations such as unemployment and healthcare when the euro nation is deep in doo doo with +20% unemployment.  Yet at the same time, if spending is indeed cut in Europe, people will be unable to pay their loans, cash will be hoarded and a slide into recession will occur causing prosperity to regress to where it would be without all this make believe wealth that is only temporary. The cash shortages in Europe and lack of spending of course will have a global impact.

That is what we will soon be looking at.

However, for now this is already known, both bonds and stocks present risks and all is well. We can push to new highs, but with September and October as typically very volatile months coming up shortly there are greater downsides to continue to accelerate and push down the gas peddle at the same rate. Sentiment among pros and rookies is not good and people are becoming risk adverse. So a crash is probably pretty unlikely just now. It is only when everyone that wants to buy has done so and suddenly something no one was expecting hit where a crash is possible. But the slow moving train is coming around the corner, and the deflationary vortex will return! Obama will be lucky to even make it to election before the market crashes However, he has been working his whole 4 years making sure that if a crisis hits, the republicans get the blame, so he has planned well, and may be able to reverse the strong trend of the incumbent being voted out when the stock market crashes afterall. Conversely, he has fallen out of favor poorly and things are pretty bad, so I suppose it’s possible that even if things are okay people still vote him out. Ultimately I expect it to be a very close race either way and would expect the margin of victory to be only about 2% of the popular vote. (obviously, I realize the popular vote doesn’t always determine the outcome). Nevertheless, for now, keep trading your setups but begin treading a bit more lightly than you normally would.

 

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If you were playing the 3 crows pattern, you would want to set 1 or 2 alerts and 1 buy. The buy would be a stop buy at/above the pattern high which signifies the breakout point. The alert you would want to set is at the pattern low which signifies a breakdown. If this alert triggers, you take your buy and move on…. or…. perhaps you instead exchange it for an alert, or wait a couple days.

Sometimes, you get bluffed out of the hand on a bad flop, and as it turns out you would have picked up a hand on the turn or a big draw on the turn and hit the river card. It happens. FIO gave us a bad flop as expected, breaking below the “low”. However this was a failed breakdown and swung up above the pattern high signalling a breakout. I don’t really know if you would count this as a breakout at this point as the pattern failed initially. Unfortunately although encyclopedia of candlestick patterns is a very great reference book there are many unanswered questions such as “Does this still count as a breakout?” and “at what point after the pattern has shown is a breakout in either direction no longer considered a breakout.” and “how does the ‘percentage meeting price target’ and ‘avg 1,3,5,10 day gain’ change when a 5% stop is employed? A 10% stop?”

Personally the setup still looked good to me. Breaking above new relative recent highs after making 3 failed attempts to really break down (a triple bottom of sorts) and as it broke out of the consolidation range, it looks like a buy. Well you could have a 10% gain from $20 to about $22 If you captured the best of the move.  Even if you just get a 3 day hold, you probably get 5% from $20 to $21. Such gains in a short amount of time are great, but does this really mean buying is the right move?

In poker, sometimes the cards turn over and you would have caught runner runner. Your 35 of spades on a 4 of spades as the only card in the board may have then given you an open ended straightflush draw and then you happened to hit. Unless you are making an advanced play where you call with the intention of bluffing or semibluffing the turn and can take the pot down often enough for it to be worth your while, you should almost always fold and move onto the next hand if the odds are against you and the cost of playing is too much which it probably will be with only a gutshot and backdoor draw. In this case, the triple bottom may have been enough “supporting evidence” such as a “tell” that opponent is likely to be bluffing or weak, and that calling or raising here to bluff the turn may be a good move. But certainly, there’s nothing but missed opportunity (and there may be greater opportunity elsewhere anyways) by folding, and it isn’t a bad move to fold. There are a whole lot of cards that may help you pick up a draw. Your opponent may give you a free card to see the river, and then try to bluff the river if he is a player who has a weak hand and isn’t going to bet on every street. In other words, if you hit runner, runner, you may get some more chips out of it. Additionally, if your opponent checks the turn and you have no draw, you may try a complete bluff. You don’t have to break even on your bluffs since you are getting decent odds, you have the possibility of hitting the long odds gutshot draw, and you have even longer odds of hitting runner runner and getting a lot more chips out of it. So there is the argument to be made that making the “bad play” can be marginally profitable if you call to bluff later on. That play depends not on your hand, but your opponent and your read. How this relates to the stock chart FIO is that it is one of those situations that in fact invalidates the breakout when their is first a breakdown, but then it swings around and breaks to new relative highs after also making a triple bottom. The “tell” is there, and this hand/stock/chart is now playable. Does that mean you definately should play it? No but there is an argument to be made either way.

Sometimes it’s best to just let the hand go and comment “nice hand, sir” and stick to the system of patience and only trading when you KNOW the odds are in your favor and you knowexactly how you want to go aboutthe trade. You have a choice in poker/stocks to try to make every move and trade/play anything remotely close to that of a hand that suggests it can be profitable. Sometimes your decision will actually have a negative expected value, but it may just keep you sharp and the marginal decisions you make that do turn out to be right will make you close to break even on the marginal hands to slightly up and if you can master the marginal decisions, you perhaps can make a killing. But if you are wrong, you perhaps are on the other side of the “killing” that is being made. The argument for the strategy is that being involved more allows you to see more situations and gain more experience and eventually will allow you to perhaps improve your ability at making those marginal plays. In the market, or table, you may become better in tune and this “loose aggressive” strategy (or loose passive aggressive) may actually turn out best.

But this strategy is on the verge of insanity and can cause you to form bad habits just as easily.

The other option is patience. Take the known edge at risk of potentially earning less than you could but providing more security of gains. There’s nothing that says you have to be super active when playing poker or stocks. Poker you actually may need to worry about how people perceive you as a player and playing more hands may get you more chips when you have a winning hand because of that perception. You also are forced into hands because of “blinds” and “antes” where as nothing but inflation causes a loss in value if you don’t play, and that is very mild compared to the potential gains you may make.

If you are going to play this, I would instead play it as the triple bottom breakout and that is an entirely different “style” of play or another completely different “deck”. That has to do with “price patterns” The way to deal with price patterns isn’t as cut and dry as “hold for 5 days and then sell for average expected gain of X”. You have to set stops, maybe use a trailing stop, and at some point take profits, either at the target, or use the target price to readjust the stop. It’s a much more “advanced” and “complicated” way to play and is similar to “small ball” poker than Daniel Negreanu made so famous. Perhaps the “big money” is in price patterns. The upside will far outweigh the downside and the holding period for winning stocks will be much longer. But the potential dangers and ways you can screw up taking profits too early to not compensate for your losses, or too late until they turn into a loss, or cutting your losses to quickly that you lose to commissions and don’t give the stock enough room to run, or not quick enough which can cause bit losses that are difficult to come back from. Making trades more often has drawbacks. The obvious one is commissions (or in poker, the rake). But it also has advantages. Even when you know the odds are against you, trading more often allows you to gain more experience. There may be other variables that also can potentially put the odds back in your favor such as a “tell”. There are more variables to monitor than just a candlestick pattern, and price patterns are the next variable that can provide a “tell” on the direction of the stock. Of course, there are several others just as one particular tell is not the only indicator in poker.

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The last post candlestick charts as a poker hand goes into minor detail about the 3 black crows chart pattern. It can be summed up by this image

Some more details about the pattern:
If price opens within the body of the previous candle (or at least ties
with the prior close), it’s a valid three black crows pattern. 3 candlesticks make up the pattern, price trend prior to candle should be upward, the pattern itself should move downward each closing at or near their lows, also closing below the previous candles low.

Measure rule. Use the measure rule to help predict how far price will
rise or fall. Compute the height of the candle pattern and multiply it by
the appropriate percentage shown in the table*; then apply it to the breakout
price.**

*In a bull market, an upwards breakout of this pattern leads to 33% meeting target.

**Due to the low number hitting target and possibility that those that do greatly exceeds it, I prefer having a fixed number of days to hold this instead, such as 5 day hold (5.3% average gain) or 10 day hold (6.95% average gain from breakout), losses though probably should be managed with a stop order below the lowest low of the pattern before it breaks out.

How to find 3 black crows without going through thousands of charts:

Some stock screeners allow you to find chart patterns. In this case, the three black crows chart pattern can be screened for.
Open up “prophet” in think or swim’s platform, In the menu bar go to patterns, Find candlestick patterns…
Then click on patterns and find “Three Black Crows” and make sure it is the only one selected.

Then you can go through the ones selected and double click and you will see this.
The box highlights the pattern. You have to analyze whether it is confirmed bearish breakout, confirmed bullish breakout, or unconfirmed. If it’s confirmed bearish, you can either trade the bear pattern, (going short) or just ignore. If you trade the bear pattern you have to know your odds and “expected value” as well. If it’s bullish you can buy it if it hasn’t gotten too far away from breakout line or just leave it. Ideally you look for an unconfirmed breakout so you can act and set a stop buy just above the breakout line.

If the pattern has just occurred and is unconfirmed, you may want to set a stop buy order a few cents above the highest high so that you buy it immediately after a intraday move above the breakout price. This will prevent you from missing out on a big move that happens too quickly for you to react although it’s still possible you miss out on an overnight gap upwards. But overnight gap confirmations actually work best. This pattern is frustrating to set the buy order and have it not execute 78% of the time, but just like a poker player playing suited connectors trying to crack someone who has aces, it probably is still entering the pot to “see a flop” Fortunately, you aren’t forced to pay to place an order that does not execute like poker where you have to call to see a flop, but you do probably want to temporarily have the cash on the side available for this trade so it doesn’t risk putting you on margin to execute it so there is a minor “opportunity cost” to “see the flop”.

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I believe combining two subjects and relating one to another engages the brain in a way that is more condusive to learning. The more associations we make with a particular topic, the more we can draw upon metaphors and general understandings.

As both a poker player and investor, it’s important to know your odds. Unfortunately with stocks, there are a lot more than 52 cards in the deck so to speak and sometimes your odds changes drastically even given the same hand. So where as in poker you can estimate the probability that your hand will win with clarity in the market at times you are playing a bit more “in the dark” (without knowing the true value of your hand/pattern). Like Stock trading, Poker playing is a game of odds over the long run, wit and bold decisive action at the right times. However odds can be estimated using enough of research from past results to at least allow one to determine if it seems worth playing.

The first “hand” I will talk about is the equivalent to suited 1 gapers. Not particularly strong initially, but has potential and worth playing if things continue in it’s favor. We will use the hand 35 of spades in this example. This hand in the market is the “Three Black Crows” candlestick pattern. In theory the pattern is bearish and more often than not it in fact is a pattern that occurs often before a decline. However, once the chart has broken to the upside and confirmed an upward breakout, this pattern suddenly becomes a winning hand. So a hand with bad odds initially that improves and that provides a good enough payout if you hit, is the perfect metaphor.

The chance of stocks breaking to the upside is low at 22%. These are your “preflop odds”. The “flop” (odds of hitting target) improves your odds to 33% say a 24T. You do not have a hand but you have a draw and your odds of winning improve to 33%. After a breakout is confirmed with a move above the breakout line and the “expected value” (Average expected net result) over a
1 day period:1.89% gain
3 day period:3.73% gain
5 day period:5.31% gain
10 day period:6.95% gain

If you hit your draw, you get paid off and this compensates for the low probability of winning. In the market, you have a good expected return even though it often falls short of the target. Sometimes you will drastically exceed the target but overall it is a very profitable hand.

How to play?  You can play the up breakouts in a bull market for the odds mentioned above. Wait until the right “flop” hits (It breaks to the upside) before getting money in.

The hand completely changes if you are playing it to the downside.

 

In the future if people like this concept of relating poker hands to the market, I will make some kind of deck of cards with all candlestick patterns and also price patterns. Price Patterns can either be evaluated as the initial swing or instead as a longer hold. Because the hold is often much longer, the percentage return is often better but that doesn’t always mean it’s a superior play. It’s a matter of style and preference.

At some point I would like to make a handful of decks of cards similar to flash cards in that the reverse side of the cards would be the flop and contain information on the odds and the front would just be the hand and the picture of the chart pattern or candlestick pattern and color coat them to represent the market conditions. In this case this would be part of the “up breakout, bull market” deck.There would be 4 candlestick decks since the odds for each situation are unique.

They would be:

Bull market, up breakout,

Bull market, down breakout

Bear market, up breakout

Bear market down breakout

Then there would be 4 decks for same conditions for “price patterns”.

*data used from book Encyclopedia of Candlestick Charts by Thomas Bulkowski

 

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GLD has been caught in a tight range for nearly a year. I suspect it could make an explosive move higher or lower soon. For now I will play a strangle until the direction is determined.
I want to have until at least September to sell. The “conservative” option play would be to go out 3 months after you plan to sell it so you aren’t at great risk of losing all of your position as the time decay hits you the hardest the closest to expiration.

Once the breakout has made itself clear, I may add to the side it’s moving in. I will add calls if it breaks out to the upside, puts if it breaks to the downside.

8/8 update: BOT September strangle. Candlestick showing double inside bar on weekly chart and triangle/falling wedge for price pattern. Neither are confirmed in either direction yet. That should bring clarity of direction very shortly. I suspect by 8/10 or 8/17 (week end for confirmation on weekly chart) we will get clarity.

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