Herewith, my eccentric review of everyone’s favorite holiday film, “It’s A Wonderful Life” starring James Stewart and Lionel Barrymore:

Like everyone else, I love this film. While not particularly well received on release, it has become perhaps the most cherished holiday film of all time. Before I get into my thesis, I want to emphasize that. It’s wonderful! Terrific performances, heartwarming, what more could anyone ask?

From here on is the part everyone is going to hate, so stop reading now unless you want something completely different.

“Life” essentially is a battle of philosophies, one represented by too-good-for-this-Earth George Bailey (James Stewart, a career performance), the other by “the meanest man in town,” Mr. Potter (Lionel Barrymore, in perhaps an even greater performance than Stewart’s). Bailey inherits a failing Savings & Loan that lends money to families to realize their dreams, new homes. In the post-war years, that was everyone’s dream, a plot of land with a house and picket fence. Everything George does is pure and good, particularly the extended scenes of him wooing his high school sweetheart, Mary (Donna Reed). So, he is set up as the prototypical hero who helps people realize their dreams and even saves lives (“It’s poison, Mr. Gower!”).

Bailey’s polar antithesis is Mr. Potter. He is old, crabby, crippled, sour, and thinks only of himself. He also happens to run the only other (apparently) bank in town. His plans for total domination (by way of foreclosing on everyone he can) and turning Bedford Falls into “Potterville” are stymied only by Bailey’s out-gunned savings and loan, which operates on a thread so thin it could go out of business at any time. And something happens that may make that happen, but then Bailey’s popularity shows its power….

This juxtaposition of good versus evil mirrors a change that was happening in society. With the good fortune of the U.S. winning World War II, there was abundance and prosperity. Bailey wanted to loosen things up, get the economy moving by lending to everyone. He just wanted to make people happy! How… wonderful! Mr. Potter stood for the old ways. Before loaning, you establish creditworthiness. If someone doesn’t pay their debts, you foreclose. Very simple and tidy. Balancing budgets can be simple, you just need the will, discipline and willingness to be unpopular to do that.

“Life” portrays Mr. Potter’s ways as unremittingly evil. But they are what built the prosperity that Bailey wants to use. Bailey’s philosophy boils down to “just do what people want and makes you popular, and things will work out.” In the end, this very democratic viewpoint wins out. How… wonderful! This is precisely what has happened in society at large. It’s one of the reasons the film has gained in popularity. Rather than make people pay their debts, the trend has been to forgive, roll debt over, find “creative” ways to finance debt using new debt, and grow entitlements because that’s the angelic thing to do. Doing things like Mr. Potter, sending guys to war, foreclosing, that’s the evil old way which we have moved past and must be overcome.

The end result of Bailey’s triumph? Trillion dollar deficits, Europe on the brink of collapse, entitlements grown out of control, a world where the “answer” to debt is just new debt. Nobody wants to be the evil Mr. Potter and actually impose fiscal discipline and hurt people. When politicians do, they get voted out of office. Weak “solutions” are put off into the distant future where they inevitably will be watered down or discarded completely. Economic collapse looms despite the greatest prosperity in history. The end result of being so warm and generous eventually could be economic Armageddon and chaos. Then, nobody would get entitlements and it would be impossible to spend so generously – which, in a decadent Democracy, is perhaps the only way to accomplish that. In the end, looking not just at the present but at future generations, is that really better for people?

Meanwhile, societies that still have internal fiscal discipline, while undemocratic, sit back and accumulate larger and larger surpluses. They are unduly harsh, but don’t have to worry about being popular. Someday, the philosophy of George Bailey will have to dial back closer to that of Mr. Potter or Western society’s debt may strangle it. A balance must be struck. It is not so one-sided as this film would have you believe.

The rule of the angels can have some dire consequences. In a sense, it is selfish. But, the reckoning can be put off for decades down the road, so be generous now and be popular!

This is perhaps the most heart-warming film of all time. But this is where it all started going wrong economically. Try not to see the dark side over your holiday meal.

As I posted on October 28,2011, I entered a position in TZA.  I posted the reasons and some additional thoughts in my previous blogs.  I suggest you read those first if you have not done so before.

Here is what has happened in the SPX since.  The entry point is where the upper arrow points:

And here is what has happeend in TZA since:

As you can see, the S&P is down slightly, and TZA is up slightly.  So far, so good, a gain is a gain.  I have been trading in and out of it to lower my basis, but TZA is my core position for now.

As I said in my previous posts, a prime reason for entering the trade was my perception of events in Europe.  Put another way, it is my impression that the European Union in its current form is unsustainable and unraveling.  However, as Keynes said, there is a lot of ruin in a country, and I’m sure even more so in a multi-country Union.  So, I expect things to take time to develop.  We’ll still be talking about Europe’s problems in 2012, and 2013, and 2014.  They are not going away.  Eventually it will have to break up or become more like the the United States, with fiscal and monetary policy in the same hands.  I think the former outcome much, much more likely.  The countries of Europe simply value their sovereignty too highly, a problem the US did not have when it formed a more cohesive whole.  Plus, many of those countries have bad historical associations with Germany, the country destined to be a prime leader in any tighter union due to its economic power and influence.

But that’s the macro reason.  I also think the US market is simply ready to see lower valuations.  There is a very strong opposing viewpoint that says companies are making good profits and in fact, by historical standards, are under-valued.  How you view that sort of thing depends on what yardstick you use.  I don’t care what the average S&P 500 P/E ratio is over the last five or ten or 50 years because it fluctuates continually based on market conditions.  It is like saying you think the Euro will go down tomorrow because it is currently trading at $1.36, while over the last ten years it has averaged $1.31 (or whatever that figure may be).  You will go broke thinking like that.  There is no “average” figure that has any meaning. Whether that current ratio, whatever it is, is going to rise or fall depends completely on macro economic conditions and investor reactions to those conditions, like it or not.

You will see people justify buying the market now based on these meaningless historical measures.  My viewpoint is that wherever the ratio currently stands is a fair value for this moment in time.  What we are interested in is the NEXT moment of time and what values will be then.  Future valuation depends on investor psychology, which derives from macro economic events.  Whether you make money on your trade depends on these fluctuations, unless you are interested in a buy-and-hold strategy over a period of years and ready to wait until that psychology just so happens to change in your favor, in which case you most assuredly should not be investing in TZA or anything similar.  “Historical valuation” thus is a completely nonsensical idea, except in the very broadest of terms, and we are in the middle of a very broad range.

The bottom line is that the economy right now is extremely fragile.  Europe is going into a recession, everybody pretty much accepts that.  Austerity budgets required by the European Union in Italy, Greece, Spain, Ireland and elsewhere will see to that.  The United States is not an island, and if its largest trading partner has economic troubles, it is not going to sidestep them.  Combine that with the need for austerity in the United States as required by current budget laws soon to go into effect, due to decades of profligate spending and borrowing, and you have the makings for at the very least an economic slowdown, and quite possibly another recession.

Anyway, that is the overview.  The chart I posted above shows a triangle formation that is very near its conclusion.  Either we break up, or down, and it will be a hard break.  As I posted in a previous blog, my expectation is that it breaks lower.  However, it may go the other way, in which case I am out of the TZA position completely.

But so far, the position is working.  The market tone has changed completely since October.  Monday’s action was an inside day, a Bearish Harami pattern.  If we get continuation, we could easily get a real breakdown to the S&P 1200 level or lower.  We play it by ear once we start moving one way or the other.

Be ready.  Soon it is time to make the easy money.

What charts tell you depends entirely on the questions you ask.  There are no absolute answers with charts, only suggestions and hints.  Anyone looking for certainty shouldn’t look at charts at all, they only tell what happened in the past, and cannot predict the future.

But patterns recur.  The difficulty is spotting them in time for them to be useful, rather than afterwords when you can only say, “Wow, so that’s what happened.”  Patterns are imperfect, and they can be rough and ragged and completely unrecognizable.   It always takes a leap of faith and courage to take action on an incomplete pattern.  As traders, though, that is what we have to do.

Today, I am looking at certain larger, recurrent patterns.  Specifically, triangle formations (also known as “coiling”) and how they resolve.  The textbooks say that these patterns can resolve in either direction, and that is true.  What I am going to do is lay out a case for what is happening in the market now based on past triangle patterns and how they resolved.  I chose this formation because I think that is a pattern the market is in right now, and it appears to be close to resolution.

First, let’s look at the largest relevant time frame, the past twenty years, on a weekly chart.

I have pointed out two formations, one in 1999-2000 and the other in 2001-2002.  One could say that neither is actually a triangle, but they have two things in common with the general pattern I am zeroing in on: they have declining highs and higher lows over a fairly compact time frame, which if continued would indeed form a point.  The thing about these formations is that they don’t usually complete in the absolute sense, they generally will break out before that.  Anyway, these two patterns broke out decisively to the downside.  Their downside resolution was a function of the heavily overbought Y2K market.

That’s just a warm up.  Let’s look at the last ten years, also on the weekly chart:

Again, these are not ideal triangles, but they show the coiling action at work.  The triangle in 2002-2003 resolved to the upside, a function of the oversold conditions at that time with the SPX in the low 800’s.  The 2007 triangle resolved to the downside, as it was an overheated, overbought market with the SPX in the 1400s.

Next, let’s look at a a couple of triangles in 2008, now shifting to the daily chart.

Here I pointed out two major formation, in mid-2008 and 2008-2009.  Both resolved strongly to the downside.  That was a function of, in the first case, an overbought condition combined with a looming recession and banking crisis.  The second was completely a function of the banking crisis and the related TARP bailouts.  I also pointed out a few minor triangles in 2009-2010 that all resolved strongly to the downside.

Now, let’s turn to the present on the daily chart.

This year is chock full of major coiling patterns.  This is a function of the fear that lingers in the market, it is a pattern that thrives on fear and chaos.  With the VIX hanging tough over 30, it is clear that fear lingers in the market no matter how much ground the market has recovered in the past month.  This remains a volatile market, every day’s price action shows that, with alternating bouts of euphoria and panic.

The chart speaks for itself.  Each of the triangles this year resolved decisively to the downside, the most recent one leading to the lows of the year.  Today, Friday November 11, was a huge up day that stopped just about perfectly right about at the top trend line of the triangle.   November 2011 is showing precisely the same kind of coiling pattern as earlier in the year and in the prior years we looked at.  It actually is kind of eerie that the present triangle is using the same trend line that the September coil was using.  While it could break out at any time, it may well take a few more days or a week to resolve.  If it resolves to the downside, as the majority of the others have, it won’t necessarily lead to the lows of the year, but a break to the mid-1100s would be in light with past breaks.

The triangle pattern reflects uncertainty and fear in the market.  It isn’t a coincidence that the pattern in its largest manifestations shows up during major market turns and during years when market turmoil, either on the over-exuberant side (2000) or the panicky side (2008-2011).  That the market is on an uptrend and everybody is happy and betting strongly on higher prices doesn’t mean the triangle formation won’t happen, or won’t resolve to the downside, just ask veterans of the Dot.com bubble.  Traders increasingly hedge their bets and the market turns inward on itself, with nobody willing to call the turn.  Another factor keeping it going is that there is profit to be made in playing the swings, which become nastier and sharper and brutal with time.  Note that while today, November 11, was a sharp upswing, it also was curiously contained despite the absolute buying panic based on no real change in news or fundamentals, at +259 stopping well short of the Dow 400+ up days that can appear earlier in these patterns.  Ultimately, the triangle runs out of room and the underlying sentiment emerges.

One factor in the breakout direction picked is news.  In 2008, it was the banking crisis.  In August 2011, it was the European situation and the US debt downgrade.  In November 2011, it could be the deepening European crisis, or the US budget deadlock, or any number of other factors.  Since overall upward momentum has stalled out, it is unlikely to be a simple uptrend continuation, though one could argue somewhat unconvincingly that recent price action is simply a bull flag in a larger market move. One thing is for sure, this pattern is going to resolve well before the end of the year, one way or another.

Seasonal factor could be in play, though the market had no difficulty going down in, say, late 2000, or late 2002, or late 2007.  The “Christmas rally” phenomenon usually involves continuation of an earlier uptrend that, as in 2010, can get overbought and correct violently early in the new year.  When the market in one of these patterns did, perhaps coincidentally,  finish the year on a relatively up note (e.g., 2007, 2008), it was followed by quite a rough start to the next year which brought the market lower than it had been previously.

The current market, by most technical measures (e.g., percentage of stocks trading over their 50-day moving averages), is more overbought than oversold here.  That is one clue on which way this is likely to resolve.  The $EURUSD exchange rate also is said by many to be overbought on several time frames, and it sure looks that way on the charts.  It has been leading the market (or vice versa) quite closely lately.

I hope this helps you form your trading plan.  Good luck.

The strength of this Bear Market rally has been fierce.  It is like the vampire who keeps rising from his coffin, only repeated applications of silver bullets will send him back for good.  This week, we have another collection of such bullets.

Looking at the charts, once again we see some distinctive patterns.  Chart analysis is as much an art as it is a science, because two people of equal charting skill can see different things in the same chart.  Few patterns are perfect, and thus they are open to some interpretation.  The wisest thing is to compare other technical indicators and chart patterns with Candlestick patterns to reach some kind of conclusion.  Even then, we are just talking about increasing the odds of deciphering future market trends.  Nothing is certain.

That said, the charts aren’t just speaking this week, they are shouting.  Let’s look first at the SPX daily.

Last week, we had a Doji to end the week.  That is the Candlestick I pointed to on the left.  Now, some didn’t think the tails were big enough to make it a Doji, but I did.  A Doji after a big rally is a reversal indicator.  Sure enough, the market reversed on Monday and Tuesday, taking the market down.  Call it what you will, it did what a Doji is supposed to do.

This week ended with a Hanging Man. That is the Candlestick on the right.  This also is a reversal pattern.  A reversal pattern such as a Hanging Man does not mean that prices necessarily will reverse, but only that the trend will change.  Since the trend the last couple of days, and indeed for the last month, was up, that implies we move either sideways or lower.

Reversal patterns need to be confirmed.  If Monday’s action is down, we will have good confirmation.  For now, I note the technical indicators which I circled which suggest a decline is coming.

For additional confirmation, let’s look at the SPX weekly chart:

We also have a Hanging Man here.  The three requirements of a Hanging Man are: 1. the real body is at the upper end of the trading range; 2. There is a long lower shadow; 3. There should be little or no upper shadow.

I think this meets those criteria.  Technically, the lower shadow should be twice the height of the body, and that is not the case here, but it is close enough, and besides, we are only using this as confirmation.  In any event, it looks like we either go sideways or down next week, at least early in the week.

Next, let’s look at the COMP:

On this post, there was no Doji last week.  The market fell off on Monday and Tuesday anyway.  We do, though, have a nice Hanging Man to end this week.  If anything, the technical indicators are even more clear as confirmation that the market is weak and ripe for a fall.

Let’s turn to the COMP weekly for confirmation:

On this chart, we also have a Hanging Man.  It looks like we also had one two weeks ago, but that one failed.  The important thing to remember is that we need confirmation for a reversal pattern to have any meaning.  The other technicals are mixed and of little value.  That is why price action next week is so important.  However, two Hanging Men in three weeks is more evidence that something is up in the market that easily could lead to a trend change here.

Next, the Russell 2000:

As you can see, we also have a Hanging Man to end the week.  The technical indicators are not quite as ripe as for the other two averages, though.  The small caps have shown strength in the market recently.  It is unlikely, though, that they will overcome an overall  trend change.

Let’s also look at the weekly for the Russell 2000:

Unlike the daily charts, this one looks less like a Hanging Man than it does a Doji.  Either way, though, the result is the same – it signifies a trend change.  It does not automatically mean we will go down next week, but it does serve to confirm the Hanging Man on the daily chart.  The technicals on this chart are not nearly as ripe as on the other charts, so this one is less certain.

I could go through some more charts, but they tend to say the same things.  The point is that the charts are trying to tell us something here, if only we are able to understand.

There is an army of Hanging Men.  Ignore them at your peril.

One of the prime questions I hear is, “What is your target on this trade.”

I have to say I have none.  Because I don’t.

That is followed up with, “Well, if you don’t have a target, why are you in the trade?”  I consider that an amusing question, it’s so off-kilter from common sense that I usually start laughing when I hear it.

I don’t like to come off as a smart-ass – OK, well maybe sometimes – but the absolutely honest answer to that is, “I am in the trade to make as much money as I can from it.”

Targets are completely unnecessary and counterproductive.  In fact, just thinking of a trade in terms of a target puts you in the wrong mindset from the moment you consider entering the trade.  It creates an underlying feeling that you have failed if you haven’t reached it, or succeeded just because you did.  In either case, your feeling would be completely unwarranted and could easily cost you money.

I both day and swing trade.  More often than not, I swing.  A day trade can turn into a swing under ideal circumstances, though it rarely does.  Day trades, in fact, can be exploratory trades for later swings.  But that’s another topic for another day.

I day trade because I see a temporary opportunity such as an oversold condition on one of the shorter charts.  I swing when I see a trend on one of the longer charts. Targets don’t enter into either.

If I’m day trading – meaning the trade begins and ends that same day – and I get a good, quick scalp, I’m out.  If I’m wrong on direction and the security starts heading the wrong way, I’m out.  Either way, I’m never in a day trade for a very long time.  That has nothing to do with a “target.”  My only target is to make a good profit with as little risk as I can manage.  I take as much as the market will give me, no more and no less.  I prefer to keep things fluid and simple.

Swings are designed to last more than one day.  That basically is the only limitation or target I put on it.  Sometimes I don’t even achieve that.  If I enter a swing and the security moves the wrong way immediately, I’m out.  I can always get back in.  Admitting my error quickly saves me time and money.  Making or missing a “target” has nothing to do with it.

For both swings and day trades, I consult both the short and long charts.  A day trade is based on a 1, 3, 5, 10 or 15 minute chart, but I consult the longer 30-minute, hour and day charts to make sure I’m trading with the larger trend.  It’s just safer that way.  Swings, on the other hand, are based on the hourly and daily charts, but I prep with the shorter charts to find a good entry spot.

Once I’m in either trade, my only goal is to make as much money as I can from it in a reasonable time.  If I enter a day trade and get an immediate fifty cents, I’ll take it and move on and be quite pleased with it and maybe even boast about it on twitter like everyone else.  I’m not going to to stand and fight because my original target was seventy five cents.  That’s just money management.  So, if I do that, what is the point of having a target?  It will just distract me.

“I better not sell here despite the sell-off due to that Guardian article, because I’m only at $49.30 and my target is $49.63.”  I don’t think so.  My goal is to make a reasonable profit and get out without damage.  That’s my target.

Similarly, in swings, I keep going until the market signals the risk/reward ratio is turning against me.  If all lights are green and I’m riding a trend, I’m not going to sell at $50 just because I set that as my target a week before when $52 is looking quite attainable.  If the trend changes on me or what looks like a typical three-day sell-off starts, I’m not going to try and ride it out because I set a target at the outset of a $5 gain and I only got $4.  That seems silly to me.

The most I’ll do is look at the chart and see a likely ending zone.  That can be based on prior price action or any of a number of other factors.  Maybe I just want to make sure I get out before the weekend, or some earnings news.  Lots of decisions can shorten a trade.  Having a “target” isn’t one of them.

Targets are gimmicks used by sell-side brokers and analysts to make themselves sound like they know what they’re talking about and convince you to buy or sell.  When an experienced trader talks about targets, I have a pretty good idea where they’re coming from,  and I know that’s not my bag. I don’t need that crutch from a broker.  Hey, if it works for you to organize your thoughts, terrific.

There’s an old military saying.  “No plan survives contact with the enemy.”  Same way with this target idea.  The market here is the enemy, and no target is going to survive what the market does or does not give me.  I simply don’t set targets in Dollar and Cents terms.  Selling at such a “target” would be a pure coincidence of many factors.

Targets don’t interest me.  Period.

As I posted on Friday, that day I entered a trade in TZA.  For me, it is an important trade, so I am devoting a lot of time to it.  It is a good trade for me because, besides being profitable, it is forcing me to refine my charting skills.  I could get blown out of this trade at any time, this is one volatile security, but since I’m still in it, I thought some traders some might find an update of use.

Briefly, TZA is a 3x inverse Bearish play on the Russell 2000.  The Russell, represented by IWM, has its own peculiarities but overall follows the major trends in the market.  By playing TZA, you are shorting IWM, which means you are short the market.

I entered the trade for several reasons.  First, I felt the market was overheated last week, with the blow-off rally on Thursday.  Too many technical indicators supported this view, such as the number of stocks trading over the 40-day moving averages and so forth.  Every indicator for the market that I checked on the daily charts screamed “Overbought.”  The Doji on IWM on Friday also was helpful, as I posted then, but that alone wouldn’t have been enough.  Second, I just could not bring myself to go and stay long when the market popped on the absolutely ludicrous and quite astonishing developments in Europe that caused the Thursday rally.  Third, I discounted all the pumping by CNBC and others about hedge fund managers somehow being able to force the market higher into the end of the year.  Hey, they WISH they had that power.  And, fourth, TZA itself was trading around where TNA took off in early October, and had been beaten up pretty good.  Yes, rallies can and do cause the market to stay overbought for extended periods, but that invariably occurs when the economic news somehow justifies it or some other macro news ignites it.  Nothing like that was apparent to me, so why should the market use a sharp, classic V-shaped Bear Market rally to hit all-time highs?  Didn’t make sense.

Those were the reasons, whether you agree or not.  As a trader, you have to make decisions and take chances.  That’s just the way it is.

Enough background.  As seemingly everyone knows, the market has been unusually correlated with the Euro/Dollar rate ($EURUSD).  Over the weekend, futures were doing their usual wishy-washy dance slightly to the downside, which really means nothing for the week ahead, when suddenly on Sunday night Japan intervened to force down the Yen (and thus support the Dollar).  $EURUSD plummeted, the futures around the world followed, and Sunday night in StockTwits felt like a regular trading session, it was so active with people watching and trading ES_F.

So, the market gapped down this morning, TZA gapping about a buck higher.  It ran up slightly to the low $30 area, then stalled.  People trading this market can vouch that the middle of the day can trade perversely differently than the first and last hours do, and today was no exception.  As the morning wore on, the market edged higher, and TZA edged lower.

This was not the action I was looking for.  Even at its low, it was above my buy-in price in the mid-28s, but I was bound and determined not to take a loss.  So, I had my finger on the trigger for a while, but never did pull it.  A little too antsy, perhaps, but three weeks of constant moves higher will do that to you.

I turned to the IWM chart to see what was going on.  For some reason, it was going up while everything else was going down.

This was a fine kettle of fish.  I checked some of my momentum indicators, and I saw some huge spikes on the tape. Fortunately, they were only a few, and were not followed up.  The big-money boys were playing their mind games, but they just didn’t have the firepower left to pull it off.  So, despite being right on the edge of my mental stop, I stuck with the trade.

That was fortunate.  Here is the remainder of the day for IWM:

I put an arrow to show the critical point.  This was the moment of capitulation for the Bulls.  IWM put in a double top, and fell for the rest of the day.  TZA obviously rose.

Anyway, I’m not showing you my technical indicators because I can’t get some of them to work except during active trading.  But, they were vital by showing me the ebbs and flows of volume and momentum on the tape.  Also, IWM had an uncanny knack today of trading to its pivot points, resistance and support lines, and then reversing.  It didn’t really disregard them until the end of the day, when the market showed its true colors with the late sell-off.

So, I’m still in the trade.  No, there was nothing guaranteed about this, but I thought it might be instructive for some to see how it is developing.  If we get another sell-off on Tuesday, I may be in this one for a while.  I don’t have a goal or target, the market will decide that for me.  If the market slide gains steam, though, I wouldn’t be at all surprised to see this thing hit 40.  As we go along, a little cushion of profit will help keep me from being so gun-shy and exiting too soon.

Good luck with your trading.

I’m working into the night on my trading strategy, so am going to post again despite having already posted just this afternoon.  I don’t know if these posts help anyone else, but they help me clarify my own thoughts.

I’ve been trading TNA and TZA.  Both are flip sides of the same coin  The former is triple-leverage Bullish on the Russell 2000, the latter the same on the short side.  As options tend to be, they basically are a zero-sum game, when one goes up the other goes correspondingly down, though some correctly will quibble with that and note that they do not completely cancel each other out.  For the most part, though, they are Yin and Yang.  If you are playing the Russell up, you long TNA or short TZA, and vice versa.  Anyway,  I’ve noticed a few things which might be of interest.

These are not for the faint of heart.  They definitely are NOT for newbies, and nobody should play them on margin.  You will blow your account.  Some folks think these are the crack cocaine of ETF’s and should be banned.  Whatever.  They move fast and are unforgiving.  They are said to be good only for daytrading, but doing that can be extremely dangerous.  They move so fast that if you get the direction wrong, you are hosed.  If they don’t come back, you are out.  Either you’re right, or you lose.  No other likely outcome.

I find that, despite all the admonitions and warnings, they still can be worthwhile.  One way is just to time them right.  Figure out the right timing and direction, and you are golden.  Unfortunately, I have found in my trading career that it almost impossible to get timing and direction right at the same time.  Well, it is possible, and we all do it at times, but to do it over and over again with few errors, that’s impossible.  Yes, impossible.  I don’t care who you are.  It’s impossible.  IMPOSSIBLE.

OK, so now that you know where I stand, why do I trade them?  In part, it’s been a learning experience.  I wanted to see what they can do.  I think I’ve succeeded at that modest goal.  If you learn how to handle nitroglycerine, then working with dynamite becomes a little less stressful.  I refuse to be intimidated by any securities.  I am now comfortable with them.

But, of course, the objective always is to make a profit.  I have found – and maybe this is just me – that trying to daytrade them is very difficult.  They are just too unforgiving.  They will say “Adios” to your entry point in the wrong direction in a heartbeat.

But swinging is another matter.  Yes, they lose their value over time and you can’t hold them for years at a time.  But I don’t think any of us WANT to hold these trading vehicles that long.  If you want to buy and hold, I can give you a whole list of great, great stocks (GE, ED, INTC, etc.).  But so can anyone else.

My point in writing this is to give you a different perspective, perhaps, on these two particular trading vehicles.  And that is what they are, trading vehicles.  They are not for widows and orphans, as the saying goes.  You buy them in order to sell them, not to harvest dividends and wait for splits.

But saying they are trading vehicles does not mean a good holding time is necessarily measured in minutes.  When you trade like that, you may get the odds in your favor through various technical measures, but really you are just gambling.  You are simply gambling at one of the easier tables in the casino.  That’s really the essence of daytrading.  There are very, very good gamblers, and very, very good daytraders.  If that is you, you have my admiration and respect.  But my experience is that very, very few people are good gamblers, and very, very few people are good, consistent daytraders.

You should only use these particular vehicles, in my humble opinion, to play a trend.  Doing anything else reduces your odds of success to well below 50%.  You can play the bounces in a counter-trend, but you better be nimble and lucky at catching the real bottoms, not the bear flags.  Otherwise you are hosed.  Plain and simple.

It is much wiser to play in the direction of the trend.  Then, even when you misjudge a bottom, long- or short-term,  you stand an excellent chance of the instrument recovering.  Try that with a counter-trend play and you may be waiting a long time.

If you are going to play a trend, you can daytrade, for sure.  But if you are confident you have the trend nailed, I would not to do that.  You actually reduce your risk by just letting the position ride until it is time to sell.  If unsure about when to sell, wait for the market to tell you.  With these particular securities, that can be a dramatic, even traumatic experience.  I don’t think that anyone who was holding and watching either of these things in the last hour of trading on October 4, 2011 will ever forget that experience.

If you were holding TNA then (perhaps in anticipation of a trend change due to oversold conditions), the generic advice that these things are only worth daytrading would have been completely wrong.  It would have cost you gains.

The highest-reward strategy, in hindsight?  Well, if you thought the trend had changed, that is easy.  Hold the darn thing!  You would have almost a double after three weeks.  Try doing that with AAPL or some bond.

Hindsight is always perfect.  But my point is, if you make the decision to ride the trend and, of course, catch the right trend, this strategy works.  When I say the “right” trend, well, let’s look at TZA during the same period:

Well, the optimal strategy for this would have been to sell it at some point during the previous uptrend.  Over a third of the losses on this happened in 45 minutes on October 4th, just as the same amount of gains accrued during that time to TNA.  But once this turned, it didn’t really look back.  These instruments are volatile, but they respect the trend.  So either ride it, or completely avoid it.  Don’t try to fight it.

There are a few other things worth noting.  You don’t want to hold these until the trend ends.  You can see the results of that with TZA.  Blink, and you lose a huge chunk of your gains.  Get out while the getting is good.  With these more than anything, getting greedy will hurt you.   Conversely, if you do think a trend change is imminent, it is prudent to pick some up BEFORE the trend changes.  Yes, you will have to hold it at a loss for some period of time.  But look at the potential gains of doing so!

There are some, shall I say, advanced strategies you can play with these.  Trader 3xshort in StockTwits suggested shorting the opposite instrument for the direction you want, rather than going long.  So, if you think the market is up, you don’t long TNA but instead short TZA, and if down, short TNA.  I’m not sure I understand the math involved, but that’s something to consider.

You also could consider simply shorting them and waiting for them to go to zero.  That will take some patience, but I’m told there are gains to be had by doing so.  Maybe someone else can work that out in greater detail.

Finally, some claim to hold both at once, and adjust their positions based on market conditions.  So, if the market rises, you would take some profits in TNA and keep your TZA, and so forth.  That strategy requires a lot of patience, but I can see how it could make you money, though it also would tie up a lot of funds.

Let’s turn from the abstract to the practical as of today.  A lot of people think the market is getting over-valued.  Others, of course, think we are going straight to 1400 on the S&P 500.  That’s what makes markets.  I can see valid points on both sides.  But traders have to make decisions, otherwise they don’t get paid.  I’m leaning heavily into the first camp.  I think a market turn is coming, and soon.  Surveys show the herd turning from Bearish to Bullish, the Europe news is out and no longer driving things, and an awful lot of weak hands are holding an awful lot of profits.  And I’m won’t waste your time going through all the technical indicators showing an overbought condition, you’re all aware of what a four-week rally without a pause does to the charts.

One curious and almost completely coincidental point leaps out at me.  TNA bottomed on October 4th at 26.67.  TZA just bottomed yesterday at 27.20 (see charts above).  May not mean a thing.  TZA may go to 10, who knows.  But quite an interesting coincidence, in such similar circumstances.  Yin and Yang….

As I said, you could see a lot of gains at the turn, but trying to time the trend change is next to impossible.  For that reason, I made the decision to pick up some TZA today and wait it out.  Yes, it is a wasting asset, but if the trend does change to the downside as has happened with some regularity recently, the gains could be tasty.  It may be a day, it may be a week, it may be longer, but eventually this market is going to turn.

And I’m going to be there waiting.

It’s Friday after the close, and it doesn’t feel like a normal trading day just passed.  It was more like a holiday, where the big shots get the day off and we little fry still have to push papers around and look busy.  The Dow Jones and S&P 500 were barely green, the Nasdaq barely red.  Overall, a big fat nothing for most people.

I will refrain from relating any of the rapidly increasing number of jokes about the Euro bailout, except to say that, no, Mr. Sarkozy will not come and wash your car if you agree to invest in his fund, and that the waiter at your local Greek restaurant will not even smile if you say you expect half off your check.  Probably the funniest comment was a real one made by our man in Roma, “Macho Man” Silvio Berlusconi, when he claimed that nobody was stronger financially in Europe than Italy except Germany.   One has to wonder if his next campaign will revolve around making the trains run on time.  Charlie Chaplin would have a field day making a movie about this guy.

Anyway, there are two paths to choose in this market.  Either you are in the camp that says “Overbought be damned, full speed ahead and never mind the torpedoes Mr. Gridley,” or you think that the normal rules may reassert themselves at some point now that Europe is in the rear-view mirror for a few months or more.  Everybody has an opinion, and opinions….  Well, anyway, people are going to bet on this with real money, so it is a serious issue.

As I wrote last night, the trend is up.  Today also was mostly up.  It was easy to expect some profit-taking, at least that’s what the talking heads on CNBC mouthed with their patented and studied look of amazement and wink when there wasn’t much selling that was supposed to say, “Well, you know what THAT means, folks!”  But the Euro markets were up slightly, too, and they had a lot more reason to take profits than we did.  That the market stumbled into the close without much of a change didn’t prove that thesis right.  In fact, perhaps just the opposite.

Take a look at the daily chart of the $SPX.  What do you see?  I see a nice little Doji sitting there for today’s trading.  “Doji” by itself doesn’t really translate into English, but the meaning often given to it is “A sudden danger.”  My Candlesticks book calls it “The Magic Doji.”  It is a Bearish reversal indicator after an uptrend.  Now you can add that to all the other indicators (including the startling absence of late buying on Friday) that have been saying for the last two weeks that the markets are overbought.  It may mean nothing, the markets have just kept relentlessly rising – but a lot of people take this candlestick stuff seriously.  I do, too.  But in an endless Bull market, that may not mean anything, either.

To think that this market continues higher requires faith.  You must have faith that there are endless supplies of money sitting on the sidelines or still short, just waiting to buy into a month-long rally.  You also need to have faith that people who made easy money on Thursday or the weeks before that won’t take profits at the slightest sign of trouble, or for no reason at all.  That’s the uncanny thing about October – there were none of those down days explained away by the talking heads as profit-taking days.  None!  Weird.

I don’t listen to the people on Stocktwits or elsewhere who say the market has to crash because Europe or the US has too much debt, or that there has to be a crash because someone’s Waves or The Cloud predict one, or just simply that this is all manipulation setting all of us poor little Bulls up to be slaughtered.  But the market has to pause for breath at some point, because, well, it always has before.  With the end of the month pretty much behind us now – Monday is the last day, and window dressing is usually done by then – we may see a turn back to normalcy after this weird October.  I bought some $TZA that I’m holding and probably will wind up holding for quite a while, until a real pullback occurs.  And rest assured, there will be one – some day.

So you can live on faith and wait for the momo market to burst eventually, like the ill-fated $NFLX.  Maybe you’ll get out in time….  But then you won’t be living in Doji City.

Today was one of the wilder trading sessions I can remember.  When news hit last evening that the Europeans had agreed to a Greek default on 50% of their loans along with some kind of plunge protection fund for their banks (which is what it was, though called ESFS or something stupid like that), the markets went wild.  I’ve been trading for 20+ years, and I’ve never seen futures react like that during the overnight session.  It was truly extraordinary.

Let me be clear.  I think the European news is all nonsense.  They are buying themselves some time, nothing more.  The Greeks are still living beyond their means, as are the Italians, the Spanish, etc.  Deficits are NOT good, you do NOT cure them with more borrowing.  There will be more news out of Europe in the coming years, and the boys on CNBC were only half-joking today when they said the Euro was no more, it really was the Deutschmark now.  I completely agree, the problem is competitiveness and efficiency, and those issues haven’t even been on the table.  However, the news is what it is, and you don’t fight the market.  The market thought this was a good thing, and we have to react accordingly.

I was watching the futures when the news hit.  They were barely above break even, in the U.S. and abroad.  It took them some time to react.  At first, several minutes after the news hit, I wasn’t even sure if they were going higher.  Boy, was I in for a shock.

If you are new to trading, rest assured, it will likely be a long time before you see the S&P 500 minis move 20 handles like that before the open.   They then moved another 20 during the regular session.  The most awkward thing is that traders were caught completely unprepared, many short while the markets were going wildly higher in a buying frenzy.  I think I speak truthfully in saying that a high number of traders either were wiped out or were put on the verge by getting margin calls.  Being in front of that sort of steamroller is frightening, and there is nothing you can do about it until the markets open.

I since have learned that one of the causes of the panic buying was the fact that many hedge fund managers were caught flat-footed by the news of the Greek agreement.  They were largely in cash, having liquidated their equity positions in the belief that no agreement was forthcoming.  When the news hit in the middle of the night, there ensued a mad scramble to put on positions before the end of the month.  So, the intensity of the move was ratcheted up by the added pressures of month-end window dressing, there being only three trading days left in the quarter (Monday is the end of the month).

What did I learn from all this?

First: it is dangerous to hold positions overnight.  I have done that routinely, but I don’t think anyone could have seen that kind of firestorm developing.  We might not see anything like that for another five or more years, but when it does hit, you are absolutely helpless.  Whether or not you are on the right side of the news, I think everyone would agree it was scary, like watching a tidal wave take out a town while you watch from nearby.

Second: there is an incredible amount of buying pressure left in this market.  We already had rallied from 1070 to 1240 in two short weeks, without consecutive down days in the last twenty trading sessions, so you might have thought there was some kind of market exhaustion or at least tiredness brewing.  Nope.  While I wasn’t trading back then, I’m sure this felt akin to that fabled breakout day in August 1982 when the great 1982-2000 Bull Market began.  The pressures were that intense.  The Russell 20oo was up 5%!  You just don’t see that kind of sustained buying very often.

Third: Trying to call a market top right now is foolish until price action tells you it is there.  Throughout today’s session, people kept trying to go short by buying $TZA etc.  I’ve played that game myself the last two weeks, and it is a fool’s game.  The market will roll over when it is time, and not before.  Trying to time it is simply purposeless and will cost you money.  Positioning yourself in advance for the inevitable move lower does have marginal benefits, but they are not worth the associated pain/risk.  Wait for the market to roll over and play it that way then, you will save your trading account that way.

Fourth: Just ride the current trend higher for the time being.  Yes, it could go the other way at any time, including before you read this.  But don’t fight the trend!  There is no way to beat the massive forces arrayed against you.  You will only get hurt, maybe not critically, but any damage is unnecessary.  Patience!  There will be plenty of time to re-institute shorts.

Fifth:  You can tell which way the trend is going by watching how your plays react.  For the last two weeks, I have seen my short plays bounce briefly after I bought them, lulling me into a sense that I was succeeding, only to have them quickly reverse and move lower than where I bought them.  When you see that, run!  It means the trend is against you.  If the pullbacks leave you higher than where you started, the trend is with you.  It really is as simple as that.

Sixth: Use this market ramp to hone your trading strategies.  Take your profits early.  Do NOT hold them thinking that the 3% gain you have is going to turn into 5%, then 10% and so forth automatically.  They WILL reverse and you WILL lose your gains.  LEARN TO TAKE YOUR PROFITS!  Then buy back after they dip.  TRUST ME ON THIS!  This is something with which I am having extreme difficulty and is my highest priority right now to correct.

Seventh: Scale in.  Don’t buy your entire amount at once.  If you intend to buy 100o shares, say, then start with 300 or 500, and add 100 here, another 100 there.  If you have time and are uncertain about your exit timing, scale out the same way, selling 100 here, 100 there.  Yes, the commissions are higher that way, but the results are a lot better.  We don’t always pick the best spots to buy and sell, even though our analysis is good.  Don’t screw yourself by risking it all at once and then getting caught when some minor fluctuation robs you of your trading profit.  Build your position and tend it like you would tend a garden.

I think that is enough for now.  Despite the parabolic move upwards, I think we have more upside.  As I said, today’s action showed how much money is still sitting on the sidelines, or perhaps short and still needing to be convinced to go long.  Play the trend for now, it is your friend.

The Europeans threw more money at their problems and fixed them – or so they would have us believe.  It won’t be long before Greece spends more money that it doesn’t have, and Italy and Spain as well.  The problem can’t be solved in one simple bail out.  When you live beyond your means, your debt must be paid by someone else.  The fact that the Germans were willing to do it this time doesn’t mean they will the next time.

In the short term, the markets will bounce, but as we hopefully leave the European fairyland of easy money and easier debt behind, reality intrudes.  In the real world, the economy and earnings determine what our investments are worth.  While the Europeans were blithely burning barrels of cash every day waiting to get a consensus on Europe, U.S. companies were going quietly about their business.  How they did will determine the markets from now on, not what Angela Merkel had for dinner.

This is a dangerous market to fade.  Unless you are highly experienced, don’t get in its way.  At some point, we are going to get a nice, long decline.  Since everyone is waiting for that, though, it isn’t likely to happen any time soon.  So sit tight, play some longs, and we’ll have fun on the short side soon enough.  Just remember, the higher this endless rally continues, the harder the market will fall when the time comes.

Patience.