Bias, Reinforcement, And Turning Off CNBC
5/4/2011 9:18:58 AM
What's this have to do with trading?
Do you think watching CNBC will help your trading? Do you think taking a position based on economic theory will help your trading? It won't. Why?
This may be a tough concept to grasp, but there's quite a bit of neuro conditioning that takes place in the market, and you have to learn not to allow it to happen. Neuro considitioning is bascially when you observe two things happen and relate one as the cause to the other.
This is what shows like CNBC play on. They will tell you that the market likes this or that, and the market may follow a direction, and you may associate that what they're telling you is the reason for the action in the stock price.
But this neuro conditioning is hard to break. Point is, you may wonder why I don't write much about the news or go into depth on current economic reports as the reason for the market's action. It's because they don't matter. Sure they may cause some short term blips in the overall movement of the market, but the market is a forward looking mechanism. The only thing that matters are 1) what internals are doing, 2) how is sentiment being modified by the current action and 3) how is price action reflecting those two items.
Point is, eliminate bias, identify how you've been conditioned and break the pattern, learn to think on your own and you'll soon be on the path to profitablility...
Just thought I'd throw that out there. I am fortunate enough to do this full time. It gives me a lot of time to reflect on what's happening in the markets and to watch CNBC. I see so many people coming on their show, giving tremendously different outlooks. I'm not sure how anyone can watch the show and leave the show with a good idea on what to do.
That being said, they do serve a purpose, they are the 'ring leader' in this cicrus we call the markets and when I'm day trading, I certainly have them on. For entertainment :)
Ok, on the markets...
Markets pushed lower on Tuesday, reversing and putting in somewhat of a hammer candle. The markets never make it easy, I contemplated taking some profits on the peak selling yesterday - something I always recommend doing if you have the time during the day - as the Qs (I use QID) tend to overlap quite a bit, giving you ample chance to reenter your shorts at higher levels.
Now for the critical stuff... Looking at the hourly futures for the NQ and ES, which I always have on one of my screens (along with CL, DX, and GC), the market appears to be making a b-wave in a move lower. The height of this bounce will determine our next wave lower (using fibonacci).
Here is our view of Global Markets.
On the economic front, here is the schedule for this week.
On to the charts:
Stock Barometer Analysis
The barometer remains in Sell Mode. We are looking for a move lower to test the current uptrend (see QQQ Chart above). This low should come inline with 5/18, our next key reversal date.
If this comes in, it will be a great opportunity for upside. At least that's how I see the indicators setting up. I'm not all that bearish. But I am bearish for the next 1-3 weeks.
The Stock Barometer is my proprietary market timing system. The direction, slope and level of the Stock Barometer determine our outlook. For example, if the barometer line is moving down, we are in Sell Mode. A Buy or Sell Signal is triggered when the indicator clearly changes direction. Trend and support can override the barometer signals.
Money Management & Stops
To trade this system, there are a few things you need to know and address to control your risk:
- This system targets intermediate term moves, of which even in the best years, there are usually only up to 7 profitable intermediate term moves. The rest of the year will be consolidating moves where this system will experience small losses and gains that offset each other.
- This system will usually result in losing trades more than 50% of the time, even in our best years. The key is being positioned properly for longer term moves when they come.
- Therefore it is vitally important that you apply some form of money management to protect your capital.
- Trading a leveraged index fund will result in more risk, since you cannot set stops and you cannot get out intraday.
- Make sure you set your stops so that you can lose no more than 2% per trade (based on the QQQQ if you're trading leveraged funds and options with our trading service).
Potential Cycle Reversal Dates
2011 Potential Reversal Dates: 1/15, 1/29, 2/16, 3/10, 3/18, 4/6, 5/21. We publish dates up to 2 months in advance.
We see the market moving lower into May. As this market moves lower, we'll start looking at our next key reversal dates. I already have the list for the year, but don't like to publish it because it gets people looking too far out. It's like driving a car, you may know where you're going, but you need to keep your eyes on the road ahead, as you never know what kind of turns you'll see... Look too far down the road, and you're likely to drive right off the road in front of you!
My Additional timing work is based on numerous cycles and has resulted in the above potential reversal dates. These are not to be confused with the barometer signals or cycle times. However, due to their past accuracy I post the dates here.
2010 Potential Reversal Dates: 1/19, 1/28, 3/2, 3/23, 4/7, 5/30, 6/10, 6/28, 7/10, 8/13, 9/7, 10/2, 10/27, 11/21, 12/19. We publish dates up to 2 months in advance. 2009 Published Reversal Dates: 1/20, 2/11, 3/7, 3/15, 4/8, 4/16, 4/27, 5/7, 6/8, 7/2, 7/17, 9/14, 10/10, 10/24, 11/12, 11/30, 12/9, 12/21, 12/29. 2008 Potential Reversal Dates: 12/31, 1/11, 2/1, 2/13, 3/6, 4/5, 4/22, 5/23, 6/6, 6/27, 7/13, 9/2, 10/3, 10/22, 11/10, 12/11. 2007 Potential Reversal Dates: 1/10, 1/14, 1/27, 1/31, 2/3, 2/17, 3/10, 3/24, 4/21, 5/6, 6/15, 8/29, 10/19, 11/29, 12/13, 12/23, 12/31, 1/11/08. 2006 potential reversal dates: 1/16, 1/30, 2/25, 3/19, 4/8, 5/8, 5/19, 6/6(20), 7/24, 8/20, 8/29, 9/15, 10/11, 11/28. 2005 Potential reversal dates: 12/27, 1/25, 2/16, 3/4, 3/14, 3/29, 4/5, 4/19, 5/2, 6/3, 6/10, 7/13, 7/28, 8/12, 8/30-31, 9/22, 10/4, 11/15, 11/20, 12/16.
Use the following Timing/momentum indicators to assist in your trading of the QQQQ, GLD, USD, USO and TLT. They are tuned to deliver signals in line with the Stock Barometer and we use them only in determining our overall outlook for the market and for pinpointing market reversals. The level, direction, and position to the zero line are keys in these indicators. For example, direction determines mode and a buy signal 'above zero' is more bullish than a buy signal 'below zero'.
QQQQ Timing Indicator (NASDAQ:QQQQ)
The QQQQ Spread Indicator will yield its own buy and sell signals that may be different from the Stock Barometer. It's meant to give us an idea of the next turn in the market.
Gold Timing Indicator (AMEX:GLD)
Want to trade Gold? Use our signals with the Gold ETF AMEX:GLD. Gold gives us a general gage to the overall health of the US Economy and the markets.
US Dollar Index Timing Indicator (INDEX:DXY)
Want to trade the US Dollar? Use our signals with the Power Shares AMEX:UUP: US Dollar Index Bullish Fund and AMEX:UDN: US Dollar Index Bearish Fund.
Bonds Timing Indicator (AMEX:TLT)
Want to trade Bonds? Use our signals with Lehman?s 20 year ETF AMEX:TLT. The direction of bonds has an impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.
OIL Timing Indicator (AMEX:USO)
Want to trade OIL? Use our signals with AMEX:USO, the OIL ETF. We look at the price of oil as its level and direction has an impact on the stock market.
Secondary Stock Market Timing Indicator
We daily monitor hundreds of popular and proprietary technical indicators that break down market internals, sentiment and money flow to give us unique insight into the market. We feature at least one here each day in support of our current outlook. As an annual subscriber to any of our services, you will get access to all our charts and research.
Daily Stock Market Outlook
We remain in Sell Mode. As always, in a sell off, the market has waves higher and lower. On an hourly chart, it looks like we're putting in a B-wave - is that gets confirmed today, we'll have a good projection for a low - and so will many other traders, which will accelerate the selling.
What's key here? As always, dollar and bonds. The dollar has been consolidating the move lower for 5 days now and is pushing on the lows (but holding). Bonds have been breaking new daily highs as they move to the top of the channel above (and maybe higher). How these act today is cricical.
In addition, the above chart is the equity put call ratio. It's one of several 'energy' meters of the market. It's at a relative high. That doesn't mean it can't go higher, but it generally suggests that fear is at a level that can't support more upside. So expect lower prices.
If you're looking for more information, please visit our blog - I'll have updates and publish other articles there. http://investmentresearchgroup.com/Blog/