2017 in Review

Stock markets up world-wide. Volatility crushed. The massive rally in Bitcoin and other cryptocurrencies. Geopolitical tension on the Korean Peninsula. The most controversial President in US history.

A lot happened in 2017. Let's look at the charts and let them tell the story. I am going to take a look at some markets on a couple of different time frames and then discuss possibilities for this year (and beyond).

Note: A "daily" chart means that each vertical bar is equal to one day's trading. A "monthly" chart means that each bar represents one month of trading. You can see the time scale at the bottom of the chart. Generally I have the daily charts set to just show 2017 and the monthly charts go much further back.


Stocks

The S&P was up 20% on the year. Every month was positive (on a total-return basis) for the first time in history. The Dow was up 25% and the NASDAQ was up 29%.

On the daily chart of the ES, we see an investor's dream. A clean, smooth rally. Pullbacks were mild and were followed by relatively quick returns to fresh all-time highs:

The monthly chart, with the exception of the Crash of '08, shows largely the same picture. Note that not all 12 months are green on this chart because these are the futures:

With stocks in the US being a big winner, a big loser was obviously volatility. There were a couple of spikes, but ultimately more lower lows and lower highs. The lows were record-setting, and the highs may have provided temporary hope to traders, but betting that a more exciting epoch was beginning would have led to sustained losses. We will see what happens in the beginning of 2018 following the end-of-year spike:

What next?

A trend in motion tends to stay in motion. There have been so many fundamental "reasons" to get short stocks over the past 8 years that it is impossible to keep track of. As long as the trend remains strong, stay long.

Be on the look out for any major topping patterns. Divergence (RSI, MACD) and declining volume seem to have lost their significance in a lot of this rally. If financial stocks begin to roll over, however, that could be an early warning sign.


Currencies

The US dollar was down this year against the majors, posting its biggest loss since 2003. Losing about 10.5%, exceptional weakness was seen against the euro and the British pound. Let's check out the charts.

Note: All charts are of the futures contracts, so they are against the US dollar. Meaning as one of these charts goes up, it means that currency is gaining relative to the US dollar. This can be a difficult topic for people to grasp, especially since in the spot market it is often the opposite, so just ask and I can explain further.


The Australian dollar's place was in the middle of the pack. It started the year strong, corrected, rallied, corrected, and then posted a nice year-end push higher. The .81 level (one Aussie dollar buys .81 US dollars) was breached in Q3, but was unable to hold:

I am bearish on the longer-term outlook for this currency. We are forming a possible rising wedge, as highlighted, on the monthly chart. Given that the trend leading up to this (until 2015) was down, this has bearish implications. To briefly dive into the fundamentals, it is relative central back policy that moves currencies. The Fed is set to continue raising rates into 2018, which will help the US dollar hold its ground. Monthly Aussie dollar chart:

The British pound was strong this year. Many higher highs and higher lows. 1.37 was almost touched (meaning at that time, one pound could buy 1.37 US dollars). There are a couple of lower trendlines to keep an eye on into the new year:

Similar to the Aussie dollar above, the pound is moving lower into a bullish formation. Here it is more channel-like than a wedge, but the message is the same. When the lower trendline is broken, expect lower prices:

Next up is the Canadian dollar. The year started off on a rough note for the loonie (not my nickname). After bottoming out in the .72 handle, the upper trendline was broken and a strong rally ensued. For most of Q4 we were seeing consolidation, but like the Aussie, a strong rally was posted at the end of the year. It is worth noting that both the Aussie and the Canadian dollar are commodity currencies, meaning that since they export a lot of gold and oil, respectively, their prices tend to have some correlation with those markets. Daily loonie chart:

Are we seeing bottoming out on the monthly chart or is this another downtrend leading to a wedge which could be followed by another leg lower? We see a bottom in 2015 here, right at .68. Since then, we have had a higher low and 2 higher highs:

The euro is the most heavily-weighted against the US dollar in the US dollar index. That is because it serves as the common currency for the Euro area. Its strength this year was largely responsible for the US dollar's weakness. From the opening bell (OK, the second opening bell), we saw a large, sustained rally that hardly looked back. Peaking at 1.21 in Q3, it fell back to test 1.16, held, and then rallied back to highs to close out the year:

The monthly chart bears little resemblance to the other majors. While we see the same decline up until 2015, the action since then was neutral until this year. What we are seeing so far is a classic rectangle that is reversing the trend. Will this break above resistance hold?

The Japanese yen was the most boring of the majors. Volatility is cyclical, so that might mean we will see some better trading conditions this year. There were three major highs put in this year, the last being the highest, above .0093. However following that peak, we saw a decline back to support around .00875. Essentially what we see here is an early-year rally to a large sideways pattern. Interestingly, it appears as if a triangle is forming now, as the trendlines delineate:

Zooming out a bit, we can see that a major low was put in at .007945 back in 2015. Last year was a strong one for the yen until the last few months. That decline led into this year's consolidation. It is extremely difficult to determine if this is just a pause in a huge downtrend, or a pending reversal. We have the higher low, but we need to see sustained trading above .01 before being long is advisable:

Finally we are going to look at the Swiss franc. The daily chart looks most similar to the Aussie dollar, which is odd because the two have little in common. Sometimes that is just how things are though; just because there is correlation doesn't mean that there is a reason for it. We see a brief push above 1.06 in the summer, but the market fell back to parity, held that, then rallied (parity is 1, meaning 1 franc buys 1 dollar). We are seeing higher highs and higher lows now:

Trading activity in the last five-ish years in the franc, to be frank, has sucked. During the European sovereign debt crisis in 2011 it spiked to 1.4167, but following that, it has been a long, dull, sideways market:

So those are some of the major US dollar components. Let's now look at the actual dollar (I'll look at the US dollar ETF, $UUP). The monthly chart shows a strong rally in 2014 and the beginning of 2015. We saw another leg to a high in 2016, but 2017 was a year of declines, with a major low being put in. This low was put in at a critical level, so it is going to be interesting to see if it holds:

What next?

The USD might be forming a broadening formation, as evidenced by the higher highs and lower lows seen since 2015. I think it is likely that at least a temporary low is put and and we see a push back into the center of this formation.

The Aussie dollar, British pound, and Canadian dollar are all forming potentially bearish wedges or channels. They are bearish because they are against the prevailing trend, which is down.

The euro is currently above resistance from the rectangle that it broke out of. As long as that level holds, the picture is bullish.

The yen has been very sideways this year and is forming a symmetrical triangle right now, I want to wait and see how we break out from that.

Finally, the Swiss franc has been extremely rangebound for years, and until a decisive move is made, there is no reason to expect that to change.


Energy

Oil began the year rangebound between about $51 and $54. Consensus was that this was a fair price range. We saw a breakdown to the $47 handle, and then a rally back into the previous range. That topped out in the middle of the $53 handle. From there, 2 declines took us to what would be the low of the year, at $42. A strong rally ensued for the second half of the year, closing out above $60:

The monthly chart of crude oil is one of my favorites at the moment. A massive, complex head and shoulders pattern has formed. There are 2 shoulders on each side of the head. Following the completion of the final shoulder, we have had 4 months of gains. The target on this move is around $68, but there is a lot of resistance higher than that which may be tested:

Natural gas was a boring market this year. A decline at the end of last winter was followed by a rally, and then another decline into a consolidation pattern that lasted for most of the year:

The monthly chart doesn't look much more exciting, unless you're including the crazy spikes in 2005 and 2008. More recently, however, the market has been anything but exciting. This year was especially dull, as the last 12 bars attest to:

What Next?

Oil looks set to continue its rally. The trend is up and the head and shoulders pattern is playing out. It would take a major fundamental shift to turn things around.

Until natural gas breaks away from the year's range, I expect it to continue to be boring. There might be some heightened volatility in January and February.


Gold

The year in gold was positive, with a rally taking it from $1130 to $1320. An intermediate high was reached above $1360 in September. The rally started on day one of 2017. It can be broken down into multiple waves, with generally higher highs and higher lows. In July a decisive bottom was put in, and then a rally to the year's high followed. A decline into a rising broadening formation led to a breakdown to $1240 in December, but those losses were recouped and then some:

Looking at the bigger picture, things seem more ambiguous. Since the massive rally from 2006 until 2011, we have seen a decline and then a multi-year sideways formation. Will this result in a continuation higher or a reversal? I think that is a difficult call to make right now. We would need to see a move above $1400 or below $1125. One other thing to consider on this chart is the ascending triangle that is forming. That would have bullish implications:

What Next?

I lean toward being slightly bullish here on account of 2 things: the long-term trend is up and an ascending triangle is forming. Should we break out from that, the target would be roughly $1700.

Treasuries

Yield on the 10-year note ended 2017 at 2.41%, not too far from where it began. The 10-year initially rallied, but fell to test lows in March. That was the low on the year. A strong rally ensued, and then 2 more waves took us up to highs in the upper 127 handle. Since then, an extended decline has taken place, almost bringing the market back to where it began. Since mid-October, a bearish sort of wedge has been forming. That is interesting because generally this pattern forms against the prevailing trend, but in this case, it is moving with the trend:

Longer-term, the 10-year is sitting above a major support level, as marked. This is right around the 122 handle. An older, upward-sloping trendline was also tested this past year:

What next?

With the Fed expected to continue raising rates in 2018, I think it is likely that the support level around 122 is tested. It is possible that the market then turns higher to test the upper trendline. Overall, the trend here is not clear and it is a wait-and-see situation.

Agriculture

A mixed bag in the grain markets this year. We will look at corn, soybeans, and wheat.

Corn began the year with an uptrend. A breakdown from its high led to yet another uptrend, which eventually took it to 417. A sharp decline followed, and then a wedge formation formed. We saw a breakdown from that to the low on the year at 336. A push from that and a gap higher led to the range that we closed the year in. The trendline that markets the upper boundary of that wedge could still be in play in 2018:

Corn was an exciting market to be in  before 2014. Since then, like we have seen in a few other markets, an extended consolidation pattern has taken hold. This one appears to be a rectangle. It is worth nothing that the highs are getting lower, however. 300 is a major support level:

Soybeans were all over the map. A rally started the year off, putting in a high at 1080. For the rest of the first half of the year, the market declined to a low at 900. A sharp rally followed, and then we saw a decline back to a HL. Since then a channel has been building:

Things look a bit more interesting on the monthly. This year was part of what appears to be a multiyear symmetrical triangle, which means we should expect a move soon, as we are approaching the apex:

Aside from a massive rally which was immediately retraced, wheat had a pretty boring year too. Following the sharp decline from the 575 high, a bottom was put in again at 400. That will likely be an important level going forward. We bounced from that and then entered a down channel, which we are trading in now. A breach of the upper trend line may be beginning:

Wheat is also in a long-term downtrend that has come to a halt at that 400 level. Last year it was breached, but could not sustain trade below it. After testing it once this year, we had that sharp rally, but immediately came down to retest it. Since then we have been hovering above it:

What next?

Corn is trading sideways and there is no reason to expect that to change until we see a breakout. Soybeans look to be approaching the apex, and thus the breakout, of a triangle. The trend in wheat is lower, but 400 is a level to watch. 

Disclaimer: Futures trading involves a substantial risk of loss. Nothing here should be taken as a recommendation. If you need trade recommendations, then you should probably not even be trading. 

Week Ending 12/8 - Long IBM, and Precisely Measuring Risk

Let's start with a look back at IBM. 2 weeks ago I talked about lining up the technicals and fundamentals to make trades. IBM was used as an example. The fundamentals were decidedly bullish, so I looked at the technicals to make a trading decision. Recall:

The pink line was the technical that I was watching. If we closed above it, I would get long with a stop under the last major swing low and a target at level D (see last post). We did close above the pink line, so an entry was made on the opening of the next day, at $152.00. The next 2 days saw some sideways action at this level, and then we rallied for 4 days. This past week we mostly corrected, but so far, the trade is still intact. We are far from the target, but this is a long-term trade, so I am just going to sit with it. On the chart below, the we entered at the blue arrow.

On this particular trade, reward/risk ratio is roughly 4/1. Meaning I am risking $1 to make $4. Over a long serious of trades, you don't need a very high winning percentage of trades to make money with a reward/risk ratio like this. It allows more room for error in making trading decisions. I think measuring your risk is key to being able to make less emotional trading decisions and being able to stick to your game plan in times of draw-down.

Every trading system or method has a different level of reward/risk. System A might have winning trades 80% of the time. With a rate this high, your winners can actually be smaller than your losses. I think achieving this level of consistency is very difficult, if not impossible. System B might have winning trades only 20% of the time. With a rate this low, you need to be making $5 for every $1 that you risk, at the very least, or else you will not be profitable over many trades. It takes a certain level of mental fortitude to stick with a system in which you are losing money on most of your trades. For example, in System B, your risk of having 3 losses in a row is 51.20%. Your risk of having 5 losing trades in a row is 32.77%, and your risk of 10 losing trades in a row is 10.74%. Meaning if you trade System B long enough, you will have 10 losses in a row at some point. However, if you understand your trading system and know that this is just a matter of probability, then you will more likely be able to tough it out.

I want to use this as an opportunity to look at my own trading metrics. My sample size of trades at the moment is small. Over the past 3 weeks I have made 20 trades. Some days I make 0 trades, some days I make 3. Out of those 20 trades, I have had 5 winners and 15 losers. So my winning percentage is 25%. That is lower than I would like, but I am working on getting it slightly higher. 35%-40% would be my sweet spot. My average win to average loss is 3.72. Based on this, I made the following spreadsheet:

The first thing is the Account, which is irrelevant in this case. What matters is the Risk Cap, which is what I am stuck working with right now. With this $2,000, I decided I do not want to risk more than 5% per trade. That means I am not risking more than $100 per trade. I can further deduce that the maximum number of losses in a row I can have starting at the initial balance is 20. This is just the Risk Cap divided by the Per Trade Risk.

I know my W/L ratio is 3.72. I have a separate spreadsheet containing more data that I am drawing this from. Same goes for my W/L rate, which is .25, or 25%. Based on this, I know my average win (Avg W in column D) is $372. Dividing my Avg W by average loss (Avg L), I know my expected value per trade is $18.00. So over 100 trades, I can expect to be up $1,800.

I also know that my risk of 3 losses in a row is 42.19%, so if I have that many, I'm not going to worry too much. However my longest losing streak so far has been 6. I calculated that the change of 6 losing trades in a row is 17.80% (not shown) so also not a huge deal. So overall, I think this strategy is performing decently. But like I said, I want to increase my winning percentage of trades by a bit. In trading, incremental improvements can have large and lasting effects on the bottom line. If I increase my winning percentage to 35% and my W/L Ratio to 4, this is how things would look:

There is no need to go through every single metric again, but it is obvious the results have improved dramatically with a few small tweaks.

I believe that having a good understanding of the risk in your strategy is important. It gives you a road map for what to expect. It helps to reduce the impact of losers on your trading psyche. If I know that every trade I put on has a 35% chance of being a winner, by default I am expecting each trade to be a loss. Which is great! Because then I don't care or get emotional when I take that loss. I know that it is simply the cost of doing business, and over time if I stick to the strategy, I will make money.

Lining up the Fundamentals and Technicals

Making trading or investment decisions based on both the fundamental and technical picture is not a novel idea. There are analysts or portfolio managers with both a CFA and a CMT. Many trading firms, hedge funds, and advisories keep technical analysts on board so that they can have an understanding of what the market itself is saying. One story that Ralph Acampora likes to tell is, when fighting on behalf of the technical analysis, a SEC lawyer held up a chart, and said, "Ralph, what is fact on this?" Ralph responded that the PRICE was fact. Price is what is happening right now. It sums up what all market participants think. Earnings are history. Earnings get revised. Stocks get upgraded to buy, and then often when it is too late, they are downgraded to sell. In the realm of technical analysis, there are hundreds of different oscillators, indicators, bands, moving averages, and candlestick set-ups. But those are still just a derivative of the only thing that really matters: price.

Does that mean that fundamentals and technical indicators should be ignored? Certainly not. Using one or two technical indicators can help eliminate bad trading decisions. Understanding the fundamentals of a company can help to see the bigger picture. Then when you get price confirmation, you can be right in a big way. 

Let's look at an example of lining up the fundamentals and technicals of a stock, IBM, and see how it plays out. We will check back in every month or so. The fundamental work I leave to Barron's. I like to read Barron's on the weekends, and since they came out with a bullish piece on IBM, I thought it would be a good example. I will sum up what they say, look at the chart, and come up with a thesis.

Firstly, IBM has massively underperformed the S&P 500. Barron's believes that the stock is at a bargain price. Since the new CEO took over in 2012, shareholders have seen a loss, even with dividends. Compare that to the S&P over the same time period, which is up 130%. IBM is now leaving its lower margin businesses behind. Their gross profit could grow this quarter for the first time in years. We don't need anymore than that. If you require more evidence, go buy the paper. Barron's make a compelling case, and based on that alone, the stock is a buy. But that is not all you can base a decision on. You need to look at the chart.

To the right is the monthly chart. Right away we can see that the stock topped in 2012 at above $215 a share. It has steadily fallen since then, having put in a few lower highs. At this time frame, the stock seems pretty directionless. It might continue to consolidate until the apex of this triangle is reached. Let's zoom in. 

There are 3 lower highs and 3 lower lows that are circled on the weekly chart below. A 52-period EMA is also on the chart. The EMA has started to move sideways following its decline. That is one possible sign that the stock is beginning to stabilize. So, the lower highs and lows are circled. The more recent high, which is a higher high, is displayed in the first rectangle. The second rectangle shows that we now have a possible higher low, provided that it holds. Another sign that the stock might be stabilizing. 

So if we have a case that the stock might potentially be shifting, what now? Since we want to keep this trading decision in line with the fundamentals, we are looking for an area to be a buyer. The most obvious spot that sticks out to me would be a close above the recent high at $183. That would confirm a bull market in the stock. We can also extrapolate a possible price target by using the ABC method. 

This is a super simple technique. Just take B-A, and then add it to C. We would subtract 116.90 (A) from 182.79 (B).  The result is 65.89. Adding that to C, or 139.13, gives us our potential price target of $205.02. However, waiting to buy upon a close above B provides poor risk/reward. Where do you place your stop? Below C you are risking more than you can make. You would need to enter earlier in order for this set-up to work. Let's zoom in to a daily chart and see if there is another signal we can look for. 

The most apparent thing on the daily chart is the gap up. This followed earnings. Since then, the stock has given back nearly all of those gains. The most important thing for the stock to do right now is hold C, which is our higher low. On the daily chart it is displayed in the rectangle. Our stop, if we enter a trade, will go below that level. Buying right now would keep the risk/reward low, but possibly at the expense of having a higher probability trade. You'd only be risking $10 to make $57 (based on our ABC target of $205.02). That is great, but I need to see a little more confirmation that the stock is ready to move higher. And since the earnings gap and fill, I haven't. The high of that move was $162.51. Coincidentally, or not, that level is also where we gapped down to back in April. Above this, there is a lot of empty space. So if we get some momentum as we move higher, we could certainly propel through. The level that sticks out to me as a possible entry is at the link line. If you look back to July, we gapped down from there, and then on the most recent decline, it acted as resistance. If we get above this level, which is $151.90, I would be looking to be a buyer. Initial stop would go below C, or $139.50, and our target would be D, or $205.02. 

We will track IBM and see how it develops over the coming weeks. If C is taken out, then the trade idea is invalidated. Without that low holding, this potential reversal is moot. We would then need to wait for another signal. The stop will be moved as the position moves in our favor. It will not be set to trail, but rather be moved manually to key technical points. Finally, the entire position will likely not be closed at D. Should we fail to hold above B, we will exit some. And a small portion will be held until there is a clear reversal of trend. 

Week Ending 11/10 - An Update on the Yen, Crude, ES, Corn and $ECYT

Last week we looked at a few different markets where I saw interesting things happening. As tends to happen in the markets, levels were tested, breakouts were reversed, and new patterns formed. So let's take at the same markets as last week and break down their behavior.

If you recall from last week, the yen was on major lows and ready to breakdown. We looked at how we were testing support for a third time, but in a very different manner than the first two times. The first two times we briefly traded in the general vicinity of the .8750 level and immediately reversed and rallied. The most recent test was different in terms of duration and attempted breakdowns (more time spent at the level and more tests of it; see last post). We did indeed breakdown, but for now, it appears that this was a "fakedown." On the 6th, which was Monday of this week, we broke through .8750 decisively, but we were unable to facilitate trade at these lower levels. A strong rejection took place, and that daily candle ended up being quite bullish. I don't think we are going to see a strong rally to swing highs like we did the last two times. I think the dynamic of this market has changed now. There are new shorts and longs at these levels. The .8750 level being breached is going to change the perception of participants. Perhaps a smaller rally is needed to lure in some longs, and then a retest of .8750 will result in a shakeout of these positions. This new selling could be the fuel for the next leg lower.



There are two daily bars circled here. The first is the bar that actually broke the low. Notice how we rallied back and closed on highs that day. I think it is highly likely that new shorts entered the market upon breaking the .8750 level, and they were forced to cover upon rallying back above it.

The next circled daily bar is the day in which volume was unusually high. Obviously, a lot of trading was done in this area. Let's zoom in and take a look at the hourly and see what signs, if any, are there.



There are a few trendlines that may act as possible support should we fall back again. The breaking one of these trendlines would be significant. The circled region is where heavy trading took place. A new high was tested, and then we settled into a range. I would like to see some confirmation of further downside before taking any shorts. A close below this current range low, a breaking of one of the trendlines, or another failed attempt to move higher would all qualify. The immediate trend is up, as evidenced by the higher highs and higher lows. Until that trend is invalidated, being short isn't an option for me. Being long is also not an option given the clear downtrend on a slightly longer-term time frame. No position is a position.

Crude oil ripped higher on Monday. The previous Friday, we had closed strongly, so this was not a huge surprise. The strength of the move was impressive however. Since Monday's move, we have seen consolidation as longs take profits, new longs enter, and new shorts enter in anticipation of a reversal. I normally find that after such an explosive move is a terrible time to trade. You can expect a lot of desperate longs that missed the move to come in, only to be countered by new shorts. Generally the action is choppy and there is not any direction to be had. This can be seen on a daily chart or a 1 minute chart.

The most interesting thing about the above daily chart is the highest support line. A test of this level is marked with the blue arrow. On this time frame, you can't see where this level comes from. But, if we zoom out a bit...
It is actually the low of a range from 2015, and the level from where we broke down! That gap has now been filled and retested. The market indeed has a memory.

Finally, let's go the other direction and zoom in on this chart. Not a pretty week to be trading. Following Monday's move, we have seen a tight, sideways market with one spike higher (DOE data on Wednesday) followed by more sideways action. A trend trader's nightmare. The trend is up, but buying in the middle of this range would be ill-advised.

We will only look briefly at ES. No need to look at a daily, because everyone knows exactly what that looks like. The hourly is a little more interesting, with a potential double-top being confirmed this week. This followed a fresh all-time high of course. Today's trading shows us continuing to hold below where the double-top was confirmed. Yesterday, Thursday, we had broken down to test and hold last week's low. A rally back up to 2585 followed, and then today's decline takes us back to a range just below the double-top confirmation level, as aforementioned. That level is one to watch. As long as we are below that, being short is an option.



We are also not going to dive into corn too deeply. No need to look at the daily. If you remember last week there was a clear pennant forming. This pattern continued to develop this week as we fell and tested the lower end of it.








And finally, let's take a look at $ECYT again. If you recall from last week, we were looking at a possible "W" pattern forming. We did not follow through fast enough, so that pattern has been invalidated. I guess it could be sort of a "W" plus a "V" when all is said and done, but we'll see. This week we saw continued buying in the stock and we are aiming at a potentially important resistance zone at $5.62.

OK one last chart. Natural gas. This market has been stuck in a tight range since May. Obviously this is a very seasonal market, and this is its season. We broke out decisively this past week, gapping higher and then closing at highs. Does this mean higher prices to come? A fakeout followed by a fall back into the range? It is too early to tell, but this was a nice example of a breakaway gap, and so far there has been strong follow-through. Take a look at the weekly and 4h chart below.

Yen Breaking Down

The Japanese Yen broke to its lowest level since March when BoJ's Kuroda began speaking tonight. Additional data was also released from Japan shortly after. The level we are breaching (.8750) was tested in May and in July of this year. The decline to this support area this most recent time was more gradual. We also spent more time consolidating right above it. I notice that when markets reject a level, it is often done quickly. When markets pause and consolidate, I think the chances of big levels being breached are increased. So, let's first look at how the Yen acted the first two times we tested this support level versus how it acted this most recent time, and then we will talk about the outlook.

First, here is the daily chart. The supportive area is marked with a few lines. I don't like to mark exact levels as support or resistance because I think markets can be a little too noisy for that much accuracy.



Let's also look at the Nikkei 225 futures. They have staged a massive rally since August. This is around the time that the Yen began its recent descent, albeit at a much more moderate pace than the rally in the Nikkei. Technically, the Nikkei ripped through resistance and never looked back. Fundamentally, this rally, and the decline in the Yen, is on the back of ultra-loose monetary policy in Japan.

That is the theme in Japan right now. Weak currency, strong stock market. Now let's zoom in on the last two tests of the support level that we broke tonight. The first, in May, followed a gradual decline off of the most recent major swing high. .8758 was tested the 9th. We pushed higher, and then over the next 2 days we attempted to get through again. This time we did trade a touch lower to .8752, but rejected it, confirmed a double bottom, and then rallied. The double-bottom confirmation is indicated by the arrow.

A rally almost took us back up to .9200, lower than the previous peak, before turning lower to test support for the second time. Zooming in on this test in July, we can see that this was an even faster rejection. We tapped .8760 twice, then promptly turned around and rallied again. This time we put in a new high above .9300 (again, refer to the daily chart above)




And now, let's look at the most recent test of this level. We have spent considerably more time trading in this area. In May, we were here for 2.5 days, testing the level twice. In July we were here for only 1 day, and tested it twice. This time, we have been sitting here for 2 weeks, and you can count 5-10 tests, depending on how you qualify them. The point is, the market stayed here and seemed to accept these new prices instead of rejecting them right away. I believe that this generally bodes well for a breakout (or breakdown, in this case).



So what now? Since I started writing this tonight, the Yen has rallied, almost pulling back into its old consolidation area. For now, this appears to be a rejection of those lower levels. I think it is too early to call it a final rejection, and there will be some testing of support-turned-resistance. Was this move new shorts coming in? Was it just the big guys 'banging the hive,' trying to shake out weak longs? We will see how trade develops this week and then check back in. My bias remains short.

Week Ending 11/3

Another week, another all-time high in the stock market. ES has been up for 8 weeks in a row now. 7 of those 8 weeks closed at a new all-time high. Tech stocks are on a similar trajectory, with the last 6 weeks closing at all-time highs. Small caps are lagging. This first chart shows $IWM versus $SPY (as this chart moves lower, it indicates $IWM is falling relative to $SPY).




It seems like any economic data that comes out these days is automatically interpreted as bullish by the stock market. There was plenty to go around this week. Inflation data came in as expected, with PCE Core registering a 1.3% gain YoY. US Consumer Confidence surged to highs, coming in at 125.9, beating the 121 expectation. ISM Manufacturing was a miss on Wednesday. In the minutes prior to that reading, ES had put in what would be its high for the week (until today, when we tied it in the last 2 hours of trading). The FOMC also came out and kept rates on hold, as widely expected. Thursday, Trump named Powell as the new Fed Chair, and finally today, we had employment data and ISM Non-Manufacturing. Change in non-farm came in at 261k, and the unemployment rate dropped to 4.1%. ISM was a beat, coming in at 60.1. So overall, the data this week actually was quite positive.

To the right is a 30m ES chart. We came into the week right off of fresh all-time highs. Monday afternoon, we fell into a range and closed there. The overnight session saw a rally leading up into the US session where we continued to push higher. Wednesday we went straight up to a new high, then pulled back on the close. Thursday we tested lower twice. Should the market turn back, this would be an area to watch as potential support. There are a few lines drawn down there (2565-2566.76); I think the market is a little too random to label just one point as support or resistance. There are also 2 potential trendlines in play. A high-volume area worth keeping an eye on is between 2571.75 and 2573.25. That could act as a sticky area if we retrace back to it. The situation here seems pretty simple. We are at all-time highs and there is no reason to short. If we closed below Thursday's low (red line) I might start looking, but for now, the plan is to buy strength and buy pullbacks.

The bullishness in crude oil continued this week. We closed at the highest level since July of 2015. Looking at the weekly, there is some empty space above the market now. Back in 2015, we gapped lower from the rectangle and then had the big decline into the $20 handle. The specific rectangle/range I am talking about is circled. You can see that there is a gap from where we broke down. If we fill that, I think that we will test the upper end of that range ($62). I also think that it is possible that this current move higher turns out to be a fakeout, and we fall back and form a range between $51 and $55. However with 4 positive weeks in a row, I think the safer bet is to the upside. It is worth noting that hedgers are net short and small speculators are net long.

One market that I have found particularly interesting as of late is the yen. We have declined to a major support level that has been tested in the past, and now we are just hovering here (if you're looking at the spot pair, USD/JPY, the opposite applies). Big data from Japan on Monday failed to propel the market in either direction. Their policy rate remains negative. On the first chart below, the general area that is acting supportive is clear. It is roughly .8750 and was tested in April and July. The fact that we are spending much more time just above this level this time around tells me that the market is accepting this current price, so more testing to the downside is likely. .8690-.8715 will likely act as support should we break lower.

Zooming in a bit, let's look at how we have been testing this .8750 level. We came into the week at .8870 and steadily declined to .8770 following the BOJ announcement and outlook report. Thursday we retested this area, and rejected it quickly, shooting up to .8823. This same sort of rejection took place again today, when we quickly shot up to .8820 after failing to move lower. This second rejection was actually a result of the unemployment data, which caused initial dollar weakness. That was quickly reversed following the ISM data, and we got as low as .8752, which was the lowest level on the week. It seems like there is some perception of value down here, and like I said, I think further downside testing is very possible.

Corn has been EXTREMELY boring, but it might be gearing up for a move. On the daily, there is a pretty clear pennant forming. This kind of sideways behavior has been pretty typical of corn for the past year. Small speculators are net long and hedgers are net short. Could that mean a squeeze of the small specs is in order?

Looking a bit closer at corn, it is easy to see that the market is forming smaller and smaller ranges. Indeed, ATR confirms this. Being in the middle of the pennant like this doesn't provide any good risk/reward trading set-ups in my opinion. I think you need to wait and see if there is a decisive move in either direction, and go with it.

One last thing I find interesting is $ECYT. I don't really look at individual stocks, but this rallied hard at the beginning of October, topped out, fell back to support and held it, then began rallying again. There is a potential free-fall zone beneath the support level of 4.15. We tested this area between October 12th and October 17th, and then again on the 25th and 26th. This formation following the rally is starting to look like a W, so we will see if there is more upside to come.

The Anatomy of a Losing Streak

This lesson applies specifically to traders, but it can also be more broadly applied to anyone who is in a business or endeavor in which performing under pressure is essential.  We have all heard of the “hot streak.”  You are “on a roll.”  For a trader, this might mean that everything she touches turns to gold.  For a basketball player, he is hitting every shot.  Of course there is also the opposite scenario, the “slump.”  The “cold streak.”  No matter what you do, it doesn’t work.  You will never be able to regain your touch.  You have just been lucky this whole time. 

Some statisticians might argue that purely based on odds, streaks are a mathematical certainty.  But, it turns out there is much more to a streak.  There are actually some deeply-rooted biological dynamics involved.  Anyone who has read what I write knows how important I think evolutionary biology is; it is everything, and understanding it can provide a huge edge. 

I want to take a look at the “Anatomy of a Losing Streak.”  Having experienced a brutal losing streak in my own trading during the month of September, I took away some lessons, and was also fortunate enough to stumble upon some new knowledge that helped tie everything together. 

The specifics of my losing streak certainly defy all statistical possibilities that would be a result of just “bad luck.”  No question, there was something seriously wrong with my perception of the markets.  I was not seeing what was going on in an objective manner at all.  I perceived the market as a threat, as opposed to the opportunity that it really is.  So what had changed inside of me?  What biological mechanisms were at play? 

“Financial risk taking is as much a biological activity, with as many medical consequences, as facing down a grizzly bear,” says John Coates, in The Hour Between Dog and Wolf.  It is worth noting that Coates is a Research Fellow in Neuroscience and Finance at Cambridge University, with experience in the financial markets.  There might be no better source on this topic than him.  

He goes further in stressing that trading is also a physical task, and how could it not be?  Our mind and body is one; a cohesive organism that provides feedback within itself.  “Few professions, with the exception perhaps of air-traffic control or the military during times of war, compare with finance for the amount of information that must be sifted and processed in real time,” says Coates.  Information is processed physically, not just mentally, as many seem to believe.  This has very important ramifications in understanding the anatomy of a losing streak: when you are in a losing streak, serious physical changes are taking place.

During short-term stressful situations, we experience a release of cortisol and dopamine in our brains.  Small amounts of moderate stress are actually quite healthy.  However, long term stress that comes from a losing streak turns on the cortisol drip and leaves it on.  When you are in this state, your body is prepared for an immediate emergency, but stays that way for an extended amount of time.  Humans are really not meant to deal with this sort of prolonged response.   Our stress response is meant to turn on, and then turn right back off.  So, when it stays activated, your immune system weakens, digestion becomes much more difficult, and your sex drive diminishes.  The reason is that when your body perceives an immediate threat, all resources go to dealing with that threat – so metabolically expensive processes like those mentioned above, shut down. 

At some point, after a certain amount of losing trades or losing trading days, my stress response turned on and stayed on.  This helped to exacerbate the “streak” that I found myself in.  Instead of looking for opportunities, I looked for ways to AVOID risk.  I was looking for trades where I wouldn’t have to take risk, which is of course not possible.  So I was making foolish decisions in the hope of avoiding further damage. 

I also found myself seeing patterns where there were none.  This is very common in trading, and is often referred to as forcing trades.  “Shell-shocked traders…become pray to rumor and imaginary patterns,” Coates explains.  To use the basketball analogy, it would be like a desperate point guard trying to take a foolish shot under heavy coverage.  The boxer takes wild swings without using proper technique and defense.   Our minds (and bodies) start desperately searching for patterns when under the stress response; and this literally caused me to start interpreting meaningless noise as opportunity.  Armed with this knowledge now, I am much more equipped to recognize when I am prone to making a decision based on desperation, rather than one based on sound technique. 

Another important consideration is the “winner effect.”  This is another very real phenomenon.  “When two animals face off they experience a pronounced rise in their testosterone levels…Testosterone thus prepares an animal for a competition, but it is what happens next that drives the winner effect.  After the fight is over, the winning animal emerges with even higher levels of testosterone, the loser with lower levels…if you have just lost a fight, you had better retire into a bush and nurse your wounds; while if you have won, you can expect an increased number of challenges to your newly elevated status in the social hierarchy,” explains Coates.  So what is the implication for trading?  Well, if you are experiencing losses, you are actually becoming more prone to more losses!  The response your body has is one of caution, so you are naturally going to be more risk-averse! 

Hopefully, this provides more insight into what actually happens during a losing streak.  Winning streaks are similar.  The importance of recognizing our biological reactions to either winning or losing cannot be understated.  Realizing when you are susceptible to making desperate decisions based on noise that, because of the stress response, appears to have meaning, can save the trader a lot of money.  Escaping the dregs of a losing streak requires a trader to gain their confidence back, but you will keep making foolish decisions unless you are able to compensate for your distorted perception.