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Slope of Hope's Tim Knight, who is primarily a technician, discusses how he has found the consistently wrong views of some traders to be a helpful sentiment indicator in his trading.

My guest today is Tim Knight.  He’s got a very popular blog called Slope of Hope.  I read a post he did recently about indicator LDI and he was about to go short and decided not to, so we’re going to talk to him about that and his feelings on the market.  So Tim, you have a great post about your ideas on the market, this LDI thing that you talked about and going short.  Talk about that a little bit.

Well, I don’t want to name names, but over the course of time we have found that on the blog some people are really worth feeding and some people aren’t so much, and this one particular individual that for whatever reason has amazingly accurate calls but they’re in the opposite direction, and we’ve concluded he’s either a genius trader who is just fooling around with us, or he is earth’s worst trader.  I’m not sure which, but in any case it sounds silly to not look at a very hardcore technical indicator but instead rely at least partly upon this folklore.  The fact is that a number of things happened recently to me, which gave me pause about my short positions and allowed me to back off.  It was some hard technical indicators.  It was the saturation of the media about bearishness, but it was also this little LDI that crept up because this individual jumped him after having lost money on the calls.  He dumped him and bought puts and that was enough for me.

So LDI is a person?

It is and I don’t want to name names as I said.

It’s the initials of a person.

Yes, it’s the DI’s directional indicator, but it’s a particular individual who used to be on the blog but he lives elsewhere on the blogosphere now and he is watched closely.

Well let me talk about that then.  Sentiment is probably a good reason as any for people to trade.  Do you use sentiment and the general feeling of what you do in the media and the market as well as technical indicators?

Yeah, I did a talk this morning that showed a couple of interesting images from the 2007 bull market top.  One of them was a book called Richistan and it was about the wealth boom in America and it showed the classic Grant Wood farmer and his wife and behind them was this big mansion, and I put that book cover and I put an arrow on the stock chart where that was published and it was in June, 2007, almost exactly at the market top.  There is another, again not naming names, there was another individual hired at a financial network who was extraordinarily bullish and he was hired on the day, probably even the minute of the exact market top, so Slope of Hope is a contrarian blog, so we do look for those sentiment saturations as a signal to go the other way.

So you would argue that a pure technician who says everything is built into the chart may be missing something if they’re not paying attention to the overall sentiment of the market. 

Well, I pride myself in being a pure chartist, however, I read the news and I read a lot of other blogs and I do get a sense as to where people’s heads are at, and although I rely 95% on the charts, it does definitely inform me when I’m hearing this drumbeat in one direction or the other from all the same places, so I think that you have to take that as a part of your recipe in your trading soup so to speak.

Alright so as we head into the end of 2012 here and the beginning of 2013, what is the sentiment telling you now?  What are you feeling?

Well, at the moment as we sit here there is a lot of bearishness about and perma-bear though I pride myself in being, I’m actually bullish right now.  My bullishness doesn’t extend very far.  We have reached a point, I think, where we’re going to get a nice countertrend bounce, and once we reach a particular level that’s about 50% of the drop that we’ve experienced that’s when I’m going to get aggressively short again.  At present, I still have lots and lots of short positions, but I’ve balanced them with a few very large long ETF positions, and it sounds funny but I fully expect to lose money in the next week or two, but I simply expect to lose less.  I am waiting it out for the more opportune time to get very aggressive on the short side.