The Dow may be ready to reverse, and despite the Fed, the laws of markets have not been suspended, writes Jeff Greenblatt.
The Dow Jones Index is now up 54 trading days after an 11355 range on the drop. So, we have another chance to find a high. Did you know that since the May 14 low, the Dow E-Micro and E-mini contracts are up 1608-15minute bars? Still, by the last hour, they have not given up (see chart below).
So, while everyone is cheering on this incredible rally, did you notice the U.S. Dollar Index is down 7.44%? So, if you did manage to buy near the bottom, your real buying power with the gains isn’t as good as it seems. That’s what happens in a hyperinflationary depression. Not many are going to tell you that. Instead the market will cheer on an employment report that added 2.5 million jobs while tens of millions remain without work. It’s incredibly pathetic to cheer on the addition of 2.5 million jobs that were not created, they just called back a bunch of people sitting on the sidelines. This is like the Bengals being down 27-0 in the third quarter and finally scoring a touchdown to only be down by 20 points.
Yesterday my wife tried to get the oil changed at Wal-Mart only to find out the auto center is still temporarily closed. Those people are still sitting home collecting unemployment and some of them could be making more collecting PUA (Pandemic Unemployment Assistance) then actually working. I’m not in the camp where there is a recovery going on. Especially not when multitudes of businesses have been destroyed in the past week.
Getting back to the chart, it’s a halfway decent setup on the Dow E-mini for a high. The only question is how much the Federal Reserve will throw at the problem to keep the markets propped up. We come to the Fed meeting where Fed Chair Powell is likely to tell us they’ll continue to throw whatever ammo they must keep things going. Even if we don’t get the pullback from this sequence, since its June, it’s time to talk about the seasonal change point.
Many of you know this column nailed the low to the day. It’s not that I’m smarter than anyone else, I just know nothing goes straight up or down, markets do tend to turn with the season. What really concerns me is the next seasonal point in September, which is the graveyard for stocks. Since its already June it's time to remember the sage wisdom of Yogi Berra who famously stated, “It gets late early around here.”
Briefly, looking back on the past few weeks, the dollar chart has continued to deteriorate even as it is trying to find a low while the bond market did take a hit. But if the current prevailing sentiment from Tuesday continues, a weaker economic outlook should cause the bond market to retest the recent breakdown.
However you slice it, we have a market that is overdue for a pullback. Let's spend a few minutes on correctly trading this market. Once again, if you are a buy and hold person, the only thing you should consider here is the upcoming seasonal change point. For the rest of us, we’ve had to make an economic adjustment due to the changing nature of the market. When the Dow futures can move 50 points in a minute, its different from the old days where most of the wider range bars were only 20-30 points. What does that mean? It means one must adjust the risk/reward ratio of how to trade. Consider the size of your bankroll and how well you can absorb the loss when things inevitably go against you.
Not all setups are created equal. The challenge for the trader in a fast-moving market is to know when to hold, when to fold and when to hedge. There will be setups where you should scalp or take the money and run as soon as you can. Other times, it will be to your benefit to hold on. How do you know which is which? That’s the $64,000 question. One way of knowing is the earlier you can get into a move, the more staying power you have. Even with my Kairos readings, not all setups are created equal. We can have a similar tendency but the setups that materialize later in the move won’t go as far as the ones early on. Its vitally important to be able to know when to hold on because it will impact the entire economics of you the trader. Why? Because you are going to get stopped out.
In hockey, the goalie doesn’t stop every shot, but he does have a chance to improve on his goals against average. The batter will strike out and if he is good enough to hit .300, he’ll end up in the hall of fame. The idea is to take that .280 hitter and turn him into a .300 hitter. It’s doable with lots of practice. What traders need to do is pay very close attention to the swings that lead to stop outs and look to minimize them.
Then you want to take inventory of the setups that only lead to puny moves and compare those to the kinds of setups that leads to the kind of moves where you let a winner run. The only way one makes money in this business is by having enough winners (big winners) that run to outlast the times you’ll get stopped out. If you can improve on the quality of the setups you take, that’s half the battle.
A final note on improving your stop out ratio. Work at avoiding taking setups out of emotion. If you find yourself taking trades because you believe the train is leaving the station without you, it’s a sign you could be getting stopped out. The best setups come from a place that is psychologically difficult on the chart, but you know you must do it because that’s where your edge shows up. Never forget the idea in trading is to know your edge, execute correctly and wait for the crowd to develop the wave that carries you on to victory.
