The Pattern Trader

THE LIFE OF A PROFESSIONAL TRADER. HIS MOTIVES, INSPIRATION AND VISION.

Ten Truths About On-Line Trading

This is another extract from my upcoming book. It is part of the opening chapter and I thought it would be worth sharing it here first. This is a condensed version as each topic actually takes up several pages in detail. I hope to shed some light about what trading is REALLY about and not what is widely being conceived. Happy reading!

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Ten Truths About On-Line Trading

Since I started teaching about six years ago, I have come to realize that there are many people out there who have no idea or the wrong idea about on-line trading as a source of income or even as an alternative job. Many who have come to my Previews seem to already have a pre-conceived notion about this business and are surprised when I tell them the truth. And in spite of the truth being so obvious, they would still choose to believe in their idea about what trading is about and will not accept that I am offering nothing but the truth about it. They want to continue believing that there must be another way and that I am just bullshitting them into signing up for my class. Many walk away unconvinced only to come back months and even years later, acknowledging that what I said before was true.

Where do these people get the concept that trading is going to make them rich? How do they get the idea that it’s as easy as reading a book, attending a workshop or learning off the Internet? Why do they believe that they are the lucky ones that will become the next Buffet, Sorros or Peter Lim? And what is it about trading that draws these disillusioned people into getting slaughtered like flies to a flame?

The answer can be found everywhere. It’s called Media. It’s in the advertising, in books, on the Internet and it’s being sold at every workshop, with every software and in every website. It is a sales pitch and you can’t sell anything if you don’t hype it up. And you can’t hype anything up if you don’t sell a dream. And you can’t sell a dream without lying or hiding the ugly truth.

I should know. I am in the business of trading and selling.

But I have always been at odds with selling the dream. This has been the case since I started selling a class. It was tough at the start. No one wanted to sign up for the class because I was too brutally honest. The first truth I ever sold was that you will lose money. (Now, is there anything about that statement that you can’t believe?) And unless you banished any and all ideas of easy and quick wealth, you were likely to lose everything first before you wake up and discover, accept and learn from my first truth.

It was also a painful start as the naysayers and disbelievers questioned and grilled me about my credibility. I was even labeled as one of those gurus I despise for selling dreams. Such labels came from people who hardly knew me or knew what I stood for and why I wanted to teach … a topic that has been discussed in great detail in several series of posts on this blog including; Why I teach what I teach (2 parts), Why teach then you can trade (4 parts) and Why Traders Fail (3 parts).

I didn’t care. And I still don’t care for those who won’t believe or accept. I do what I do because there are many others who want to learn and many more others who want to unlearn. And the only way for me to teach them is by being honest and brutally truthful. For those who want to buy dreams, I can’t do much for them and I am sure they are not interested in my help.

The second truth I want to share with everyone is that on-line trading is tough. Thus, it is also about the mindset. It’s the toughest thing I have ever done in my very tough life. (Now, why won’t anyone believe that to begin with?) There is so much that need to be learned, so much more to do after learning and even more work before you can begin trading. It will take a toll on your life-style. It will eat up your time. It will force you to manage your time better or lose sleep over it. It will take its toll on your family and those closest to you. It will change your mood, your appetite and your hairstyle. I will change your life for better or for worse. In most cases, for worse.

The market is not a black and white place. It’s not even a grey area. It is a manipulated hellhole filled with crime and lies. It is a money-laundering machine where big money wins and small money loses. Those with the wrong mindset thinking that trading is all about looking at charts will be in for a huge surprise. Those who believe they are doing everything “the right way” will find out that the wrong way can be more profitable … and sometimes not. (read “Novice vs Seasoned” for an idea about what this is about.) Those in the wrong mindset will not accept that you can make money by losing money. The wrong mindset will also not allow a trader to make money more often by shorting the market because most dreamers are only of a bullish mindset while the market is never bullish for more than 70% of the time. (Now, is that hard to believe? If you want proof, you should come to my Preview.)

It is a place where small minds with little knowledge or experience will suffer against those who know that will prosper from those who suffer. It’s mean, it’s rough, it’s irrational, it’s unreasonable, it’s unforgiving, it’s thankless and it’s damn tough. And I mean it.

The third truth is the most obvious one. (And yet many believe otherwise.) There are more losers than winners. It’s around 8 to 9 losers for every single winner. Amongst the very few winners are an even smaller number of highly successful traders. And amongst the minute number of highly successful traders are even fewer successful traders that have made millions.

One of the possible reasons for this lopsided ratio could be that most of the market are bulls when the market is not bullish more than 70% of the time, as previously mentioned. The reason there are so many bulls is, once again, because of the hype, the sales pitches and the media. What they don’t tell you is that most professional traders make more in a bear run that a bull run. Why do you think we have that age-old joke in the market that goes, “The bull ran up the stairs and then bear jumped out the window“?

What makes everyone think that they will be good enough to be amongst the elite few if they don’t even accept my first two truths? And there are the extreme dreamers that believe that they can make a million by trading. A very good, very experienced trader friend of mine once said that he could make a million from trading in a very short time. I asked him how and he answered without batting an eye, “By starting with two million.” Which leads me to the fourth truth.

The fourth truth is another obvious one – it takes money to make money. (Now, is there anything you would like to differ to?) Therefore if you don’t have much to start with, don’t trade. You are likely to lose it all first because a small amount of money doesn’t last at all in this business in which you are likely to lose money (1st truth). If a very experienced and profitable trader can admit to how difficult it is to make a million, then you have to wonder why there are so many that believe that trading is the answer to becoming a millionaire quickly.

I should know. I started with almost nothing and lost almost all of it. It was a mighty struggle to trade on a tiny account to make any money at all. For a while, I was trading to make a mere $10 per scalp with no room for error because one mistake would take me five trades to make it back. Looking back, I could have done it differently but with no one to mentor me, I did what I could and knew. I wouldn’t wish it on anyone and I will definitely not encourage anyone to believe that it can be done.

If you don’t have the money for it, start saving first. Build a reserve of no less than US$5,000 on top of an already available cash amount of another US$5,000 if you want to consider trading. Anything less will severely test your psychological endurance especially if you have poor financial management. This should be money that you are willing to lose and never see again. And it should not change your life if you lose it all.

If you can’t save it, then don’t trade. Saving is the first good habit every trader must have. It is the first lesson in good financial management.

The fifth truth is that it takes a long time to become a good trader. The minimum by any outstanding measure is three years. (Now, why would I bullshit about that if I wanted to sell you a dream of quick easy money?) With so much to do, there is no damn way anyone can rush the process and be expected to be a profitable trader within a year. Some even believe that a weekend workshop is going to help them become millionaires! (When I started, I was one of those naive ones!)

It takes a lot of experience to be a good trader and experience means that it takes a long time. You can’t rush time therefore you can’t fast-forward the learning experience in any way. The minimum learning time is already one year because a trader needs to know the market cycle of a complete trading year, its seasons, cycles and rotations. They have to get intimately acquainted with all its self-fulfilling prophecies, economic data, earnings, money flows, sector leadership, etc. And you cannot rush the process that takes at least one year with so much to learn and apply. Which is why …

… the sixth truth demands that you must learn everything instead of only learning how to trade. It is very obvious that in order to learn anything in any professional field, you need to learn everything that the professional learned. (Now, isn’t that common sense?) And just who are these pros? They are graduates from Princeton and Harvard. They become fund managers, bankers, analysts and institutional traders from some of the finest financial institutions in the world who were mentored by some of the best traders in the world.

Now consider those ignorant victims who were sold a dream in a weekend workshop that trading is as easy as watching for blue and red arrows. Consider that they don’t know who’s on the other side or exactly how disadvantaged they are when going up against the best, the most knowledgeable, the most influential and the most manipulative professionals in the business. It took them three to five years to learn their craft from the best universities in the world, another two to three years in mentorship under the very best and experienced professionals in the world and then another two years on the floor of one of the worst dog-eat-dog places on the planet to hone their skills and experience.

Trading is a profession, a very serious profession. So are being a surgeon, a lawyer, an accountant, an engineer and even a soldier. If it takes these professionals years of study, years of practice and a lot of experience to become good at what they do, then why do some dream that trading is any different? A soldier takes years of training, mental preparation, physical fitness, weapons knowledge, field experience and even leadership management in order to operate in the battle field. Anything less will surely get him killed. Anything more doesn’t guarantee he’ll become a General.

In spite of this obvious truth, there will still be those who believe that a book or a workshop or something off the internet will make them good enough to beat these professional traders.

I don’t know of any soldier who became a high-ranking hero just by reading a book. Do you?

Having said that, the seventh truth is about training. (Now, Can you get good at anything without practice?) It takes endless hours of training and practice. It takes a lot of dedication to learn this craft. It takes even longer to understand its form. And it takes forever to apply what you think you’ve learnt.

Trading is not an academic subject and demands that you put into practice what you’ve learnt. That is not easy for most. Singaporeans are largely academia based meaning that they are academically intelligent but severely challenged in a practical sense. You can’t argue with me about it because I train plenty of them. Knowledge alone is never going to be enough because, as previously mentioned, it takes experience and experience means practicing and that means training will be required.

Part of this training is about being flexible and adaptable. Taking trading as an academic subject will not allow the learner to be either. Academia is rigid, static and theoretical. The market and the economy are not. If one is not ready to be flexible then when the market becomes irrational, nothing will make sense. If one is not adaptable then such irrational changes will hurt the trader and worse, opportunities will be missed. Academics need to quantify and justify everything – something the market will not allow you to do all the time. And most of the time, you are going to have to wait for the market to tell you what to do.

Thus, the eighth truth is that you need a lot of patience. (Now, there a serious problem … most of us are not patient at all!) You’ll need patience to learn so much stuff, patience to paper trade out your first year to get that minimum one year’s experience, patience to learn to control your losses, patience to wait for the market to present its opportunities, patience to wait for your profit, patience to tolerate how irrational the market can get, patience to control your emotions and patience to continue the learning process even when you become a good and profitable trader.

Anything done in haste never lasts and good things come to those who wait.

The ninth truth is that this is a very emotional business. (Now, this is one that you won’t appreciate until you’ve clocked up a few losses.) Even with rules, strategies and and the best technical knowledge, you will still lose money. And it won’t be because of the wrong kind of rules, the inflexibility of strategies or the unreliability of technical analysis. Even when those things do work, you will still fall victim to your own uncontrolled greed and irrational fear.

Your trading psychology can either be your best ally or your worst enemy. The market will do what it will do. It will give you what it wants to give you but it will take away whatever it wants too. You have no control over what it will give you thus you can never demand from it. Yet there are traders who plan their trades based on what they want to make instead of planning on how much they are likely to lose first. You are the one variable you can control thus you can control how much you lose to the market … but you are the most difficult element to control because you will be emotional. And when you are emotional, you have no control over your financial management. And then you will realize my first truth.

The tenth truth is …

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I guess I’ll keep the best for the release of the book. Are you still skeptical about what you just read? If one thing changes after reading this, it will be the way you look at the market from now on.

Happy Hunting!

Novice Versus Seasoned – Part 1

Macros, Technicals or Gut Feel?

Am I the only person who notices that things aren’t as rosy as the market is making it out to be? And I am not just talking about stocks and commodities – I am talking about everything.

It is extremely obvious at this time that events around the world now do not support any sort of bullish appetite. Prices of staples are ridiculously high and getting further out of control all over the world. This coming Wednesday’s USDA crop report is likely to show up a shortage across most grains and softs. The last report on 12 October reported a build on inventories but this build was never going to be enough to sustain the growing demand for such commodities. Weather conditions have made things in Asia worse by flooding Thailand. Rice has risen in a sharp spike and the longer term future for this Asian staple looks bleak as prices are expected to rise further as shortages in the coming months will take its toll on all the major rice-consuming economies, Singapore included.

As a matter of fact, the high prices of commodities traded in the last twelve months are taking its toll on our pockets today. While prices of live cattle and cattle feeder continue to break to new all time highs., prices of oats, corn, wheat, soy, sugar, coffee and FCOJ remain at their highs from a year ago. Copper, cotton and cocoa prices have dipped but that is all that has come down. Although off their highs, gold and silver remain at elevated levels from a year ago as with WTI, RBOB gasoline and heating oil.

In the meantime, Asian economies trudge along like there is nothing to worry about. Inflation is rampant everywhere in the East but the higher income earners have taken on a blase attitude toward it and continue to support these high prices with their ceaseless buying. This is slowly but surely putting pressure on the lower income earners who can’t afford these sky high prices.  And while all this is happening, there are those who pretend they can afford it by leveraging on debt which in itself, is going to be a major issue when this bubble pops.

Singapore’s growth rate expanded in Q3 albeit at a very modest pace. This was a convenient side-step away from a Technical Recession but it does not take away the fact that growth has slowed and is expected to slow further in the next two to three quarters.

So here are the stats; growth is slowing and is expected to continue slowing … inflation continues to rise and is almost surely going to rise some more … the central bank is lowering the currency rate in a bid to encourage growth (instead of raising the rate to fight inflation) … the banks continue to keep the borrowing rate low to further encourage spending and support inflation … the markets are flat for more than two years and lower from a year ago … doesn’t all this spell “Stagflation“?

The only saving grace is that unemployment is at 2.1%, slightly down from the 18-year average of 2.48% (Historical low was 1.3% in 1997, historical high was 4.8% in 2003). Having said that, the last few weeks have seen as many as 6,600 people lose their jobs from various industries of the financial and manufacturing sectors on the Little Red Dot.

The Singapore economy is on the verge of a major slow down. Jobs are becoming a premium. Property prices are stalling again. Manufacturing has been slowing and car prices continue to soar.

Times are getting tougher but we don’t feel it. And the reason we don’t feel it is because this is a Slow Bleed. In a slow bleeding situation, you don’t know you’re dying because life seeps out of you so slowly and before you know it, you’re on the edge of death. Some are already feeling the pain … six bodies in a reservoir in four months says a lot.

I am still maintaining the same sentiment that I have held over the past year and a half when I wrote, Balloon, Not A Bubble, Inflation – The Shit Hits the Fan, Singapore Beware and The Little Red Dot Gets More Expensive.

Over in the U.S., economic data would have us believe that the economy is on the mend having bottomed out over the last quarter. Overall earnings in the current Q4 earnings season have been impressive and guidance hasn’t been too disappointing. However, within the S&P 500, there have been 65 negative fourth-quarter earnings preannouncements against 19 positives so far. This makes it a negative-to-positive ratio of 3.4 which is the highest negative ratio since the 3.7 ratio in the second quarter of 2001, just after the start of a recession. The S&P500’s YonY fourth-quarter earnings growth estimate is now 10.8%, down from 15% on Oct. 3. This means that even as the market has rallied, the outlook for earnings has gotten worse. And lest my graduates forget, earnings has a quarterly effect on the market going forward

Employment too, it would seem, is improving … or is it?

The more important data that seemed to be lost was that the Fed slashed growth estimates significantly for 2011, 2012 and 2013 while making steep upward revisions in the unemployment rate for all three years.

It is notable that the FOMC Central Tendency Forecasts slashed GDP growth by 1.1% in 2011, 0.8% in 2012 and 0.6% in 2013.  It also raised its estimates for the unemployment rate by 0.3% in 2011, 0.6% in 2012 and 0.7% for 2013.  These are highly significant revisions from the previous forecast.  Even as late as 2014 the Fed estimated the unemployment rate at 6.8%-to-7.7%.

In its most recent policy statement on Wednesday 2 November 2011, the FOMC kept its target interest rate at 0.00% to 0.25% for “an extended period of time“. This, after Ben Bernanke had broadly hinted that rates may have to be hiked sooner rather than his mid-2013 deadline. The day after that policy statement on Thursday 3 November 2011, at the European Central Bank’s latest meeting, members decided to become more accommodative by trimming the key lending rate by 25 basis points to 1.25%. The day after that, the Eurozone reported another month of contraction in their October Services PMI at 44.6 vs 46,0. This adds to other major economies’ manufacturing and services PMIs all falling across the globe in October; Chicago’s PMI fell to 58.4 vs 58.9 from September’s 60.4 … Britain’s Services PMI 51.3 vs 51.9 expected (52.9 previous), Britain’s Manufacturing PMI disappointed 47.4 v. 50.0 … China October Non-manufacturing PMI dipped 57.7 vs 59.3 in Sep … Eurozone October Manufacturing PMI slipped to 47.1 vs 47.3,

FYI, a PMI read below 50.0 reflects a contraction while a read above 50.0 shows an expansion.

That lead us to Europe, whose problems are never going to go away and will only get worse and worse. After Greece, if Greece ever gets done, we have a REAL problem … Italy. And we still haven’t addressed the Spanish and Portuguese issues. There is much more debt than cash floating around in Europe now and we haven’t even considered the “smaller” threats like Belgium, Finland and Ireland.

I don’t want to revisit this region because enough of it can be found all over the internet and frankly, having been bankrupt myself, there is no way out for a region that is already deep in insolvency. It is a simple equation in life -

• You don’t work, you don’t make money. Companies that don’t make money have a high debt/equity ratio. Countries that don’t produce, will run up a debt.
• You don’t pay your bills, you get into trouble. Companies that don’t pay their debts file for Chapter 11. Countries that don’t honor their obligations, get a bail out.
• You don’t balance your cheque book, the taxman will get you. Companies that cook their books get their bosses incarcerated. Countries that don’t balance their economics default on their debts and conveniently ignore their obligations.

So why are countries any different from people or companies? If banks are allowed to fail now, shouldn’t countries be allowed to fail too?

• When you go bust, the Court moves in, assumes ownership of your assets and sells them off to help off-set the debt you incurred. When that is not enough, you become Bankrupt and stay bankrupt till your debt is paid up in full no matter how long it takes.
• When a company goes bust, Corporate Raiders move in, break up the company and sell it off in smaller, more profitable pieces. The company, whatever is left of it, is then listed as “Junk” and stays junked until it works itself out of bankruptcy or until a White Knight appears.

Now shouldn’t Germany be allowed to raid Greece to break the country up for all its assets then sell the little pieces off to help recoup the monies that are owed? You can’t say that it is merciless and the people shouldn’t be griping about it because it was the people that got the country into that mess in the first place. What Greece really needs now is Zeus letting loose the Kraken and Medusa on Greek ass for being idiots. Now their ignorance is costing the whole world a lot of pain. And it’s not fair.

Here’s the best part … we’re going to have to play out the whole scene again for Italy, Spain, Portugal, etc, etc, etc … this is the beginning of the end of the European Union and the Euro.

Technically speaking, the U.S. equity market is looking shaky again after an amazing and record breaking October run. DOW at 12,250 is looking daunting especially if Q1 and Q2 of 2008 replays itself now …

The VIX is back up above 30.00 and the TRIN has been ticking higher on average in the past week.

Bond yields are once again down at near their 52w lows with the 5yr yield twice under-par again and the 10 and 30 year yields not far behind from also dropping 2X under par as well.

The technical indications are there to support another possible correction/sell-off. It won’t take much to set the market spiraling into another major sell-off. The question is whether it will crash. The economic circumstances are there to support a crash – they have been there since 2009 – and if it happens, it will be long overdue anyway.

I mentioned in my Facebook account on Thursday 3 November 2011;

I can’t explain it and I don’t know why I did it but I liquidated ALL my Option positions yesterday except for LMT. I suddenly felt odd seeing the market rally and something about what I was seeing on CNBC (words like slowdown, downturn, pullbacks, shrinks, etc) and what I saw on my charts (optimism).

We rallied because the ECB dropped their Policy Rate – isn’t that a confirmation that the ECB is addressing a very serious problem? Then why are we rallying on the confirmation of bad news?

My portfolio is now hedged again. Like I said in Facebook, I can’t explain it. It’s not the technicals, it’s not the macros … something in my bones is telling me that something is not right. If I am wrong, so be it. But I would hate to be right and be on the wrong side of the trade.

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Note to Spammers: Forget about it. You’ll just be wasting your time.

October 2011 In Review, November Preview

Is This The Real Deal?

Or is it another Bull Trap / False Break-Out / Dead Cat Bounce / Rally-in-a-downtrend / Bear Rally …

With the benchmarks breaking out of their respective downside flags, this could be another serious spike for new highs. The only problem will be the volumes that get weaker with each up tick. Also, DOW seldom makes a bullish 1,000 range in five days and whenever it did, it gave it all back in a hurry.

In the last five years, DOW has made only three bullish 1,000 ranges in a week including the current one. The other two times were in October and November 2008 and the resultant trends were obvious …

Another uncanny similarity from the 2008 1,000 point weeks is the dip in volumes every time the market made gains. This is called Price-to-Volumes Divergence. This translates to a rally that is unsustainable or as some would call it, a False Break-out. This phenomenon almost always ends up breaking down to newer lows as was the case in October and November 2008.

Now take a close look at the last five sessions leading up to the Monday 10 October 2011 close in the chart below … from the low of 10,404 on Tuesday 4 October to Monday 10 October’s close at 11,433, the DOW has gained made more than 1,000 points in five sessions on consistently lower volumes. You will also notice that volumes today are half of what they were in 2008 which makes this market more susceptible t0 major gyrations. Thus it won’t take much to tank this market when volumes are so weak.

If you didn’t know Price-to-Volumes Divergence, now you do. You’ve seen the results of this from October and November 2008 and that is why I will not be convinced to reduce my hedge, let alone turn Bull as long as volumes stay unconvincing and sector leadership stays inconsistent. The VIX is still at heightened fear levels (above 30 points) and it didn’t help matters that the bond market was closed Monday. With no bond trades to counter-check the “buying” in the risk market, investors stayed sidelined as evidenced by the drop in volumes.

A few readers have asked what would be the likely catalyst for the tanker if we do get another crash.

There is no way to know what it will be but here is a timely reminder;

In the Crash of 1929, the morning of Monday, October 28, 1929 started out like a normal day. The market had already been showing signs of a top since September 4, 1929 but the general public continued to live like the problem wasn’t serious. But the structural weaknesses within the economy were very obvious and the financial system was over-stretched with leveraged debt.

Then in the middle of the trading session, with no reason, no catalyst and no warning whatsoever, the market started tanking after lunch. By the close of Monday, October 28, 1929, the market had lost 13.5% in a single afternoon. The following day, October 29, 1929, the market crashed in what became known as Black Tuesday. The market and economy had started a -91% downtrend and it never looked like recovering till WWII provided the greatest bail out of all time.

Many of such major crashes happen this way. The market doesn’t need a catalyst to crash when the reasons have already been there for a long time but the public ignorantly denies the gravity of the problem and governments behave like they have a fix for any such circumstance. All it takes is a sell off to get out of control as in 15 to 19 October 1987, 23 to 27 October 1997, 27 August 1998, 6 to 17 Sep 2001 and most recently on 2 October 2008.

Will history repeat itself? Or will this October turn out to be a Bear Killer as it has happened 11 times before in the last 70 years in 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001 and 2002 when those Octobers turn a bear market around?

I remained hedged and under-committed till the market tells me otherwise. I am not that brave to risk good money on a fickle market now.

Three Years On …

I started a forum on trading around mid 2005 at patterntrader.proboards.com. That forum became a wealth of information and my personal archive. Upon teaching at AKLTG, the forum was migrated to www.wealthacademyinvestor.com/forum towards the end of 2007 to facilitate the growing number of members as well as the Investors from Wealth Academy (WA) and later on, Traders from Wealth Academy Forex (WAF).

In early 2008, six months after the market started falling as a result of the Sub-Prime debacle, our then new forum (www.wealthacademyinvestor.com/forum) crashed and much of the data was lost forever. But thanks to our dedicated and selfless community, many traders re-posted whatever they had saved to revive the forum again. Many had backed-up certain parts of the forum for personal reasons and were able to restore up to 70% of what was lost. I was also able to retrieve some of the data from the old proboards forum and all these combined efforts brought our forum back online in no time at all. It was like it never crashed.

The forum has since migrated and it is almost one year to the day that this PatternTraderTools forum was born. This was to facilitate the ever-growing number of graduates from the Pattern Trader Tutorial and to make it absolutely private and exclusive. Looking back through all those forums is like a going back in a time machine to see its evolution and the growth of the success of what we’ve built. It also reveals how each and everyone of us has evolved from amateur traders to savvy financiers in the way we asked and answered questions.

And one truly amazing fact is that it has captured our outlooks on the market to vindicate the accuracy of our analyses since 2006 through to the current situation. It sends a chill down my spine that we could have been this accurate during a time when we were simple, unsophisticated and used simple common sense analysis to prepare us for the worst to come.

In October of 2007, before the market started sliding, I mentioned in the WA forum that the market was going to take a huge slide and that it wouldn’t be far-fetched to imagine getting from from 14,000 to 9,500 within the coming year. Of course I was slammed and ridiculed. But I kept my focus regardless if that analysis turned out right or wrong.

Then the forum crashed before the market tanked in January of 2008.

Upon restoration, after the market made its spectacular drop from 14,000 to 12,000, I made this first posting …

Originally Posted by Conrad on Monday 21 January, 2008

Its a pity the forum got slammed because at the start of October last year, this is exactly what I said was going to happen. Going back further (in my old forum) I mentioned that the end of 2007 was going to be soft and this softness would carry into the middle of 2008. The longer term future, if you think all this is bad news, is that we are going to be soft for the long term … how long? I suspect till 2010. Any sort of recovery will probably be around mid to late 2011 to mid 2012.

Visionary or smart analysis? … Or blind luck?

Either way, every one of my analyses have panned out accurately in the last five years. My only regret is that I wish I wasn’t so damn accurate.

Going forward, I am still keeping the view that this pain is going to get worse before it gets better. This will drag into next year and will probably find a bottom by the middle of 2012, give or take a quarter. And the low? … well, its a long shot but the call in 2007 was also a long shot – 9,500 on the DOW. And if the world doesn’t end by 21 December 2012, we should get into a massive rally that will go all the way into 2016.

I am not a fortune teller and there is no way I can guarantee that this will be the actual outcome. This analysis, as with all my analysis, is based on macroeconomics, technical analysis, historical patterns and economic models, market time-lines and plain ol’ common sense.

And just to scare the living shit out of everyone, I will leave you with these two charts from 2008 and the current one.

Sweet Dreams, Have a lovely weekend and Happy Hunting!

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September 2011 In Review, October Preview

SEPTEMBER 2011 IN REVIEW

The main event for me in September was my three-in-one colorectal surgery to remove a fistula, piles and hemorrhoid on Friday 02 September. I was then laid up at home for two solid weeks, unable to move much or do much else except pound out the day-by-day experience on Facebook. The medication was numbing and slowed me down terribly. But it was better than suffering the pain. My history is a well documented record of poor physical pain tolerance in spite of my mental determination and resilience … an irony.

I was reviewed on Friday 16 September and my Doc passed me as having recovered quickly and recovered well. The wounds had healed properly and would take a month or two more before everything returned to normal. This was really good and relieving news as the ‘roid and fistula, I was told, were rather sizable and more work was necessary in order to achieve a total clean up. I had lost a lot of blood on the day of surgery which explained why I felt so weak in the first two days of recovery.

But while I was into my 5th or 6th day of healing, my gout blew up in the worst attack I have ever experienced. To add to my woes, the only medication that can help bring down the swelling has a side effect – diarrhea. Now that’s what you don’t want to do when you are recovering from colorectal wounds. So more pain killers and steroids and more slow and hazy numbness.

The worst part about all this was that my schedules were all in a mess. I had to push back the Mega Gathering in K.L. from Friday 9 September to Friday 14 October and Batch 52 in Singapore had to push their two Boosters back by two weeks and hope to recover in that time.

The good news was that by Sunday 18 September, the gout relented and my whole body was recovering. The other good news – I lost weight! Yay!

TUTORIAL & WORKSHOP HIGHLIGHTS

Batch 53 started their tutorial on 20 September and Batch 52, the weekend batch finally got their two boosters after a two week postponement. It was quite a struggle to get myself to start Batch 53 as the ass was still sore and the gout was fully blown out. But the show went on. If anything, teaching distracted me from my pains and it was truly good to be back and teaching in spite of my struggles. By the weekend of that week, Wealth Academy started. I struggled on my first session as the foot was still slightly swollen and I still wasn’t able to sit properly. I did manage to get my foot into my leather shoes for the last day.

WA28 graduated on Sunday 25 September.  Thank God! This was another great batch with great energy and I am looking forward to their Booster in a couple of weeks.

MARKET MATTERS

Now we can look forward and leave that awful quarter 3 behind us. Not that it was that awful, really. The trading was good but I can’t say the long term positions benefited from all those massive gyrations. Now we face the most potentially tragic month of the trading year – October – famous for all the worst market crashes in history … and there have been a lot of them lately. Ominous? Definitely. But it is still a money making opportunity if you know how. And it is a good, a very good opportunity. I’ll be gagging for it!

BUT …

Does the DOW look like its forming a Double Bottom? Could it be true that a rally back up to 12,800 may be on the cards by December? I’ll be happy if it just gets back up above 11,577.43, the opening price for the year, and not finish the year in the red.

But the truth of the matter is that it is more likely to finish the year on a sad note if there is no QE3. Even as I write this on Tuesday 4 October at 01:03am in Kuala Lumpur, the DOW is breaking below 10,800 and looking like it is destined for lower targets in the month to come. Here we go … 10,700 will be the key interest this coming week. A break below that is going to make for an excellent sell-down that should rival some of the tankers of October 2008. If the August and September ranges were any indication, we’re in for major volatility.

Looks like the VIX wants to find higher ground having broken out of its Bear Flag. That is enough to convince me to be extremely cautious and even deter me from being long. The internals have been hinting at a major sell-off in the making and with volumes getting weaker with each session in September, it won’t take much to bring this edgy market down. Leadership has been favoring the defensive plays and even they are copping losses while the usual bullish leaders maintained their leadership to the downside. The “rallies” in the last two weeks of September were nothing more than short covering. So with the bears rather empty handed and foolish bulls slightly stocked up, expect the market to turn down sharply as the bulls force-sell and the bears short the market again.

It is, after all, October – the anniversary month of all the major market crashes in history.

Trivia For October

October starts Quarter 4 and the final earnings season of the year. It is also the worst of the three months of the quarter. October is infamous for the worst market crashes in history; 1929, 1978, 1979, 1987, 1989 1997, and 2008.

Having said that, October is also known as a “Bear Killer” as the market turned up in a big way in 1946, 57, 60, 62, 66, 74, 87, 90, 98, 2001 and 02 to reverse some of the most bearish markets in history. Will October 2011 be a Bear Killer and “bail” the market out of this rut? I certainly hope so.

Statistically, October ends the worst six months on the DOW and S&P500. The really good news is that October is a great time to buy if the preceding September sold down big time – and we sold down big time in September 2011.

October Trivia
• There are 21 trading days in October 2011
• The first trading day of October has been down 4 of the last 6
• October traditionally starts out poorly in the first week
• The first week of October holds the record for the worst historical week on Wall Street in 2008
• Saturday 07 October is Yom Kippur
• Monday 10 October is a Bond trading holiday in observance of Columbus Day
• The second week is typically bearish
• The second week ends bullishly and carries into the third week
• The Monday before Expiration Friday has been up on the DOW 25 of the last 40
• October 19 is the anniversary of the Crash of 1987 (DOW went down 22.6% in a single session)
• October Expiration Friday has been bearish 7 of the last 8
• 28 October is the anniversary of the 1929 Crash (DOW went down 23% in two days)
• The last three days of October are traditionally bullish
• Halloween on 31 October is traditionally bullish

Commodities
• Oil remains weak (Hold)
• Natural Gas tops out
• Short Gold and Silver till end October/early November
• Copper stays bearish
• Start accumulating Corn, Wheat and Soyabeans from mid October
• Corn is a good bet for a run till end April
• Sugar is another good bet and stays bullish in October
• Cocoa and Coffee prices usually stabilize in October

SUMMARY

Well, its back to the grind and back to busy schedules. Apart from the usual Tutorials, on the weekend of 30th September to 3rd October, K.L. gets its 16th Batch … the Pattern Trader Mega Gathering in K.L. will be on Friday 14th October … Wealth Academy gets yet another batch on the weekend of 20th to 23rd, … Previews in Penang and K.L. … leaving me only five off days in October and one Public holiday, Deepavali on 26 October. I am not complaining … yet … because November gets worse with only three off days and every weekend burned!

Trade Safe & Happy Hunting Always!

Michael Kahn vs Daryl Guppy

This could turn out to be a great lesson in technical analysis for one and egg in the face for the other. Both technicians wrote a report each on 6 September 2011 in which they analyzed the Dow Jones Industrial Average. On CNBC.com, Guppy is rooting for Dow to get up to 12,400 while on MarketWatch, Kahn says Dow is headed below 10,000. I want to put both men on record on my blog and watch as the drama plays itself out over the next few months.

From Guppy’s report (read the original here) …

The Shit Is Damn Near The Fan

We’ve been hearing all about the possibility of a Double Dip Recession and all the rhetoric about what governments are doing to navigate their way to a soft landing.

Now how about the truth … how about acknowledging that most countries are already in Recession and that we’re only a few steps away from Depression. After all, back in 2008, most governments delayed their official acknowledgement of a Recession until 6 months after the fact and America delayed theirs by a whole year.

We’re, and I mean the whole global community, already in a global recession and several countries are on the verge of a Depression. This is the beginning of one of the worst financial failures in post-war history.

Consider the facts – according to Wikipedia …

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Now there is no doubt that over the last four years dating back to August 2007, the situation described above has not been out of place. Unemployment has stayed high and intolerable all over the world especially in the developed countries and key developing economies (emerging markets). We did have a bubble of sorts and some countries are still living in those bubbles as we speak – an Asset Bubble – and they’ve been popping and deflating over the last year as expected.

Money supply is out of control with the US clearly out of options and the European economy clearly out of cash as both sides of the pond increase spending and keep taxation down. Macroeconomic indicators have been supportive of an ongoing recession for the longest time – we’ve just been distracted by no-so-bad data that we think its all good. Now that GDPs have been contracting all over the world, we cannot continue living in denial that all is well and that this correction is short-lived and irrational.

Consider another fact – according to Wikipedia …

In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle.

Considered, by some economists, a rare and extreme form of recession, a depression is characterized by its length, by abnormally large increases in unemployment, falls in the availability of credit— often due to some kind of banking or financial crisis, shrinking output—as buyers dry up and suppliers cut back on production, and investment, large number of bankruptcies—including sovereign debt defaults, significantly reduced amounts of trade and commerce—especially international, as well as highly volatile relative currency value fluctuations—most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.

Read that again and tell me we’re not in a Depression. Remember that we don’t have to be in a Recession to get promoted to a Depression.

Rather than categorically classify the current situation as a Depression too soon, I would rather call it a period of Economic Failure. I mentioned this in the previous posting when I illustrated the 4-year Rececession Cycle, the Market’s 20-year Cycle and the 40-year Economic Failure Cycle. And if you consider that the market has been generally sideways since 2000, there is little to deny that we are right in the middle of an economic failure with the last period of failure being the 1970s, 40 years ago.

Now here’s something else to consider. Take a look at the two previous periods of failure and take note of the yellow highlighted period …

Those major dips happened right in the middle of the 20-year consolidation. Now take a look at this …

If you consider that the current consolidation started in 1999, then that would put the Sub-Prime crash right in the middle of this 20-year cycle. Or did the consolidation start in 2002 with the Dot.com debacle? Depending on how you look at it, we’re either done with the “big one” or the “big one” is due soon. Either way, we’re going to be volatile and sideways for a long time to come. And given the state of affairs around the world, I reckon this sideways and volatile mess is justified.

Here are some of the scary facts from Europe after Monday 5 September 2011;

• The stock market in Germany was down more than 5%.
• The stock markets in France and Italy were down more than 4%.
• Royal Bank of Scotland was down more than 12%.
• Deutsche Bank was down more than 6%.
• Societe Generale was down more than 8%.
• Italy’s UniCredit was down more than 7%.
• Barclays was down more than 6%
• Credit Suisse was down more than 4%.
• The yield on 2 year Greek bonds was up to 50.38%.
• The yield on 1 year Greek bonds was up to 82.14%.  A year ago it was under 10%.

With the US government crucifying 17 of the major banks this week, this could be the catalyst for a financial meltdown. The bond trade seems to be supporting this theory as is the rise of gold to a new record high today at $1,923.70. Yields across the US treasuries have all fallen below par and the yield curve is quickly flattening to the downside – something that has not happened in history.

Based on my Rotation Models, we should be “officially” in Recession by October or November this year and the market will become an officially bearish one by the end of this month. I made a similar call in August 2007 and no one took me seriously. I am making that call again now. The only difference is that this time, it is more obvious that it will inevitably happen.

So now the question begs – is anyone taking my call for a Depression seriously?

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