Thoughts of a trader.

Last night was a big night for the markets. The darling of Wall Street, (and CNBC evidently) AAPL (Apple) had its earnings report. While I am not one for following such things, I happened to be watching CNBC while at the gym. There was a certain young woman reporting on this upcoming event, and while the markets had taken a bit of a beating over the last few days, she had a gleam in her eyes every time she talked about Apple. In fact, she could barely contain her excitement.

As she was talking, the other anchors chimed in with “Apple always surprises, they sandbag earnings”. I began to get the idea that they were somehow quietly rooting for AAPL. While I am all for a company making its earnings, I was wondering how many people were buying before the close of the session anticipating this great event.

I started to think about how often these people do this. I often will have CNBC on in the background, and luckily I don’t pay too much attention to it. But it seems over and over it’s an endless stream of bullishness. No matter what. You have analysts coming on convincing you to buy any and everything in the market. The world is a wonderful place, and all you have to do is buy stock. These people obviously lead a sheltered life. But then again….so does Wall Street. The price of stocks is a simple indication of that. My industry, construction, has an unemployment rate of roughly 23%. It’s hard to buy things to make companies profitable when you don’t have a job.

I have said before that these people are dangerous. Nobody, and I mean nobody but you are going to care about your money like only you can. These people are worried about two things: Their “friends” and their ratings. That’s it.

With their “friends”, I mean people on Wall Street that feed them tidbits of information. (Often times in order to profit.) Our news reporter doesn’t care that manager of hedge fund “ABC” is feeding him the good story and ignoring the bad about a company that the fund has a large position in, because it creates “news”, and the manager gets you, the average sucker to push the price up. He will then be the first to dump the stock out on the market, making a nice profit, while you hang on to it.

Also, one must always think about the ratings aspect. The retail trader is typically a “long only” trader, and gets whacked every time the market goes down. (Unlike you and I, who simply “go short”.) If the markets go down, some of their viewers are blowing up their accounts. Guess what? They won’t be tuning in tomorrow. The anchor is losing viewers everyday. Hopefully tomorrow there will be new blood.

As I type this, I am hearing someone talking about “11 Trillion Dollars of money sitting on the sidelines.” This is the reason the market has to go up. So many people took money out, and now it’s in money market accounts, so they need more returns, and will certainly come back. Funny thing about that: I have been hearing that for about 8 months now.

Just think about who you are listening to.

Currently, I am long this pair. I don’t often blindly play support or resistance, but sometimes it’s just worth it. Trading is all about risk, and how much you are comfortable with. I am attaching the monthly chart of EUR/AUD, and showing the major bottom we are sitting at.

As you can see, this is what somebody could call a “no-brainer” trade. (As in his holiness “BillyRayValentine”, from the Forex Factory forums.) 1.55 has been such massive support, this certainly could be a long-term trade. In fact, it could very well turn out to be several trades. I have already gone long once, and will intend to do so every time it dips, as long as it stays above 1.55.

When you see set ups like this, it is time to think like Buffett, and “Buy when everyone else is fearful.” It could go against you, but honestly, how often do these chances pop up? If it breaks down, then we are a major short. Either way, you should know what to do once it makes it’s intentions known.

As I am reading the monthly currency charts, I am seeing one common theme: USD and CHF strength. Normally we see this when traders are in the midst of a “flight to safety.” This generally means bearish things for the equity markets. Take a look at the following Dow and S&P500 weekly charts. We are currently at the 50% retrace of the large meltdown. We are at a major spot now, and the trend will show itself soon.

If there ever was a place for a sharp correction, it’s here. It’s also not uncommon for a second leg down in bear markets, and this would set up perfectly on this chart.

I believe one of the most important days of the year is January 8th. The Non-Farm Payroll Report comes out that day, and after last month’s surprise to the upside, it needs to deliver good news. If is disappoints, it could be “Look out below” for the markets. If it surprises to the upside, it could be the catalyst to clear this 50% hurdle.

Chris

It’s the end of the year, which is the equivalent to a slow death by paper cuts for the average trader. The liquidity of the markets get less and less everyday, and the movements are a lot like watching paint dry. It is truly better to be anywhere but in front of your computer. When you do get a signal to take a trade, you are better off taking profits a bit quicker than the rest of the year.

So what is a trader to do? First and foremost, you should go on about your life. I know a lot of traders that can’t seem to do this, as trading can become all-consuming for them. This is not healthy at all. It is so common, a recent commercial here in the United States  for a stock broker features a guy saying, “Me….if I’m awake, I’m thinking about trading.” Not good.

If you feel the need to be doing something trading related, then perhaps it’s a great time to start reading books that you have undoubtedly collected over the course of 2009. A lot of hidden gems are probably just waiting to be discovered. Also, it will still keep your brain working, but it won’t cost much money. An errant trade in December can get pretty ugly.

Also, I have found it’s a great time to look at possible trends for the coming year. My post about the NZD/USD is a perfect example. Take a look at all factors, and see if you can get a read on what might happen next year. (Notice I said might and didn’t say…place your trade now and get a head start on everyone else.) Look into fundamental factors as well as technical ones. I could possibly set a good bias for next year.

Also, look into other markets. I have really been delving into the VIX lately. It can be used for directional bias for several markets. I haven’t ever really thought of it in the ways I have been using it lately. It has been a bit of an eye-opening experience to say the least. (Perhaps I will write about it one day, once I feel I am qualified.)

None the less, have a good holiday season. The markets will still be here in January. As a side note, don’t rush back into them. I would venture to say the firs Non-Farm Payroll is what most people will be waiting for. That’s January 8th. You also shouldn’t really trade that particular day either…..so it’s a good bet that January 11 will be the first “normal” day next year.

Happy Holidays!

Chris

Friday saw a major shock to the markets as Non-Farm Payroll printed a negative 11,000 number.  -119,000 was the expected number. Needless to say, that caught a lot of people off guard. This lead to several interesting moves, all involving the USD gaining ground with conviction.

Gold got absolutely pummeled after this number came out, as traders got a first hand look at what a bubble being popped looks like. I have been warning about a possible landslide in the Gold markets for a while now. The thing about Gold is that when everyone runs towards the exits – it gets brutal, and fast. Think about it, the underlying commodity (Gold) is priced in USD, and as the USD goes up in value, it takes less of them to buy that ounce of Gold.

The chart below shows the Dollar Index. The Dollar Index is simply a futures contract that prices the USD against a basket of currencies. (Hence the name.) Take a look at this trend line we slammed up against on Friday. If we can get above that line and hold, we should see continued upside for the USD.

You can see that the move up is predicated by a support level as well. This could be a sign of either a run up, or possibly the start of consolidation. Often, a consolidation period will proceed a trend change. It is possible that we will see either one of those moves. The key will be how Asian traders react on Monday morning, Sunday night in the US. If we see a gap up in the USD – we could see some real follow through on the thrust upwards.

Think of this: You are a trader in Tokyo who has been making a killing shorting the USD, and buying Gold. Can you imagine what your thoughts must be on Saturday morning when you wake up and see Gold fell something like $60 an ounce? Not to mention the USD/JPY going straight up. I think there could be some real fireworks in Asia tomorrow night! (NY time that is….)

Chris