Contrary Indicators

When moves of a market price are accelerating to extreme levels, market participants are often in a euphoria or panic mode. Their emotions are running high. As an individual trader, I have to be willing to experience my feelings and to see clearly what are happening in the market and its underline conditions, so emotion waves might not carry me away. One of tools can help me see the market conditions is the contrary indicator.

Barry Ritholtz, the host of The Big Picture blog, has a nice research report on contrary indicators - "Contrary Indicators 2000 – 2003 Bear Market". Here is his definition of contrary indicators:

"Contrary Indicators are the data points, signs, and events whose actual significance to the market is the exact opposite of what their initial impression suggests. These counterintuitive signals can reveal when great masses of investors are collectively reacting emotionally to a given event or stimulus. When the herd becomes violently emotional, they typically “shoot first, and ask questions later.” This invariably results in poor investment decisions.

Whenever the investing public panics, the result can be neatly read in a variety of Contrary Indicators. I’ve found it helpful to think of these Indicators as coming in two distinct flavors: “Internal” market signals, and “external” societal displays."

Click here to view the full report.

File the News

News is a discount machine. More popular and emotional the news is, More discount it makes to the underline conditions. One indicator related to this is the magazine cover indicator. When major magazines put a development on their covers, the development is probably near its end from the trading point of view.

     

The two magazines above publish around March 22, 2008, which marks the end or pause of a major downward move of the general stock market. See the red circle mark in the S&P daily chart below.



For me as a trader, "File the News" has two main benefits. First, it gives me the signal to exit the position and take profits, even reverse the position. Second, it can remind me that I have to turn my attentions to other areas for opportunities.

This is the lesson I just learn. Before the March this year, I short the stock market in general and financial and consumer stocks in particular. I keep looking negative news and commentaries to confirm my positions. Between January and March, more and more negative news appear on the media, just like two magazines shown above, so I tunnel myself into one direction. I ignore positive developments that the natural resource and energy stocks hold very well, and transportation stocks actually move up. From March to now, many stocks in these sectors have spectacular moves. CLF is just one of them.



So I lose paper profits of my short positions in general market index futures and profit opportunities in long positions of these stocks. Open mind and having a broad picture of what are happening are important to a successful trader.

The Essentials

Ed Seykota distills his more than forty year trading experiences into the following essentials:

• Ride Your Winners
• Cut Your Losses
• Manager Your Risk
• Use Stops
• Stick to the System
• File the News

You can get "The Essentials" card and see the Whipsaw Song video from his website at http://www.seykota.com/tribe/essentials/index.htm

Quote of The Day

"I set protective stops at the same time I enter a trade. I normally move these stops in to lock a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn't get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating."

-Ed Seykota

Some Trading Guides

1. Limit losses and ride profits, irrespective of all other rules.

2. Use of stops orders.

3. Buy strong-acting, strong-background commodities and sell weak ones subject to all other rules.

4. Watch for volume climax, especially after a long move.

5. Breaking of minor trendlines counter to the major trend gives most other important position-taking signals. Positions can be taken or reversed on stop at such places.

Quote of The Day

"The joy of winning and the pain of losing are right up there with the pain of winning and the joy of losing. Also to consider are the joy and pain of not participating. The relative strengths of these feelings tend to increase with the distance of the trader from his commitment to being a trader."

-Ed Seykota

What are Grains doing?

Grains act differently within recent two months. Corn holds quite well and is consolidating in the new high area. Beans break down during March and are now also consolidating. Wheat is much "weaker" than its peers and continues to slide down after its March Breakdown.

Corn



Soybean



Wheat

YG is Dangerous

July YG took a dive to 844 last night, while ZG only went down to 893. Likely because there were no buyers in YG and a stop run avalanche occurred. But where was the arbitrage? I believe this CME contract is faulty. I have heard this can happen in the currency minis as well.

I was long several contracts and got taken out WAY below my stop. I recommend not trading YG. That's the last time I will ever touch it.

-Bryan

YG intraday chart



ZG intraday Chart



This post is from the email of my friend Bryan. I add two intraday charts to show when the "abnormal move" happens. It looks it happens between 3 am and 4 am.

Nation Home Prices

The New York Time online posts an interactive chart of Home Prices Across the Nation. It looks cool.

Quote of The Day

"If you have timed the movement correctly, your first commitment will show you a profit at the start. From then on, all that is required of you is to be alert, watching for the appearance of the danger signal to tell you to step aside and convert paper profits into real money."

- Jesse Livermore

What is Mr. Copper doing?

Mr. Copper is in a large trading range for almost two year. It is very interesting to see which direction it finally choose to go.

New High and New Low

Although the overall market closes higher today, the new high pool is shrinking. Some of technology stocks appear in the new high pool, such as WDC, SY, QCOM, ARBA, and FLIR. Regional Bank and discretionary consumer stocks still dominate the new low list.

Regional bank stocks continue to make new lows for a while. But one stock from this group acts in an opposite way, and it reaches the multiple year high. I plan to put it into my watchlist.

New York Community Bancorp

New Lows of Dow components

Major stock indexes close higher today, leading by the Nasdaq composite index. In 30 Dow Jones components, no stocks make new high and four stocks are in new low. They are American international Group, General Motors, General Electric, and Pfizer.

AIG

GM

GE

PFE

Quote of the Day

What can an individual do to become a successful trader?

"The "doing" part of trading is simple. You just pick up the phone and place orders. The "being" part is a bit more subtle. It's like being an athlete. It's commitment and mission. To the committed, a world of support appears. All manner of unforeseen assistance materializes to support and propel the committed to meet grand destiny."

- Ed Seykota

George Soros at Money

CNN Money has an interview with George Soros - "Soros: Global investing's godfather".

"The Fed's first duty is to prevent the financial system from collapsing. It's shown it can do that, and the markets are breathing a sigh of relief. But we can't avoid the fallout in the real economy. We're facing not only recession but also inflation and a flight from the dollar. To fight recession, the Fed needs to increase the money supply, but that only makes the dollar weaker and inflation worse. That's why I think this crisis is so serious. The Fed's power to intervene is limited."

"It's important in life and in investing always to question yourself. Understand that you may be wrong, especially when you believe too firmly that you're right."

His critical views on things probably helps him become a great speculator.

Market In A Euphoria Mode?

By the Citigroup panic/euphoria model, the stock market is actually in a euphoia mode. It is very interesting.

New High and New Low

Natural Resources and Energy stocks are in new high area. Sectors now in new low are regional banks (mostly with name 'bancorp'), airlines, and high-end restaurants. Below are two charts of a high and a low.

FDG

FHN

Dry Bulk Shipping Stocks and Baltic Dry Index

Baltic Dry Index is an index covering dry bulk shipping rates and managed by the Baltic Exchange in London. Recently this index makes a all time new high, but some of major dry bulk shipping stocks don't make it.

Baltic Dry Index




DRYS




EXM




DSX

Charts of Fast Movers

When I look at things in rear mirrors or see charts in hindsight, patterns seems more obvious. Below are charts of four commodities that form inverse V shape tops. The moves at these tops are quite fast and volatile.

Wheat

Coffee

Cotton

Sugar

A divergence between QM and OIH

Within recent few days, the price actions of stocks of oil services and futures of Crude Oil have a divergence pattern.

OIH

QM-N8