Lessons from the Pros

Markets and Market Timing

This morning I was listening to a cable news network and in the span of about three minutes, I heard that home foreclosures increased 25%, job losses were on record pace, and Congress was meeting today to figure out where the 700 billion dollar bailout was actually going. This was enough to make your head spin so I turned off the tv.

Homes are being foreclosed at a record pace because people borrowed more than they could afford and lenders lent more than they should have to people who could not afford the loans – this is what happens. This is not news, we were expecting this more than a year ago at Online Trading Academy. People are losing their jobs because people in China and other parts of the world are willing to do the same work an American does for a fraction of the hourly wage – this is what happens in free markets. This is not news, we were talking about this over a year ago at Online Trading Academy. The 700 billion dollar bailout program is not working. The money is going to the corporate elite with no restrictions on what they can do with it. This is not news, in the Extended Learning Track (XLT) Futures and Forex classes that I lead at Online Trading Academy, each time a country announces a bailout, it is a hard and set rule for us to find resistance (supply) and short the stock market either by shorting stocks or the futures.

You have two choices during these challenging times. One is to give in to fear and to take no action, or worse yet, take ill-informed action. It is easy for the government to pass ridiculous bailout packages and hand our hard-earned money over to the corporate elite and special interest groups because they know the public is experiencing extreme fear and will agree to almost anything. Your other choice is to rise above the fear, rise above the risk, observe the reality of what is happening, and understand that with the most challenging times come the most outstanding opportunities. More on this subject later in this piece.

As market speculators, volatility is at record levels and we love this because we are experts at identifying turning points in markets based on the laws of supply and demand. Volatility is tremendous because the distance from our demand (support) levels to our supply (resistance) levels is big, that’s all. When these areas tighten up again, volatility will decrease. Whatever the scenario and whatever markets we speculate in, we always apply the same set of rules.

For stock traders, one of the most important functions of your routine needs to be proper analysis of supply and demand in the S&P and NASDAQ prior to doing any analysis on stocks. Why? Simply because stocks ebb and flow with these broad markets. Thursday of this week in the Extended Learning Track (XLT) Futures class, we used our rule-based supply and demand analysis to attain a very low risk, high reward, and high probability trade that worked out very well. I will explain for your review using some of the rule based information we use each day in the XLT. This opportunity was found in the NASDAQ futures using a very small time frame. Area "A" on the chart shaded in yellow represents an area of supply (resistance). We know this because when price was at area "A", it could not stay there, forming candle wicks which are the footprints of sellers. Price only declines from "A" because there are more sellers than buyers at area "A". Another factor that made that level an ideal supply level is that 1175 also happened to be the overnight (globex) high price that morning in the NASDAQ futures. Why was it the high? It was the high because that is where all the supply was. Area "B" represents the first time price revisits supply level "A". Our rules tell us here that novice, consistent losing traders are buying (at "B"). We know this because these buyers are buying AFTER a period of buying, mistake number 1, and they are buying AT a price level where supply exceeds demand, mistake number 2. The objective laws of supply and demand ensure that the trader who commits these two mistakes will consistently lose. We simply sell short at the lower black line with our protective buy stop just above the upper black line. The lines represent the "supply zone". As active traders, we determine these zones each day. When we swing trade, we do the same thing in the larger time frames.

Let’s now discuss the key point that made this trading opportunity so high probability. Notice the area shaded gray. It is a strong rally built with NO DEMAND levels during the rally, just nice big green candles. This means that as soon as price reached supply, it was likely to fall very quickly through that gray shaded area. We require strong rallies in price such as this one to our pre-determined supply levels as that increases the odds of our short position working dramatically. In other words, price reached our supply level and we shorted at "B" for a move down to "C" because of the very clear and large PROFIT MARGIN (the gray space).

Some might say that we traded too close to the open of trading and that is risky. This all depends on your definition of risk. Why trade near the open? Because if you really understand how markets work, you know that the largest imbalance of order flow demand and supply is at or near the open of trading in any market which means high probability opportunity. I would much rather take on risk when the odds are stacked in my favor then later in the day when the odds are not that great. In this trade, people who bought from us at "B" fell for the emotion "trap" called "greed". In the Extended Learning Track (XLT) Futures and Forex program, we don’t fall for those traps, we set them.

For those who only trade stocks, your odds dramatically increase when you time your equity trades with the S&P and NASDAQ. Instead of spending hours scanning through hundreds of stocks for setups when starting your daily analysis routine, spend five minutes creating buy and sell zones in the S&P and/or the NASDAQ markets. Then, trade a handful of stocks at most and TIME long and short positions with the S&P and NASDAQ supply and demand levels.

As for the global bailouts and comical intervention, don’t expect these to have any positive effect on your financial well being. You see, markets do a fine job of making everyone’s lives better in time, if left alone. In a free market with NO bailouts or intervention of any kind, banks and lenders who make bad choices that lead to insolvency simply fail. This removes the bad banks from the system and we are left with quality banks that don’t make these same bad choices and this outcome is good for all. In other words, the strongest foundations have no cracks, they are strong and solid. Banks that would otherwise be insolvent due to bad business practices are kept in the system with bailouts. These bad banks are cracks in the foundation of our economy. When a government saves a bank with our tax dollars, it does not make the bank better. Instead, it ensures the crack in the foundation of our economy will remain, until it is removed. If you reward a thief for stealing, the thief will steal again. If you reward a child for bad behavior, they continue to behave poorly. When governments attempt to intervene with bailouts and other forms of intervention, this futile action ensures that cracks in the foundation of our economy will not only remain but get worse.

Free markets naturally force change. They force cheaters to be honest, they force market prices to be at levels that are acceptable for all willing and able workers and producers, they reward the educated with direct deposits from the uneducated which forces education on those who wish to survive. When left completely alone, free markets create a wonderful economy and life for all. It’s really natural selection at its finest. When governments stop intervening to save those who would otherwise fail and begin to dramatically reduce taxes world-wide, expect the markets to begin to recover nicely.

Hope this piece was helpful. Send comments and questions. Have a nice day.

- Sam Seiden

sseiden@tradingacademy.com