Lose The Crowd, Don't Become Part Of It

Major U.S. and European markets limped into the Holiday weekend with a thud to conclude what was arguably one of the better two-day trading opportunities of the season in terms of market setup, conviction and pace.  For the week, the S&P lost nine while the Nasdaq gave back only seven, but the real story was Thursday's post-FOMC bull trap that had longs clogging the exits faster than holiday weekend SUVs congestion on the tiny Cape Cod roads.

And while the DAX virtually stood still on a net basis for the week with a mere gain of seven, the German index also provided outstanding intraday volatility to open and close the week, taking turns with the U.S. in fluid "you lead, I lead" fashion.  In fact the DAX may have actually tipped Thursday's morning's U.S. hand with loss of key support well before the pits opened here in the states as noted in our lead chart below.

Around the globe, both the 13- and 60-minute timeframes -- cornerstone timeframes for our trend-based intraday scalp and swing traders alike -- provided outstanding backdrops following Thursday morning's trap.

But we'll again let the charts do the major technical talking, starting with a recap of Thursday's 13-Minute DAX chart, and then get out the old soapbox to dissect Thursday's market events from this independent trader's perspective.  In doing so, we'll need to revisit an old friend -- the "roach motel" concept -- as we often did in our early years.

                                                   S&P 500

                                          Nasdaq 100

                                               Moving Avg Legend:  15MA   Larger Timeframe 15MA
                                    See http://www.donmillertrading.com for Setups and Methodologies
                                                               U.S. Charts © 2004 Tradestation


^next^ Lose the Crowd

I finally started reading "The Purpose Driven Life" this past week.  Having been at the top of the New York Times Best Seller List for what seems like eternity (pun intended), the book has been on my list of to-do's for some time, and so I finally stopped putting it off.  As always, when I read non-trading books, snippets are plentiful for those reading between the lines that reinforce the concept that trading indeed mimics life.  One such early excerpt was "Those who follow the crowd usually get lost in it", which immediately reminded me of several market "predictions" made after Wednesday's FOMC action and Thursday's resulting trap.

As I've said many times in the past, I usually do my darndest to avoid reading any industry press, but especially anything that doesn't assist in establishing a proven method -- system or discretionary -- or otherwise guide self-sufficient trading.  That's not to say the rest may not be helpful, I just prefer to place trading accountability with the guy in the mirror.  Like I've said, if this piece doesn't help, don't read it.  Yet I do tend to glance around at Fed time, and I also wanted to check into recent rumors of manipulation in the S&P Pit for some comic relief.  (We'll get back to that one in a second.)

In scanning the press, I noticed what seemed to be a rather heavy "Buy Tech" bandwagon that seemed reminiscent of the late 1990s "day late, dollar short" crowd.  Many of the themes tended to be based on the markets blip up following Wednesday's FOMC announcement, where we closed a bit higher in a whopping 90 minutes of trading and above a few key supports.  For whatever the reason, the "It's safe to go in the water" signs were in abundance by Thursday morning, providing the unsuspecting "crowd" the opportunity to line up their buy orders.  Fast forward to Thursday evening where the Nasdaq proceeded to lose 1.5% for the session, with the SOX doing its best Red Sox implosion impression by giving up a whopping 3.7%.

Now my point isn't to point figures at the pundits … we've had a field day with that one in the past and so we'll let it rest this time.  My point also isn't in "look who screwed up" as we all make bonehead mistakes -- just look back to last week's column and brain cramp at this end.  Plus, the market could have turned everyone into "I Told You So" geniuses (of course, we always hear about those in bold print).  And finally, I also stuck a trading toe in the "Long Pond" -- Cape Codders will get that one -- on a midday DAX pullback to 13-minute support before reversing hard in both the DAX and U.S. markets upon DAX support loss and U.S. market implosion.  So the pundits' intentions weren't all that bad from a momentary technical perspective.

Ah, but the market isn't a static snapshot and can change violently on a heartbeat.  It has and always will be a think-on-your-feet and adapt-on-a-moment's-notice business -- even for longer term swing traders.  And while Thursday's morning early loss of key intraday supports and resulting bear trap should have been clear to anyone half-decent at reading the tape, the problem is that most don't learn to be self-sufficient tape/chart readers and continue to rely on someone other than themselves.  We've called this the "roach motel" trap in the past … others can get you in, but usually aren't around to get you out … at least not until significant damage has been done.

Here's the scenario -- it's going to be a corny one, but stick with me.  Jack and Jill Trader both spend Wednesday night reading publications and watching the tube where it seemed like 90% of the industry press (that's the so-called experts, gang … many of whom don't trade as their primary job) was screaming "Buy Tech".  Jack, who might even be a half-decent chart reader, figures it's got to be close to a sure thing, and buys early Thursday.  Jill, who happens to read the tape very well, checks her charts and also fills her buy order based solely on her setup and trigger.

The difference is that Jill sees the loss in support, knows her next move, and reacts on her own accordingly while Jack freezes as he double checks what was printed, videotaped, or logged by his chatroom horse race caller to make sure he read it right.  After all, they're the "experts", right?  The next thing you know, Jack is losing money, ticked off, trying to locate the pied piper, pointing fingers at the rumored manipulation accusations (I said we'd get back to this … but hang on one sec.), and generally blaming everyone but himself.

OK, I said it would be corny, but the cornerstone issue of success in this business remains hard-earned self-sufficiency and accountability ... period.  Last week, I said I screwed up a chart sequence that I shouldn't have.  This week, suffice it to say that the pitch after Thursday's early "high and inside" brushback (in the context of long setup test and quick failure) was not fouled off.  In both cases, the trading buck has to stop with the man in the mirror.

Back to the manipulation rumors, I of course have no clue as to whether they're true or not.  And frankly, I could care less.  I certainly don't condone such activity, but does it really matter as a trader what's driving the markets???  Yet I still see far too many traders trying to figure out "why" and not taking action, or taking action far too late, when 99% of the time the "why" is totally irrelevant.  We read the tape and charts, and react.  Period.  Over and over and over again.  Whether a move is due to Johnny Rookie mis-keying an order by three decimals, Trader XXX pushing the bids or asks, people blindly following Joe Guru's crystal ball "predictions", or the capturing of Osama's pet fish doesn't matter.  The tape is the tape, the trend is the trend, and it IS readable and tradable for profit just about every dang day of the year.  You simply have to work harder, get up earlier, and stand farther from the crowd than those relying on others.

Otherwise you're simply renting a room at the roach motel.

----

On Tuesday, I experienced (and thankfully survived) my first hard drive crash.  Fortunately, I was able to update backups of my key data files, some of which include more than two decades of financial data, before losing the drive completely.  Installing a new drive and operating system, and reinstalling all of the trading hardware and software took about six hours after a frantic late night run to Best Buy to get the drive.

Yet again, we as traders have two choices in running our business: Rely on someone else and wait for the appointment -- thus incurring trading profit opportunity cost, or learn to do it yourself, spend the night doing it, and get right back to work the next day.  It was a pain and I lost some sleep.  But no one ever said this business was easy and we didn't miss a market beat on Wednesday.

Oh yea, and use the start of the third quarter as a reminder to back up your files.

Good Trading and Have a Great & Safe Holiday Weekend.

Don Miller