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August 30, 2015

Don't Trust This Week's Reversal

I had a nice conversation this week with Alex who runs a keen TA and cycles newsletter over at Chart Freak (yes, that was a plug, and a well-deserved one). Our cycles discussion reminded me how much I miss writing my newsletter. The family schedule prevents me from committing the several extra hours per day required to run the service, though I have toyed with the idea of offering a new service via private Twitter feed, which would allow me to share setups in a more expedient manner. Just a concept at the moment.

Anyway, I am here to scratch the writing itch, so let's talk some cycles. Gold is of particular interest to many traders these days because of the widespread belief that deeply negative sentiment and COT numbers indicate a bear market low. That the July low holds at least a weekly cycle low is obvious: the current daily cycle is clearly forming as right-translated, and price has met the requisite cycle-turning criteria with regard to TrendBands on both the daily and weekly charts.

These bounces on both the daily and weekly views are so far quite routine for bear market rallies. Ignoring sentiment, I see no technical indication that a major low has formed. In fact, mining shares continue to diverge negatively. As you will recall from the newsletter, gold rarely forms a significant low without a positive divergence in the miners, so I wouldn't go backing up the truck just yet.

As for gold's action itself, we really need to see price close above the weekly UpperBand and the 80WMA before we can consider a trend change. Yes, price accomplished both feats back in January, but as you can see, the victory was short-lived. If gold had decline to form a weekly cycle low above the LowerBand and then once again breached those bands, we could have been more optimistic.

On the flip side, watch carefully for a renewed push below $1100. The fact that so many people are touting the July sentiment figures may be this rally's undoing. Trader's are now getting aggressive with gold because they want to call the bottom. If price loses $1100 again, we may see a crash to $1000 in a true washout move.

The big excitement this week came in the equity market. Monday morning reintroduced traders to the concept of risk by hosting an 8% gap lower. By the end of the week, however, stocks were higher than last Friday's close. If Monday's low can stick as a weekly cycle low, we should see new highs.

Don't relax your guard just because you see a big reversal candle, however. Many traders made such a mistake back in September 2008.

So the current cycle could quite conceivably stretch into a 30+ week count, morphing into a LT nature and bringing on a failed yearly cycle. Such action would then strongly suggest a bear market has begun. How surprised would people be if equities produced another big gap lower tomorrow morning? I make no prediction of such a result, but I respect the possibility.

My trading methodology has evolved significantly in the months since I ceased writing the Member letter. I now have slightly more sophisticated techniques for judging swing points than a simple swing high or swing low. I also no longer trade primarily off cycle analysis. Cycles are certainly an important aspect of my analysis, but are now used as part of the big picture view rather than for trade signals.

These new techniques also opened the door to trading on lower time frames, as well as new instruments. For example, I swing trade oil and currencies with no reference to cycles whatsoever. Trading can be as challenging as it is rewarding to those who love the game and put in the effort. I know of very few people who manage to use a system for years without adjustment. My experience has always been one of an evolving methodology to meet the requirements of different market environments.

The point here is to never close your mind... never assume that your system is the holy grail of trading just because it has worked well for a couple of years. Conditions change, and sometimes reactions to change do not come quickly enough. Anticipate. Always run What-ifs through your thinking process. Assume today that your model will fail tomorrow so that you are scared into constantly studying new techniques.

A little good luck once in a while also doesn't hurt.

 

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