Overview:

Last night a long signal (Swing Trade) appeared on the 12 hour chart and as we told our members this was not a trade we were going to participate in.  The reasoning was simple, we reason logically in lieu of letting our emotions guide our decision process.

From time to time this results in missing a trade,  Psychologically these are the “opportunities” we seem to dwell on.  “Ohhh I missed that trade and everyone else was on board.”   Yet lost to our memory is the capital saved by sticking to our guns.

No different than poker where everyone has their favorite crap hand.  Mine is 56S and it is likely because I remember that huge pot I took down at Club One in Fresno.  However, playing this hand every time will lead to capital erosion.  These are not great hands, they are mediocre at best.

This is the same reason you hear people say “I hate pocket aces”.  I mean seriously how do you hate looking down and seeing pocket aces?  People say this because they remember a huge pot lost playing the hand.  In the end trading, like poker, is all about probabilities and yesterday was the perfect example of 56S.

It is not the smartest guy at the table that wins, it is the most disciplined player that can remove emotional swings from the game.  Trading is no different.

Running on Empty:

Markets do not top because of fundamentals, the top because they run out of buyers.  Tops are where the greatest number of buyers are.  Since most people lose money trading markets it is safe to say most traders and investors are buying near the end of a rally.

This is because the DNA inside every trader and or investors has us thinking “safety in numbers”.  From an evolutionary standpoint this is absolutely correct.  Safety is found within the herd not as an outlier.  This is the reason we have herds in the first place.  It reduces the probability of being a Lion’s next dinner.

What keeps us safe in the wild, is an Achilles heal when it comes to markets.  Simple math.  Markets top when they run out of buyers.  This implies that the most people are positioned long at a top, as there is no one left to buy.

The Fear of Missing Out, or being with the herd, results in buying the top when the trade is the most crowded and in a position to run out of buyers.  Yet some just can not help themselves and still jump into a crowded trade.

BTCUSD-12hr:

Opportunity Here?:

So now that the market pulled back to our initial support level you would think, pull the trigger right?  Wrong, there were just to many red flags and the swing trade did not make sense.  We went over the reasoning for us not taking the trade based on rational analysis not emotional gut feelings.

There are 3 things that can happen when the market is mid range and consolidating, and 2 of them are not good for longs.

The real risk here was a fake-out and a flushing of a crowded long trade.  The trade triggered technically based on candles stick patterns.  Took out the inside bar.  First into the pasture generally gets the greener grass, but also are the first into the Lion’s den!

Yesterday when a long signal showed up in an area of shallow support, we emailed our members that we were passing on the trade for various reasons.  One of the reasons was simply, being long was already a crowded trade.

The leveraged market was 80% net longs vs 20% short or 4 to 1 longs.  One reason I like using leveraged traders as a sentiment indicator is that they are generally traders with the gambling mentality.  They are generally emotionally driven by greed.  Not all but most.

This is exactly what happened.  The long triggered, and quickly failed nearly paring the initial inside bar.  These markets are easily swayed by larger players and they saw this as an opportunity to pounce, as the herd entered the pasture.

Now this is still early into the cycle so positioning for the next swing is ok as this is a different mentality and strategy.

Cycle:

In late June we mentioned this is likely the start of a broader cycle that could last a few weeks to a couple months.  Well we are now ending the third week of the cycle and it is likely we are near the end BUT.

The fact is we do not know if this is still going to play out as a broader corrective cycle, so let’s look at the weekly for some additional insight.

BTCUSD Weekly:

It is looking as if we will get our second weekly pinbar which is a bearish sign.  In the broader picture our initial support is around 9800 and lower support is found around 8500.  Now the market does not have to pullback this far or as is technically common fall within the range of wave 4.

We do not discount 8500 or even 7200 being hit, but this early into a bull run it does not necessarily have to happen.  The clues to why we believe this is a lower probability is based on a similar equity.  We have been following the correlation with the Gold rally from 2002.  Remember patterns repeat because herds are predictable.

Gold Bitcoin Chart:

 

After Gold broke the initial consolidation range it started its parabolic rally to an all time high.  Following the nature of markets, this has been our guide for sometime.  Both Gold and Bitcoin are held by investors for the same reasons.

Both are considered deflationary and a hedge against inflation, so it would be logical they follow similar trending patterns.  Until the market proves otherwise this is our comparison for what we expect in the long term.

According to our Gold chart the next move should be parabolic in nature, deviating from the trend established during the initial rally.  We are already seeing this divergence on the charts which leads me to believe that any pullback will be shallow.  We will look for a deeper pullback once we take out the ATH.

So if you added a position at 13,200 does it really matter in the long term?  Not really in my opinion.  There is still a lot of room to run.  This is for longer term investors not for short term trading.  In the short term this is still not an environment to take long Swing Trades.

Contrarian and Lone Wolf:

As we have written time and time before, the time to be the contrarian, or John Wayne exercising True Grit, is not when everyone is bullish, but when the market is hated.  I wrote about this in my Litecoin article when it was trading at $25.  How many added?  It takes a solid pair to go against the herd not with.

This is why there are so few leaders and most simply follow the herd.  Believe me I got the emails a few weeks ago.  One of the nastier ones was “I missed the opportunity to add at 12k when XXXXX that I follow just added Bitcoin and Ethereum saying we are going to 16k and 450 soon.  They just added and you are sitting on your hands missing the move.  Just cancel my subscription you are asleep at the wheel.”

Of course this email came above 12k after we just closed our swing trade.  I almost wanted to liquidate my holdings after about the 5th email of this type.  No this was the only cancellation but you can see where emotions circumvented rational in their thinking.

We took the prudent path.  We were sitting on 20-30% cash while the market just ran higher.  As much as we talk about the Fear of Missing Out, most still fall into the trap over and over and over again.  Remember even the most bullish of markets take a break.

Well now they have, and not one apology for the ripping I took and every coin mentioned in those emails is as cheap or CHEAPER, and are likely to pullback further.  It is not about being right or wrong, but controlling your emotions period!

Summary:

Longer term the market still is in the initial phase of a broader bull market.  For investing it is more important to avoid the emotional swings of trying to time every move with your entire portfolio.  This is why we have cash on the sides during irrational rallies.  We are prepared not praying.

For Swing traders, some of the over exuberant longs still need to be flushed from the market.  Until this happens there is still downside risk.  Remember traders using leverage are short term by nature, so it does not take much to flush them out.  

This and the market being in a better position is what we will wait for.  The 9800 level is a good area to look for longs, but we need to see how the market reacts when and if we get there.

If we miss a move, well, it is no different than throwing away 56S only to see the flop come 234.  The right thing to do is throw those hands away unless you are in the right position.  Currently mid-range of consolidation we are not in a position to play those hands.  Does not good to get pocket Aces if you only have $35 left in your stack.

Just Remember:

Few of our members will remember an avoided bad trade.  In 3-4 months, I will get the emails “Are you asleep at the wheel”, once again.  Our goal is not to turn your 5k account into 50k in a year.  Our goal is to make you better and more disciplined traders and investors.

We only need to look back 18 months at how many fortunes made in the bull market, were squandered last year.  I one group who had their members in 20-30 trades at any one time, and issuing 2-3 trades a day. Towards Novemeber of last year, many were complaining their capital eroded 60-80% or more.  This was before the final big dip.

What good is it to make 500% if you end up back to where you were when you started?  Many found themselves in that position or worse at the start of the year.  Many kept piling into crap coins and or took risky trades in an unfavorable environment and now that the bull has returned they are trading from a hole. 

Speaking of alt coins.

Do you have bags filled with alts?  Fortunately for us we have a guest coming is an expert in block chain development to talk more about the future of crap.  I mean alt coins.   So tune in Monday at 4pm est to listen live, and we will have the chat room open to take questions. 

 

 

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