All right, everyone. Well, we had a rather interesting day today in the U.S. equities markets. The S&P 500 closed down quite a bit off of its highs. Quite frankly, the U.S. equities are starting to look very, very bearish. More and more, what I see coming out from the way of professional traders and funds is that sort of doom and gloom attitude. I don’t want to make light of it because, as I’ve tried to say before, we are in an unprecedented time as far as what’s going on with the markets, what’s going on with banks. So I don’t want to make light of that. But at the same time, what I’m also looking for, with one eye, is that this one sidedness, this everybody’s looking for the short side, everybody’s thinking about selling, that’s exactly what the smart money wants to see if they want to buy, because when they get that selling, that’s where they’re going to come in and buy up all of these bargains.
Having said that, again, let me be crystal clear with this. I’m not talking about going in and buying with both hands. I am not saying that it’s time to load up the truck. All I’m saying is we’ve got to keep our eyes open and our ears open. Listen to what the market is telling you. That’s CNBC, newsletters, Bloomberg. Look at what the market is telling you. Watch the price that you see on the charts.
So, let’s take a look at the British pound on the daily. You can see here, this bottoming process looks like it’s continuing. We had the market move right back into this old area of support, remember, that we were looking for. It has come down now and is beginning to retest the prior area of support. So we’ve broken through it, and now we’re testing.
This testing process, there’s no way to predict whether or not it’s going to work. We simply have to watch and wait. This is where money management comes into play. If we could predict the market, then we wouldn’t need money management. We could just predict and know what the market’s going to do, simply pile in and make a ton of money and retire off of one trade. That’s simply not possible.
This action that we’re seeing here, over the last several days, we need to see that this continues. These are signs of a reversal. You can see, the market pushes lower, closes higher. Pushes lower, closes higher. Pushes higher, closes lower. But at no time do we get a follow through past this prior area.
So all signs are pointing to a good test of support. However, we still might get price breaking through support, and we’ve got to prepare for that.
So what does that mean? That means, if we can break through these lows over here, I’m going to turn, once again, bearish, and I’m going to expect that the market is going to run to the downside. That means maybe shifting from taking off 80 percent to taking off 70 percent.
Once the market breaks through the lows here, that’s where I want to shift to more of a 50/50, leave 50 percent on. Which is more risky, because you have the possibility to take larger losses, but the trend is at least in your favor, and so you’re trading in the likely direction of the trend. That’s how professional traders get aggressive. They don’t just pile in with all their money at once. They take calculated risks with as little of their money as they can get away with.
Having said that, what we’re looking at here is the beginnings, I think, of a very nice flag pattern. There it is on the hourly. This might wind up breaking out in the Asian session. But at this point, we’ve got a very nice pattern setting up. That means taking long trades above this level, which is 4,292. That’s exactly where the market is now. So that means right above 4,300.
I don’t like that we’re forming this pattern right around 4,300 because you can get kind of wacky things happening, the way people set their stops, but it is what it is. So long trades above 4,300 as we get a break above this top end of the flag pattern here, or breaks below the 4,220 level to go short, taking the market below this support.
So, a pretty good pattern starting to set up. But nonetheless, we’ve got to keep our eye on the longer term picture, keep our eye on the longer term trend, just to make sure that we’re keeping on top of what’s going on with price.
In closing, we’ve got this stimulus bill, whatever the heck you want to call it, that got passed. There’s so much crap in this bill. It doesn’t even make sense in a lot of respects. We’ve got to keep our eye on what the market does in order to develop a trading strategy.
I can’t stress this enough, folks. You’ve got to take at least one ear off of the talking heads, off of CNBC, out of the newspapers, and focus on price. Price is what is going to tip the insiders’ hands, because it has to. Price means everything. Not necessarily the news, not what the talking heads are saying, not what the analysts are saying, because those could very well be lies.
Keep your eye on price, and make sure that you’re keeping score with price. Focus on the patterns.
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