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Vikram Rangala
MrTopStep Opening Print 05-16-2013

By Vikram Rangala, MrTopStep Chief Operations Officer


Trend is your friend? By now you should be besties.

The stock market is testing us right now. It is testing us with two questions. One, why is it still going up? Two, what should we do? How should we trade this never-ending rally?

For some traders, the answer to the first question is, who knows and who cares? And their answer to the second is usually something about the trend being your friend. (Can’t they come up with something new?) My demo account is up 20% since last Friday. The trend and I are fast becoming BFFs.

If you’ll permit me a philosophical analogy, I was reminded of a story about the Buddha. A disciple asked, “Master, why don’t you teach us about how the world was created, what forces move it, and what the roots of good and evil behavior are, and the nature of matter and energy and the cosmos?” The Buddha said, “Imagine that a man was shot with an arrow and his family called a doctor. But the man said, ‘I will not let the doctor remove the arrow until I know who shot it, whether he was tall or short, fat or thin. I must also know of what wood the arrow was made, and what type of feathers it had, and where the doctor studied, where he was born and what his family is like.’ If the man went on with such questions, he would be dead before the arrow was removed.”

Life is suffering, said the Buddha, and I teach the way out of suffering. I don't teach these cosmological questions because they don’t address the central problem you face: how to end your suffering and be happy. The trader's suffering comes from not being at one with the trend. You short a correction and the dip turns up just after you get in. So you decide, okay, let's keep it simple and buy the rally on a pullback. But that two-handle pullback turns to five, then seven. Pretty soon you're worried about wiping out your account and you do the prudent thing and get out with a loss. Only to see the market bottom and take off. Sound familiar? I feel a pain in my gut just thinking about it.

It can seem strange to non-traders to see us suffer in such an obvious rally. Our friends might ask, “You just buy low and sell higher, right? Well, if it just keeps going up, then why don't you just keep your money in until it stops?” This kind of logic reminds me of a doctor I talked to when I was in college. I had been on academic probation twice and was struggling to focus. The doctor said, "I miss college. All you have to do is go to class and study."  I felt like someone had thrown ice water in my face. Was it that simple?

I decided to try this novel approach. It worked. It wasn't easy, but it was simple. What makes trading hard and not easy is not the differential calculus or programming a black box system or tweaking the parameters of your favorite indicator. As King Arthur and his knights found, the holy grail was something inside themselves. As a 28-year veteran trader and friend of mine likes to say, "You are the holy grail." That’s a simple truth, but not easy to keep in mind. What the stock market has really been testing is our ability to find certainty in the midst of uncertainty. To separate what we can know—the trend is up—from what we cannot know—is this just a small correction or the real top, finally?

How do we find that certainty? Here’s my suggestion. Stop trying to tell the market what it should be doing. Instead, listen to the market. It is giving out clues like candy from a piñata. But if you don’t understand the language it’s speaking in, it’s like getting directions in a foreign language. Among the signals it has been giving are trendlines that it continues to respect on its way upward; its tendency to establish an opening range, break out of it, and then try and get back to it; and a growing mix of volatile moves with little volume and others with large volume. MrTopStep is now refining a new market imbalance meter that will soon make public. It gives a level of insight that was always there in the raw data but was never made visible.

The key to this listening is focused, patient attention. We get tempted by shiny new indicators because we think they’ll give us a shortcut to understanding what the market is saying. Because they’ll make the simple work easy. But markets are like people. You have to listen and give them your undivided attention. Only then will they reveal their mysteries.
My answer to the question, “How high can the S&P go?” is this: Nobody knows and, for traders, it doesn’t matter. Don’t waste time on needless questions. Pull out the arrow, end your suffering, and trade with joy and confidence, knowing that you’re not alone. You have a friend. It’s called the trend.

Our view (feat. Danny Riley): This morning we have a ton of Fed speak and economic numbers to get past. Asia closed mostly higher and Europe is mixed this morning. The speed and the size of the most recent upmove has caught a lot of people (including me) off guard. That said, we are setting a new S&P upside objective at S&P 1720. So far there has been no sign of any “sell in May and walk away” trade. Almost every day, whether the S&P gaps up or down, it makes its low on the open. The midmorning selloff has been moved to the afternoon selloff, so selling the “early” rally and buying the break has been non-existent. So far in May the ESM has been up 9 out of the last 11 sessions for a positive gain of 86 handles. In the last 6 months the S&P has risen nearly 300 handles. We want to get to the floor and get a look at the price action before jumping in. Please keep an eye on the 10-handle rule and please use stops when trading futures.

  • It’s 7 a.m. and the ESM is trading 1655.75, up 1.5 handles; crude is down 28 cents at 94.02; and the euro is up 4 pips at 1.2881.
  • In Asia, 6 out of 11 markets closed higher (Shanghai Comp. +1.21%, Hang Seng  +0.17%, Nikkei -0.39%).
  • In Europe, 7 of 12 markets are trading higher (CAC -0.15%, DAX +0.38%)
  • Today’s headline: “Jamie Dimon’s Fate Comes to a Vote”
  • Total volume: 2.12mil ESM and 13k SPM
  • Economic calendar: Charles Posner speaks, Erik Rosen speaks, Consumer Price Index, housing starts, jobless claims, Richard Fisher speaks, Philly Fed survey, nat. gas number, Sarah Bloom Raskin speaks, John Williams speaks, Fed balance sheet and money supply.
  • Fair value: S&P -0.18, NASDAQ +7.28
  • MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-5-15-2013

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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. {jathumbnailoff}