Trading Desk Notes - January 19thSubmitted by Polar Futures Group on January 18th, 2019
From the Desk of Victor Adair
The major American stock market indices have been the best bellwether for “risk on” market sentiment...since the extreme Christmas lows the DJIA has closed higher 15 of 17 trading days...closed higher for 4 consecutive weeks...rallied >3,000 points...and has recovered ~60% of the plunge from the October All Time Highs to the Christmas lows.
The sharp tumble in implied option volatility has also been a great “risk on” measure...at the extreme Christmas lows implied volatility on S+P 500 index futures was at 3 year highs of ~26%....it’s now ~14%.
The crude oil market has bounced back from the extreme Christmas lows...WTI is up ~$11 (26%) closing higher for 3 consecutive weeks...recovering ~30% of the decline from the October highs to the Christmas lows.
The Canadian Dollar has bounced off the 18 month lows made at Christmas...recovering ~50% of its fall from the October highs.
There’s nothing wrong with being wrong...except staying wrong! Last week I thought the post-Christmas rallies in stocks, crude and CAD were “bear market rallies” that would probably roll over and test the Christmas lows. I thought the Christmas lows were extreme, so, 1) if the markets rolled over but bounced before taking out the Christmas lows then they would be a “green light” buy, but if, 2) they took out the Christmas lows then look out below. I thought that of the 3 markets CAD was the most likely to roll over...it had simply been “pulled” higher by rising stocks and crude and if those markets stopped rising then CAD would fall of its own weight.
My short term trading: I sold CAD short last week and this week I cautiously shorted both the S+P and WTI and bought gold. One of my key trading rules is that I use stops...I know where I want to get out of a trade if it goes against me...and I got stopped for small losses on the S+P, WTI and gold. When I’m wrong on a trade I want out and a small loss is WAY better than a big one! I’m still short CAD with a stop about ½ cent above current levels.
I write down why I get into a trade, where I want to get out if I’m wrong, where I want to add if I’m right and “what happened” after I get out. The commonality on all of these trades was that I expected the “bear market rally” in risk sentiment would reverse. If that had happened I think all of the trades would have been making money. The net “post mortem” on the losing trades was that I jumped the gun...I followed my process...had an idea on market direction but should have waited for better price action confirmation before I pulled the trigger. Net result: My account is down 2% YTD but I’m still alive to trade another day!