The collision of global markets and social mood

Tuesday, February 26, 2013

Form And Ever-Changing Cycles

After reading The Education Of A Speculator by Victor Niederhoffer, I was left with three distinct impressions:

1) He is brilliant. 2) He is incredibly eccentric. 3) I have no idea how he made money as a trader.

The concept that I keep going back to is his discussion of the concept of form, taken from the legendary Robert L. Bacon who penned Secrets Of Professional Turf Betting.

Bacon wrote:

Few players take into consideration the principle of ever-changing cycles of results. 
The would-be professional player must always understand that the form moves away 
from the public's knowledge. 
-- Robert L. Bacon, Secrets of Professional Turf Betting

So Bacon was a cycle guy, hot damn! Elliott pioneered of the Rule Of Alternation, and Fibonacci mathematically quantified the spiral, possibly the largest cycle in the universe, and possibly the source of all cycles to begin with. These are dudes you want to learn from.

The principle of ever-changing cycles is something I try to tune into on a daily basis. It helps. This was written back on April 2nd, 2012, right before the markets fell apart:

On this side of the pond, I noticed yet another falling wedge in the e-mini futures in the overnight session. Below 1400 is a pass. Above 1406 is a fail. Two of these failed last Tuesday in the cash S&P until a larger one developed that brought the S&P down 20 points. The mere fact that they're starting to appear, whether they fail or not, is significant. As Victor Niederhoffer would say, the "form" is changing. By that he means the market's personality may be starting to change. Heads up.

As American architect Louis Sullivan famously said, "Form follows function." The function of the market's ever-changing form, is to fool the most amount of people the most amount of time.

Not trying to present myself as some sort of visionary. Just sharing what helps me and why.

The point of all this is that I think form may be changing once again. Since last July when I was dead wrong and knew it, I changed my form. I began playing for upside because the market proved to me it didn't want to go down. I didn't care how bad the waves looked or how little volume there was or how bad the internals looked, if there was a clear play for me to the upside I took it.

Since 2/20, the S&P has acted differently, and the dollar has acted differently. Yesterday the yen acted differently. It suddenly feels as though Bacon and Niederhoffer and Elliott and Fibonacci are humming the same tune about ever-changing cycles.

Even the moon seems to agree: yesterday at 3:26pm ET was the full moon.

So what's all this mean, right here, right now?

If the market's form is changing, I must get ready to be wrong about new highs. And, I must guard against getting too giddy should new highs occur, because the action of the last few days may be only a taste of what's coming after.

The chart below has an expected outcome of a quick trip to the 1470 area (I rarely use 138.2% extensions). Since yesterday was an impulsive day, any long pause or deep bounce would immediately call the expected outcome into question.

I mentioned on Twitter yesterday after the close that the large moves in Equityland felt influenced by Forexland. When trillions of dollars move quickly in Forex, change is usually afoot and it disrupts equities. Yesterday's reversal in the yen rippled across the world. If it is correct that the stronger yen may have signaled Risk Off, it's possible for it to last for a bit.

I was not paying enough attention yesterday and got rid of my VIX position right at the worst possible time, leaving a ton on the table. The slow grind lower lulled me into complacency. When it suddenly dislocated, I forfeited much larger profits.

This game requires absolute focus and conviction.

Should the market pause today, the odds would increase that the decline from 2/20 is a three-wave correction. If so, yesterday's low (or perhaps a marginal new low today) is a buy zone.

Futures have recovered well enough overnight. Asia got crushed, Europe is deeply red, and yet the euro is up. For the time being, both the dollar and the yen are stabilized. That leaves the King Currency Manipulator in charge for the next two days: Bernanke on Capitol Hill to stick up for his policies at the Fed. He could be forced to say something -- anything -- to goose the markets to get himself out of a corner. We should know by the end of the day.

First warning of "form truly changing" would be a failure of 1448 to hold. Until then, in my opinion, the market has not been broken yet.

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