Patterns For Profits In Our Winter Of Discontent

Patterns for Profits Newsletter - August 2, 2008

Reading history provides prospective. Shakespeare wrote in Richard III, “Now is the winter of our discontent, made glorious summer by this sun of York.” He was referring to the thirty years long Wars of the Roses and Richard III. In the long scope of time both Richard and the English civil wars came and went. So too will the USA’s “winter of discontent.” The question for the active trader is how to profit from the current situation and any prospective remedies. The question is, “What are the patterns for profit in the current situation?”

So what is the point of the history lesson? The point is perspective. Wars, economic downturns, apparent chaos all come to resolution. (See last month’s newsletter on the patterns in chaos.) People trapped in the misery of the English civil wars thought the madness would never end. People today wonder if the USA can ever extract itself from conflict in the Middle East. People wonder if the USA can ever regain its economic dominance. Sometimes, history tells us, these things take a generation and sometimes they resolve themselves quickly. In either case life goes on. For the trader, business goes on, investment continues, and currency transactions need to happen.

The issue for the trader is not the psychological depression of the society burdened with seemingly eternal conflict and trouble. The issue for the trader is to find and exploit the patterns for profit inherent in a given situation.

The next president will need to deal with a huge national debt, a continuing trade deficit and the steadily devaluating dollar. Will the Federal Reserve decide to raise interest rates to defend the dollar or will the Fed drop rates to nothing to “stimulate” the economy again, and again?

The patterns to look for are not just in the USA’s current situation but in what the next president and congress will try to do. Will they pump up social programs, support mortgages? Will we see a rise in trade protectionism?

On the other hand will the steadily devaluating dollar bring American industry back to a competitive stance versus Asia? Will the Asians get tired of buying dollars to artificially inflate the dollar’s value when their purchases are steadily decreasing in value? Maybe US automakers can get back more market share as US wages, adjusted for the decreasing dollar, become much cheaper versus the rest of the world.

What are the patterns for profit in our winter of discontent?

Above we looked at trends, macroeconomics. But on a daily basis traders still trade and close observation of the marketplace still gives clues as to where the next move is going. Technical trading works just as well in a bad market as in a good one. In fact, for the technical trader with no psychological stake in the fortunes of individual companies, or nations, there is no difference between success and failure outside of the anticipation and execution of a successful trade.

Everyone has their own ideas about where the economy is going and what the powers that be are going to try as remedies. This “group think” leads to group behavior, predictable group behavior. Thus we can look for repeating patterns for profit in the actions and reactions of the marketplace.

As always the successful trader sticks with his system, does the homework, stays in touch with events, does not let group psychology affect him/her emotionally and sway his or her decisions. The successful trader views the psychology of the marketplace as another place to look for patterns for profit.

The ability to view current events as the writing of a new page in history allows the trader to look for comparisons with past events and analyze the current actors to anticipate their role in the unfolding drama. The saying is that, “Those who do not know history are doomed to repeat it.” This saying has repeatedly proven to be true. We see the same patterns of action and the same attempts to solve problems. Usually what we see is politicians playing to their constituency rather than working to govern their countries. That is, perhaps, the most dominant pattern on the larger scale.

So, who will it be, Obama or McCain? What will they try to do and what will the pressures on them be? What patterns for profit will repeat themselves from former administrations in this winter of our discontent?

Pay attention. Stick with your system. And, may your trading be successful as you seek out and exploit patterns for profit.

Patterns For Profits Market Review

The Dow index made new lows on the year and tested the lows of 2006 and so far has held those lows. The Daily Chart of the Dow Index shows a retest of the 2008 lows made in January 2008. There is also a potential large Daily pattern forming in the Dow Index we are monitoring. (See the Dow Index Chart)

The SP 500 also made new lows for 2008 and has been rallying from the 1200 lows. Above 1292, which is the .382 retracement, and there is a potential larger pattern forming.

Nazdaq is currently at the top of a large trading range that can be seen on the 60 minute chart.

Ranges in the SP have continued to expand with volatility. From here we will watch the 1291 recent swing high in the SP and look for pattern completion if SP trades above that level. If the SP trades to new lows then there will be a larger potential pattern completing at lower prices.

The intraday swings continue to offer excellent trading opportunities.

Patterns for Profits Trading Tips

This article was excerpted from ‘Essentials of Trading – It’s Not WHAT You Think – It’s HOW You Think’, by Larry Pesavento and Leslie Jouflas, Traders Press, 2004. To purchase this book simply go to our homepage at www.tradingliveonline.com and click on the Traders Press link.

Ebb and Flow

Trading is extremely “easy” when you get the direction right! It is a flow and rhythm you can feel when you catch a move.

When you are going the wrong way, (opposite direction the market is moving, and it is still traveling to IT’S destination, as opposed to yours) it can feel a bit like driving your car into a cement wall.

It’s the same in skiing. Brian, my ski instructor, was teaching me some technical aspects of skiing moguls, otherwise known as “bumps”. We stood on top of a mogul run and looking down at the maze of bumps and wondering which way to go to get down, Brian had me imagine what path water would take if he took a bucket of water and poured it down the hill. He told me the water would seek the path of least resistance and it would ebb and flow effortlessly down through the mogul field.

When you have the right direction in a trade it is exactly the same feeling as that image of water flowing effortlessly down the mogul run.

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Leslie Jouflas
Kelly Hill