Trading in a Planned Stock Market

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Traders notice that chart patterns like this one almost always resolve higher these days. High Frequency Trading firms purposely create certain intra day patters for the express purpose of drawing in short sellers so their stops can be run.

Understand that technical analysis as taught in the oldbook Technical Analysis of Stock Trends by Edward and Magee is of no value in this kind of market. Technical analysis paints great supply and demand analysis pictures when buyers and sellers are on equal footing. In all of today’s markets asset prices are artificially elevated constantly. Over time the efforts of everyone with a blanket interest in driving up stock prices become coordinated without any conspiracies. Government helps by not enforcing laws when as long as the results are rising prices. The media helps by only reporting news that is perceived as good for stocks. Famous billionaires attest to the strength of the market and make positive statements. Retail brokerage firms assist high frequency trading firms by giving them complete access to customer’s positions and trading activity. Each day trading, firms manage stock prices in ways that give the impression the market is trying to move higher but meeting resistance. While stock prices are made to look like they are about to drop, the whole pattern is contrived to draw in short sellers. When short positions are ample, the stock breaks out to the upside as stops are being run. The whole thing is a trick. When laws are not being enforced, any crime you can imagine is being committed. Criminals have imaginations too and they work at their craft constantly.

Sophisticated investors are not that stupid. Most reason that it will pay to game the Federal Reserve while it is possible. They believe they can get out ahead of the crash. Maybe they can. I am not in that camp.

With respect to short term trading, my advice is not to do it in this setting. Certainly there are some sophisticated traders who are doing well. I don’t know of any but I don’t know everybody. Short term trading is not very profitable in the best of times. It is just about impossible to make a profit trading when you are being scammed by the government and even your own stockbroker. High frequency trading firms make profits by enticing naive investors into bad trades and then running their stops.  With the help of information from retail brokerage firms, their system is a gut cinch.

My operation has not changed over the past week. I own a bunch of bear exchange traded funds and am short just three stocks. The majority of my trading capital is in cash so that I can buy after the crash occurs. Not everyone took losses when the market crashed in 1929. Some very capable traders were in cash from 1926 on. Read about Alan Babson. People thought he was silly being in cash that early, but history focuses on his foresight and brilliance.

This is like knowing that a major bridge has a defect in its construction and avoiding it before it crumbles. Thousands of people can cross the bridges without incident for a long time. The bridge might look fine and stay in tact for a long time. When the bridge finally gives way, staying off of it suddenly makes sense.

There are rare times in financial history where it pays to accept that there are no risks worth taking. Cash is not safe either. It disappears as inflation increases. There is so much risk in financial assets right now that preservation of capital needs to be the priority.

 

 

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