1.- THE KOTOV SYNDROME
It takes a significant amount of discipline and patience to stay out markets that refuse to give a trader or investor an edge. Whether the absence of an edge entails absence of an opinion about direction or absence of a particular indicator you use - it doesn't matter. You should be staying out of the market until it shows its hand or until you feel comfortable initiating a new position.
However, a common mistake traders/investors make is entering (or even exiting) a position in a panicked state because they feel they have to trade. This is known as the Kotov Syndrome.
The Kotov Syndrome is a concept one of the traders (who was also an avid chess player) I used to work with described to me years ago and it has stuck with me since. Instead of reciting my own definition, here is Wikipedia's:
"It occurs when a player thinks very hard for a long time in a complicated position, but does not find a clear path. The player then notices he is running low on time, and so quickly makes a move, often a terrible one that was not analyzed at all, and so loses the game. Once so described, many players have agreed that the process is very common."
Ring a bell? I thought so.
Also, I am a big believer in the K.I.S.S. principle (Keep It Simple Stupid) that most people are familiar with but fail to implement. You would be flabbergasted to see how simple my trading techniques are compared to other traders/investors. I see a lot of traders with incredibly messy charts that are almost impossible to interpret and a lot of those same people would be surprised if I said that that is an unconscious reflection of what is going on in their own minds.
Here is the chart I look at almost every day for my trading. It is a 60-day/120min bar chart with a few trend lines and an RSI indicator. That's it. It does not get more complicated than this.
2.- ES FORECAST AND THE CONCEPT OF HIGH PROBABILITY TRADING
On the surface most people would agree that trading is a business of probabilities - but that's just on the surface! Most fail to internalize that concept and put it into practice. Let me give you an example.
A close below SPX 893.25 on Friday would mark 4 consecutive lower weekly closes, yet I see a lot of people suggesting the sell off will continue into next week. Let me ask you this: does a 5th consecutive lower weekly close seem like a high probability event? Intuition would say it's not but let me quantify it for you in the table shown below:
Probability of 'X' Number of Consecutive Lower Weekly Closes
Since 1950 the SPX has only had 46 instances of five consecutive lower weekly closes which equates to a probability of 1.48%. Do you really want to be shorting the market aggressively with these odds?
I've said this before and I'll say it again: everything I'm looking at suggests a rally into next week. However, that doesn't mean I'm going long over the weekend. In fact, today I initiated a small short position just in case. Here is the updated ES forecast:
The churning we've seen around SPX 880 is matching my forecast to the tee and I expect the correlation to continue into next week.
Have a pleasant evening.
