Transcription:
Hey, Dan Murphy here and in today's exciting, exciting market up day we're actually going to play a little game. It’s called Stupid Statistics. I got to love this one. Let's start. I'll show what I mean and where I'm going here.
First, one we'll do is; here's a stupid stat - the average person eats eight spiders while asleep in their lifetime. What do they have a group of a thousand people they monitor their life just to see how many damn spiders will crawl in their mouth and then accidently get swallowed? Yeah, I don't think so.
How about this one? 87.2% of the statistics are made up. That is a beauty. That just sums everything up doesn't it?
Or 87% girls in an online chat room are actually men. I'll refer you to number two on the list here - most statistics are made up.
Now the reason I'm talking about this at all is simply because how much use are statistics when it comes to the calendar days and things like that? You know days of the week for poor performance. How about the most recent example, which was saying that almost every option expiration for December has basically been up. That was clearly not the case last week, as it was a down week.
What's funny though is what we're seeing, in my head this is just what classifies this market as mean reversion or like I kind of call it sometimes crazy. If you can understand that these markets are crazy and that they're mean reverting or reverting to the extreme that you can make some really good money because you'll see exactly how you should be trading these markets.
So I'll start off real quick with one of the stupid stats that we saw. This was Thanksgiving week and it was the biggest down week. The weakest Thanksgiving week since I believe was 1832. And then what do we have next week? Do you remember this? The biggest up week since 2009, and then over here it was called the “can't lose trade”. Whenever you hear that in the markets, just don't count on that actually working.
Then what do we have after Monday's session. You know what with the 50% retracement failed - I'll get into this pattern in a second, but people were saying this was a fail and that the markets couldn't go back up, and then the next day what happened? We had a 3% rally. This is actually a volatility breakout here. I'll get into the day trading aspect of how to trade for Tuesday. Doesn't that just show you the manic nature of the market?
More importantly, you could actually quantify this and know this ahead of time, that the markets are mean reverting, that they're usually doing this. A few times, we'll get large moves in one direction or the other. But most of the time they are contained within a band, a range so to speak.
Anyway, what I'll do first is just remind you of what I call the Attack of the 50's. I've talked about this in prior updates, and that's where you have significant downtrends that are broken like right here. The downtrend leading into this is broken. This is an extended move, as I would commonly call it. Extended basically meaning that it did not revert down. It just didn’t do its own little thing like you can see over here in the chop.
So this is clearly something was up here and what you'll see a lot of times people will like to buy the 50% retracement, and in a perfect world in a perfect pattern what you would have seen is immediately it hits the 50% retracement and then jets the same amount as this first move right here.
That obviously did not happen, but we are still within the 50% retracement. Because it's broken doesn't mean a big thing. In this case, it is not the absolute best pattern that I could promise. I would say look the other way especially because as you might recall the Smart Money Indicator is bearish long-term.
So it's not bearish short-term. It's not a short-term trading indicator. I've got lots of other trading indicators for that kind of stuff. But for the long-term, meaning months - not trying to catch all these little squiggles in here, but the big giant moves, that it is long-term bearish.
What I'll do now after this reminder of the retracements there. You know that statistic, since I was going over that, is just amazing to me especially considering that this option expiration week during Christmas, during the December holiday basically is bullish. I can only get stats of that to 1984. That's just not really enough examples.
The profit factor is great if you just held on for a week, whatever. But there are only 28 examples - very low amount of occurrences. A lot of that could be random unfortunately even with a great profit factor. But something that's not random because there's a whole lot of trades - I always like to show you something that's either going to make you money or save you money so here it goes.
Here is a volatility breakout in action. Here's intraday, five minutes. A lot of this unfortunately started with a gap up so a lot of you that are trading during normal hours; and by the way, I trade mostly during normal hours. This is a 24-hour trading market. I got to get sleep. I got to have a life.
If you’re just watching the markets 24/7, then you aren't getting either one of those done. I don't suggest doing that. I've tried it before. I think back in 2008 when the markets were all crazy and I was watching that thing all the time. It was awful. It's like watching paint dry. It's not that fun. It’s better to just read a book.
So anyway as far as this pattern is concerned this is a volatility breakout pattern, where like in that daily chart that I was showing you, we had pretty severe downtrend in the market. Then it was actually broken to the upside, right? That would be a volatility breakout because it's not doing its normal thing.
Normally it's a staircase advance in the client. Kind of like this. But in this case, it pretty went straight up. The same thing could be said if you look at that five-minute chart on the S&P 500 here. That even though a lot of that action was taking out during the gap up right here, you still had a very significant rally. And then it headed up to new highs right there.
I actually did trade this in the futures market. Bought the breakout right there and just held for the rest of the day. What I was waiting for was these lows to be broken. Never even happened. I was thinking about adding to the position on breaking lower because you’ll see it all the time. A lot People put their stops in the markets below lows or above highs; it's going to get taken out.
The S&P 500 is a mean reverting market. I’ve shown that a million times to you and I probably have so I probably won't keep doing that. But this particular pattern you just put a stop loss in and it's only winning about 50% of the time, but the winners about two times bigger size of the losers.
If you had a coin, and every time it came up heads you got $2.00. If it came up tails, you had to pay $1.00. I will take that coin for every flip that you could ever flip at me. That would just be a pure moneymaker for me.
This is one of the edges that just seems to work. There's more to it. Unfortunately, I can't share every single recipe, but that would be the start of the recipe that I think that you could learn a lot from.
Like I said, as far as the Smart Money Indicator watch for a lot of pattern failures. You'll see a lot of these rallies in the daily charts, not really referring to these five-minute charts because the Smart Money indicator doesn't really care about five minute charts. It’s a longer-term indicator. It like the direction of the breeze, if you want to trade in a certain direction; or sail in a certain direction rather, you'd want the wind at your back not in your face.
Right now the wind is saying, "Maybe you should sail into rallies because the breeze is pointing that way". We do have some pretty interesting pattern here with the Attack of the 50's as I call it. We've had all these stats and when the market goes the exact opposite way - that's just another reminder the way that you make money trading in the markets is to actually if the market wants to go up, buy the dips. If the market wants to go down such as when the Smart Money Indicator is bearish, sell short rallies. Cover at the declines up here. Maybe it will be up here.
You don't ever know with exact certainty. This is always a market where you're dealing with probabilities. I won't go into all that stuff this week, because we're just having fun with all the statistics. Maybe at a later date. Send me any question you might have about next week's topic.
I won't be doing another video for this week, so I wish you Happy Holidays, Merry Christmas, Feliz Navidad, Happy Hanukkah and I'll see you probably right before the New Year. I just want to remind you that January 3rd that I'm going to be re-opening the Million-Dollar Target Mentorship program. I'll have details for you right now.