An Infrequent But Powerful Trading Signal


A view of the actual pool from the story.

I took a final look at the screen and walked out to the pool.  I dialed the desk as I walked.

"Trading," barked a random voice that I didn't know.  

Great... a newby.

"Sean please," I said trying to feign a level of polite that I don't generally possess.

"Who's this?" The bark was a bit more urgent.

"Tell Sean it's E."

"E who?"

"He'll know," I said slightly amused... but approaching annoyed.

"I still need a full name," the voice on the other end declared.

Instead of yelling at the young rule follower or declaring myself "E Go F&%k Yourself," I decided to take a simpler route.

"I assume Sean is either on the line at this point or he's standing over your shoulder so Sean, I'm hanging up in 5 seconds... 3,2."


"You cut it close Sean."

"I know, I know, but I'm busy E.  I know YOU'RE on perma vacation at your fancy new Miami digs, but some of us don't have that luxury."

"First, the only reason you don't have any vacation is because you've used it all for the year already.  Second, there's nothing "fancy" about my house right now... well, with the exception of the pool I'm walking around.  You forget, I'm gutting this puppy to the studs so it's pretty much not liveable at the moment.  Third, I'm calling you at "nothing to do o'clock" so don't feed me the I'm busy shyt.  Finally, none of that is why I called."

"Why did you call Sir E?  To tell me you've gotten your lap time down in your big pool."

"I have, but I wouldn't call you for that."

"Then what?"

"I think this is it," I said.

"The turn or the signal?" 

"I can't decide if you're stupid or funny.  Did you not ask me to let you know when I see the next weekly index signal?"

I could hear Sean thinking... It sounded like gears creaking.

"Are you sure E?  All the big shop analysts are calling for a new leg down."

"What's sure?  You know that's not how this works.  You places your stops and you takes your chances. Besides, are these the same analysts that missed the turn at the top 4 years ago?"

The gear creaking got louder.

"Ok... so do you have any specific trades in mind?"  

Sean was looking for me to make money for him... again.

"Not my job playa... Seems everything is moving higher in concert, but if I were you, I'd play the high beta leaders with leverage."

"Come on E... I know you have some names from your little proprietary list."

"Maybe... if you hadn't called it my 'little proprietary list.'  But since you did, I'll let you get back to your busy day."

I heard Sean yelling E! as I clicked off.

One Of The World's Greatest Trading Signals

I shared the true story above to provide a bit of background on this signal.

It was a classic pullback using moving averages as guard rails and sign posts. There was arguably a better entry in early 2003, but it would have violated my early principles.

Still the outcome of the 2nd setup was pretty good.

I'll note here that the signal is somewhat  specific.  If you don't have a new move into Bull mode and, instead, you're trying to jump what looks like a pullback, but it's from a much higher level, your chances of success are decreased significantly.

For example, you might have been convinced in late 2007/early 2008, that you were seeing a good pullback opportunity.  But the crucial, missing piece was the move higher from below the long-term moving average FIRST... then a pullback to that same long-term average.

As the image shows, a pullback from higher levels, was just a pause before falling to lower levels.

Where Am I Seeing The Same Setup Now

The SPX gave us a version of this extraordinary pattern a few weeks ago.

The time below the major moving average was neither as deep, nor as long, but price did get below.  The push through the other compressed moving averages provided the opportunity to enter on a low risk basis.

The place where I see a near replica of the 2004 pattern is in Bitcoin.

Price has worked it's way back above the long term moving average and appears to be using the compressed pullback as a springboard to higher prices.

Of course, anything is possible, but I would keep an eye on this and maybe even play it with a lower absolute dollar value alternative like BTF for example.

Hope it helps.