Daily Plan 4/12/23
I was wrong.
Hey folks -
Important post with my take on the COT report and something else very important.
At the time I begin writing this blog down, the S&P500 emini index moved a grand total of about 15 points and all of those 15 points in the RTH session came from my level shared last night at 4129.
In fact, 4129 was not only high of the RTH session but Globex overnight session as well. Barely 50 lots traded at my level.
What are Low of the day and high of the day anyways? It is a price level where there was not a single trader willing to hit the offers or smash the bids, even a tick higher (or lower, if the Low of the day). This is how important references High of the day and the low of the day can be.
Speaking of lots, this was 3rd day in a row that the emini market barely mustered 1 million lots all day. This is very very unusual.
Edit: actually the market did float up to 4152 eventually before being subdued by sellers back to my 4129.
What else is unusual?
There was news in Bloomberg about the Hedge funds loading a massive number of shorts against the S&P500 market. They are betting the market will decline in value due to recession and economic slowdown. These shorts are the highest in over a decade. As of this post, they continue to take some heat as it takes time for large traders to build large positions.
A note about the COT report
COT report is released by CFTC every week on Friday. Unlike futures which trade on several exchanges, futures only trade on one centralized exchange. They only have one central tape (CLOB).
Options on futures also have a consolidated tape (CLOB). Future order flow, therefore, is more consolidated and outside of block trades and iceberg-type orders, there are no ‘dark pool’ orders like there are in stocks and options
From that sense, the COT report can be useful.
You can see the link to report data here. I ignore the commercial and small speculator data as that is hedging and insignificant. Non-commercial data is the most important data for me as it indicates speculation.
A high number of shorts in this category do not automatically mean the markets will drop suddenly but the whole process can take time. Context is key and the context right now for me is:
We are near range highs so this degree of negativity from large speculators is important.
In my memory, there have been only 2 recent instances with sentiment so negative. A) in 2020 Summer when the speculators were very short at 3200. Rest is history. B) Last fall in 2022 when the speculators were this short, the market will drop from 4300 to 3500 within a month and a half or so.
How is 2020 different from 2022 and how is 2023 different from 2020? Unparalleled QE in 2020 versus QT in 2023 and 2022.
I will let you draw your own conclusions from this data now.
In other news…
Bitcoin continues to outperform, even the tech-heavy QQQ.
Regular readers know I am not a big fan of Bitcoin as far as having this as a long-term investment for myself.
I do not concur with the rationale that this is some sort of inflation hedge.
This is not to say I have not shared some wide swing ranges in BTC, both on the upside and downside.
I am not shy to admit when I am wrong. I have been a tremendous bear on Bitcoin from the 60000 level before it dropped to 15000. I am not a stranger to the Crypto market and I was the first to get bullish on Dogecoin at half of the half-cent before it rallied to almost 75 cents.
As a thematic trader, I need a study of themes and data which can sometimes take years of study of an asset. Based on recent events of last year and a half, I have now concluded that Bitcoin is a good instrument for money laundering. This will be a good trade whenever there is a risk of holding cash.
For the record, I do not condone money laundering which is a crime punishable by life in prison here in the US and in most advanced nations. I am simply using this example as a potential use case for Bitcoin which may well be its downfall eventually.
Holding cash always has been a risky endeavor in developing countries. In many countries, this is termed ‘Dark or Black money’ due to the fact that this cash is not part of any banking system and can not be tracked. Gold is one type of ‘Dark money’.
The main problem with Gold is the storage and moving it. The biggest issue with currency is it can be banned overnight. Many countries have done so and folks have lost billions in wealth overnight when the currency is outlawed. Most recently, both Venezuela and India have demonetized their monies- meaning the cash in form of banknotes was outlawed overnight.
As the Western world becomes more entrenched in inflation (stagflation) and as the tax revenues shrink due to recession, there could be an impetus to outright ban cash or raise taxes on cash that can be tracked. In that sense, I do now think an asset like Bitcoin could be helpful for someone who wants to avoid this fate. Now remember this will not be welcomed by the authorities and it will remain a fringe activity.
Let me take a case study from Europe.
In Europe, you can go to jail if you make a cash transaction of more than 1000 Euros.
The governments and Central Banks are not going to let go of this control over the general population. With time, I think this will become even more draconian. The governments can only have more, not less control once you have widespread adoption of electronic money. It is easier to monitor and track. The governments, for instance, may outlaw certain types of transactions, like buying new crypto coins, but the existing ones may continue to hold some residual value. Even more so if they are outlawed.
Remember, even today when you want to buy Bitcoin, you must do so by selling US Dollars OR the applicable FIAT currency of your country. This is not going to change whether the Fiat is digitized or not. You can not buy Bitcoin with Bitcoin but you may be able to buy some other asset with the Bitcoin you already own.
This is why the masses will not participate in this. This is why I think Bitocin will never have wide adoption. It will be a niche user base, fulfilling a very specific purpose of money laundering during times of crisis.
However, it could become thematic enough that Bitcoin may periodically benefit from such actions against the citizenry by the powers that be. These things also take time to develop - so I think interim we could see decent trading around my levels like 3300 and 12500. Maybe even moves of 50-100%.
Now this does not change my long-term support and resistance levels in Bitcoin due to the auction parameters. For instance, I think 12500-15000, most likely will be retested and if retested could remain decent support for an overdue bounce.
Personally, for me, it is key to understand the context behind something firsthand (to know my ‘why’) and this helps crystallize my understanding. Any other support and resistance as they become relevant will be shared with subscribers.
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My levels for tomorrow
So no two ways about the massiveness of the day tomorrow. Fortunes could be made or lost with many before the market even opens as CPI is at 730 AM. One hour before the cash session opens. A very important day.