Dear CIGAs,

The problem that we have today is that so many people are technical analysis “experts” that they are easily led around by chart patterns. That is the reason the Goldmans of the world can achieve so much by expending relatively little at strategic price levels and times. By painting charts you then get the usual throng of “experts” telling you “why” something is moving on the chart when more often than not, the action on the chart is in contradiction to the fundamentals. Price action makes market commentary is an axiom that will never lose its cogency.

Short term technical patterns will always overrule longer term fundamentals because so much money is at stake. Only the bravest or (stupidest depending on your perspective) trader can sit there and let a position move against himself if he is undercapitalized which most traders are. Prudence or margin calls dictate that they get out which reinforces the technical move and this continues until the bigger, well capitalized, long term fundamentalists move in and put an end to the technical play. It happens over and over and over again in markets and always will as long as they exist. It is also the reason that fortunes are made in the markets and why so few succeed. Only those who actually UNDERSTAND the markets that they are trading in RECOGNIZE when these technically based moves create HUGE OPPORTUNITIES that provide small risk, high probability chances for big profits.

An example of this occurred just recently in the wheat market. Index fund rebalancing required managed money and some swap dealers to buy large amounts of wheat, regardless of the fact that the fundamentals in wheat dictated that US wheat was at a supply surplus and its price was too high on the world market. That did not stop these unthinking funds from loading their plates with more and more of the stuff and pushing prices even higher. Why in the world would a market move higher when the very reason its underlying product was not selling because it was already priced too expensively on the global market? Answer – there is NO SOUND REASON FOR IT TO DO SO. Wheat moved higher because this fund buying tripped all sorts of technical buy signals and that had everyone and their mother doing all manner of semantic gymnastics looking for reasons to explain why the inexplicable was occurring. Suffice it to say, ONLY THOSE WHO UNDERSTOOD THE FUNDAMENTALS IN THE WHEAT MARKET, were able to keep their wits and recognize an opportunity created by these mindless funds which have taken over our markets. They sold and made money when wheat promptly collapsed in price after these funds were done engorging themselves with the stuff.

Today, far too many traders and analysts for that matter, are out there commenting on markets that they genuinely do not understand. It takes years and years of constant trading and study of individual markets to truly understand them and even at that, there are always new factors that need to be integrated into the mix of knowledge that one gains about that market. I have long told other would be traders, that the person who attempts to trade practically every market out there will never make money. One must learn to focus only on a few markets and thoroughly know those markets inside and out before they can hope to keep from becoming another casualty on the floor of the trading exchange.

Without learning the markets that one attempts to trade, one becomes a dupe that is easily led in circles. You end up going long, getting stopped out, then going short, then getting stopped out, then reversing back to long, then getting stopped out again until you are eventually cleaned out. The reason is because without knowledge of a market, you have no conviction other than the most recent short term price chart pattern. Without conviction based on sound knowledge, you become a trader than runs on emotions instead of discipline inevitably ending up chasing markets all over the place hoping to get it right. That’s not trading – it’s gambling, and you would be better off in Vegas where at least they have some nice looking show girls instead of a bland, blinking price quote screen.

That brings me back to the US Dollar – where is the fundamental argument in favor of a long term bull market in the greenback? Keep things simple – look at the almost unquantifiable sum of dollars being created and ask yourself where is the demand going to come from that can hope to absorb all of it. We have saddled not only the next generation and our own children with a crushing burden but their children as well. At some point it becomes mathematically impossible to realistically pay back such debt. All that is left becomes either a default or a currency devaluation.

Economics 101 still applies – when supply increases and demand remains constant or decreases, price must fall. Short term technical factors can temporary blur such axioms but they cannot undo economic law. Leveraged trade unwinding can push currencies all over the place and temporarily obscure the horrific fundamentals enveloping the Dollar, but once those run their course, we are right back to where we began once again – too many dollars and too few buyers of those dollars. Try to contemplate the size of the number ONE TRILLION and then, if that is possible, multiply that number and enlarge it further. Then try to contemplate the INTEREST PAYMENTS ALONE on such a sum. That is where the US has now arrived.

No nation in history has ever printed its way to prosperity, borrowed its way to prosperity or spent its way to prosperity. The US will not be exempt from this truth

Regards,
Trader Dan