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Profit Zone

This morning I was flipping between some news networks and after listening for two minutes, you would think the world was coming to an end…or as TV tells us, “falling off a cliff” (as in the impending fiscal cliff). This was enough to make my head spin so I turned it off. When I then went and looked at my charts, I was reminded that the S&P continues to decline from our major XLT supply level.

You have two choices during these most interesting times. One is to give into fear and take no action or worse yet, take ill-informed action. Your other choice is to rise above the fear, rise above the perceived risk, observe the reality of what is happening, and understand that with the most challenging times come some of the greatest opportunities.

For any trader, the most important function of your routine is proper analysis of supply and demand; where are significant institutions buying and selling. As I have written about before, one of the most important pieces of that analysis is knowing the objective profit zone on a given trade. Recently in the XLT (Extended Learning Track, our graduate trading rooms), we used our rule based supply and demand analysis to identify a very low risk, high reward, and high probability trading opportunity. I will explain for your review using some of the rule based information we use in the XLT. This opportunity was found in the NASDAQ futures using a very small time frame. Notice there are two small demand levels that we combined to make one level. We know this is demand because on the left side of the chart, price could not remain at that level and rallied strong from that area, the origin of the move. Price only rallied from demand because there are more buyers than sellers at that area. Notice the first time price revisits demand over on the right. Our rules tell us that novice traders are selling there. We know this because these sellers are selling AFTER a decline in price, mistake number 1. And, they are selling AT a price level where the chart already told us demand exceeded supply, mistake number 2. The objective laws of supply and demand ensure that the trader who commits these two mistakes will consistently lose. We simply buy at the upper black line with our protective buy stop just below the lower black line. The lines represent the “Demand Zone.” As active traders, we determine these zones each day. As swing and position traders, we determine these zones and opportunities each week on larger time frames but the rules are the same.

Lets now discuss the key point that made this trading opportunity so high probability. Notice how price declined back to our demand zone. It was a strong decline built with NO SUPPLY levels during the decline, just nice big red candles. This means that as soon as price reached our demand, it was likely to rally very quickly. The ideal setup is for a strong move into our demand and supply moves and that increases the odds of a strong reversal. In other words, price reached our demand level where our XLT members were instructed to buy for a move up through the very clear initial “profit zone”.

Live XLT Trading Session – November 28, 2012

For those who only trade stocks, your odds dramatically increase when you time your equity trades with the S&P and NASDAQ. Instead of spending hours scanning through hundreds of stocks for setups when starting your daily analysis routine, spend a few minutes creating buy and sell zones in the S&P and/or the NASDAQ markets. Then, trade a hand full of stocks at most and TIME long and short positions with the S&P and NASDAQ supply and demand levels. However, what is equally important to a quality demand or supply zone is the PROFIT ZONE associated with the demand and supply zone.

As for the global economic issues, specifically the fiscal cliff in the US and economic issues in Europe, don’t expect this to get better any time soon but longer term, don’t worry. You see, markets do a fine job of making everyone’s lives better in time, if left alone that is. For example, in a free market with NO bail outs or intervention, banks and lenders who make bad choices that lead to insolvency simply fail. This removes the bad banks from the system and we are left with quality responsible banks that don’t make these same bad choices and this outcome is good for all. In other words, the strongest foundations have the fewest cracks, they are strong and solid. Banks that would otherwise be insolvent due to bad business practices are kept in the system with bail outs. The “irresponsible” are cracks in the foundation of our economy. When a government saves a bank with our tax dollars, it does not make the bank better. Instead, it ensures the crack in the foundation will remain, until it is removed. If you reward a thief for stealing, the thief will steal again. If you reward a child for bad behavior, they continue to behave poorly. When governments attempt to intervene with bail outs and other forms of intervention, this futile action ensures that cracks in the foundation will not only remain but get worse.

Free markets naturally force change. They force cheaters to be honest, they force market prices to be at levels that are acceptable for all willing and able workers and producers, they reward the properly educated with direct deposits from the uninformed which forces proper education on those who wish to survive. When left completely alone, free markets tend to create a wonderful economy and life for all. It’s really natural selection at its finest. When governments stop intervening to save those who would otherwise fail, it typically prolongs the negative. This is my experience with markets…

Lastly, whether the financial markets rise, fall, or go sideways, this should have little or no impact on your financial life if you understand how to identify key supply and demand levels and trading opportunities. More on this topic next time.

Hope this was helpful. Have a nice day.

Sam Seiden


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.