Recap for Week Ending 9/7

Net Asset Value (nominal): -69.15%
Purchasing Power (real): -73.07%
Change in Contributed Capital: 0

I had an abysmal week this week.

Early in the week, I was caught in a market that couldn't decide whether to buy or sell CROSSES/JPY. Using technical analysis, I sold when the market bought and I bought when the market sold. It's obvious that overbearing market sentiment made my trading system invalid, ex-post. But at the point of execution, I believed my system was giving me the correct signals.

Later in the week, I lost the farm selling XAU/USD. Due to my home-country bias towards the U.S. dollar, I was prevented from seeing the U.S. dollar's persistent weakness. I continued to sell gold even after the EIA released disappointing inventory numbers yesterday and after U.S. Department of Labor reported that payrolls had dropped by 4,000 in August, the first decline since August 2003. There was news of terrorist attack threat in Nigeria, but I ignored that too. In fact, there was nothing supportive of the U.S. dollar. But none of that mattered, because I thought I was right. To a certain extent, I still think I'm right.

At the core of my trading system is the belief that excessive price movements in one direction causes excessive price movements in the other direction. The idea of self-fulfilling and self-defeating processes are nothing new. George Soros verbalized them in his book The Alchemy of Finance two decades ago. It's not evolutionary, either. Like a pendulum, the market swings one way, then the other, until an equilibrium is reached. More often than not, however, supply and/or demand shocks prevent the market from ever reaching a equilibrium. Thus, our pendulum never stops moving.

XAU/USD has been exhibiting such excessiveness. 699.40 - 671.99 = up 27.41 USD per oz., or 3.92% in one week. ONE WEEK! This is THE reason why I'm still selling gold after 2, 3 margin calls within one week. After I lost about three quarters of my portfolio's purchasing power. On the other hand, the market doesn't adhere to my schedule. She goes up and down of her own accord. Just because I consider this an excess, doesn't mean she does. Excesses can easily be outdone by bigger excesses. Oil supply squeezes are not going away. U.S. current account deficit is not going away. The battered sub-prime market is not going away. A rate cut in the Fed funds rate will result in higher inflation and yet lower demand for the U.S. dollar. That'll translate into a higher demand for gold. But I'm probably mixing up the short term with the long term right now. Anyway, I've placed my bet. All hands are off the table.

Here are the numbers:

	31-Aug	7-Sep	long USD	short USD
CHF	1.2079	1.1882	-1.63%	-2.29%
CNY	7.541	7.5295	-0.15%	-3.77%
EUR	0.7340	0.7266	-1.01%	-2.91%
GBP	0.4959	0.4930	-0.58%	-3.34%
JPY	115.72	113.33	-2.07%	-1.85%
XAU	0.00149	0.00143	-3.92%	0.00%
ORORCL	classified	classified	69.15%	-73.07%
DJIA	13,357.74	13,113.38	1.83%	-5.75%
Nasdaq	2,596.36	2,565.70	1.18%	-5.10%
S&P 500	1,473.99	1,453.55	1.39%	-5.31%

While my ex-ante forecast for the Dow's close was right on (see evening star confirmation below), I was not able to profit from it. The only way I can still profit is by shorting future contracts. However, futures trading is an onerous activity, one I do not want to be involved in at the moment. Considering the Fed's surefire rate cut in the Sept. 12 meeting, shorting U.S. stock futures now is like asking the market fairy to grant you a death wish.