For me, reading the tape means looking at how a market reacts on any given day relative to what would be expected given the news, and the correlations to other assets. When there is good news and correlated assets are moving up, then an up day would be expected. When a market does what is expected I don’t think there is much information there. It did what it should have done. It’s when it doesn’t do what is expected where I think the possibility of a tell in the market exists. I have called this news failure. This will guide my observation of markets 99% of the time. And I would estimate it will keep me on the right side of a markets trend 80% of the time. But there is that other 20% out there. When a market shows for example surprising strength in the face of bad news one day, only to go straight back down the next day. These are known as “traps” and they have a name because they happen enough to be noticed. One way I try to avoid these traps is by first filtering with positioning. The chances of there being a trap is reduced when it happens in what is a crowded market versus a market that is not crowded. It should be relatively obvious by now why this is, but again, like anything in this business, this still will not have a 100% success rate. This is what makes this business so difficult. Nothing works all the time. As soon as you think it does, it stops working, usually just long enough for you to give up on the idea before it starts working again. Discipline, patience, process. These are the keys to having the things that work over time work, and being able to get through the times when they do not work.

This past week was a great time to see this type of tape reading not work.

In the stock market, Monday saw much better performance than was generally expected. This was followed by Tuesday where the strength from Monday was completely erased on the open (although much of it was gained back by the close). Then Wednesday saw what I would read as unexpected strength (Korea stock market, the leader of the AI trade, down 12% overnight only to see the Nasdaq go up strongly and finish on highs of the day?). Then this strength was erased and more on Thursday and Friday.

Meanwhile on Monday, the first day of trading after a Middle East war breaks out, Crude Oil gapped up but closed very close to lows of the day. This looked pretty weak. Then Oil went up another 28% the rest of the week.

Sugar is usually seen as correlated to the price of Ethanol. From last Friday to the Thursday close, Ethanol was up over 10%. Yet sugar in that time period was down 1.2%. This was even with sugar Speculators very close to the most crowded short they have ever been. Clearly bad tape action. Then on Friday Sugar goes up almost 3% and closes on the highs of the week.

Bitcoin, which has been so weak this year, has started to show much better performance recently. On Wednesday it looked to be breakout out of a range and out of a bearish trend in general. Then Thursday and Friday came and it drops almost 7%.

Grains are also seen as a market heavily effected by the Middle East situation since 30% of nitrogen fertilizers in the world are sourced from the region. Clearly higher fertilizer prices lead to higher crop prices. Wheat futures gapped up Sunday night, only to finish the trading day down 2.4%. By market close on Wednesday Wheat was 4% lower than the Friday close. This while Oil was continuing higher. Bad tape. Then Wheat went up 9% from the Wednesday close to Fridays close. Up 4.5% on the week.

I will say it again, nothing works all the time, even paying attention to the message of the tape. Be prepared at all time for whatever you are doing to go through periods of failure.

Here is the funny part about all this. If you thought about it over last weekend, you would have thought well, this is probably bad for stocks. The S&P was in fact down on the week. But did you hold onto the position you sold in the hole Sunday night when the S&P was up on the week on Thursday morning?

You could easily have thought this is bullish Oil. So, you bought the open on Sunday night. Did you hold onto it when Oil closed on Monday $4 lower than the Sunday night open? If you did you made a lot of money by Friday.

How about saying with Oil going up, Sugar is most likely going up too. So, you buy Sugar Sunday night. You lose money on this all week and its sitting on weekly lows on Thursday despite Oil and Ethanol going up every day during the week. Did you hold through this to catch the up move in Sugar on Friday?

One more. Wheat. A pretty obvious choice to be long with a war breaking out in the Middle East. They ended up 4.5% on the week. But if you bought the Sunday open, you were down 5.3% on the trade by Wednesday close. Were you able to hold it through that to catch the 8.8% rally over the next two days?

Predicting markets can sometimes seem easy. But real trading is hard.