Hey trader,
If I gave you these ingredients: shortening, flour, cream, salt, could you tell me what I was making?
Would you feel confident guessing?
Or would you say, “I don’t know exactly what you’re making, but I’d use those to make my favorite dish”?
As someone who loves to cook and bake, I look at ingredients like these more generally: fat, starch, liquid, salt. Each one has a purpose, but purpose isn’t destiny.
Those four ingredients could be the start of a pie crust, sweet or savory. They could become English scones, one of my favorites…
Or they could be the base of a thick, creamy gravy.
If we walked into a kitchen, saw flour, cream, and salt on the table, and guessed scones, without noticing the roasted turkey already resting on the counter, we’d be disappointed when the sweet treat never shows up.
The letdown lands even while we get excited about the turkey and gravy we’re actually about to eat.
It’s not the ingredients that determine the outcome…
It’s the process: how they’re assembled, how they’re cooked (baked, fried, sautéed), and what other ingredients are part of the larger exercise.
I don’t walk into a doughnut shop expecting a turkey dinner. I don’t walk into fine dining expecting doughnuts.
Even if both kitchens had identical ingredients on the shelf, the environment changes what I should reasonably expect to be served.
Here’s the point: you have to take in more information than the ingredient in front of you. Step back and look at everything on the table.
Step back further and you can see the whole kitchen, maybe different tools, different equipment. Step back further still and you see the establishment itself.
Step back even further and you might realize you’re in a different country entirely, one that doesn’t even make the cuisine you were expecting.
No single part of that process determines the outcome on its own. Every component matters together.
I’ve been trying to make this point all week in the sessions I’ve presented on the Trade Desk broadcast. When we look at trade signals, it’s tempting to trust the technical signal alone.
Chart signals are the ingredients. We know that historically, when these ingredients show up, the market tends to move a certain way, and maybe we’re right 70% of the time.
But is 70% enough to trade with full confidence if we’re ignoring everything else on the counter? If there’s a turkey sitting right there, we shouldn’t be expecting scones.
In markets, that “turkey” might be a tweet, an economic report, an ongoing conflict with Iran, earnings season, a debt offering, or any number of other ingredients quietly changing the kitchen we’re cooking in.
This week, I’ve tried to show you exactly what environment we’re currently cooking in, so you can read the signals inside that environment rather than in isolation.
You’ve heard me say, “I will not short oil, no matter what the signal says.” That’s the environment talking.
The technical picture can be as bearish as it wants; the environment overrides the signal.
I spent several days this week on economic reports and the broader macro picture.
The environment we’re in right now is one where the Federal Reserve is fighting inflation while the U.S. Treasury may be driving inflationary pressure of its own defending the yield curve.
That backdrop changes how our technical signals actually play out.
We could keep going: jobs data, debt levels, interest rates, consumer demand, factory orders, manufacturing data, inflation prints. Every one of these reshapes the environment we’re trading in.
Take a step back from just the technical, just the ingredients. Look at the table, the kitchen, the establishment, even the country.
The technical helps with timing. Financial market pressures help with bias.
Understanding the economic environment gives you the macro rotation of money and markets.
There’s a lot working on your trade at once, and the better you understand all of it, the better trader, and the better chef, you’ll become.
Blake Young
Senior Market Strategist, TheoTRADE
