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January 21, 2009

Fear and Common Sense

Today's early rise was neither surprising nor discouraging to the bear case considering the 5% shellacking equities endured yesterday. A narrow-range consolidation would have nicely set up the next wave of selling and provided us bears with a chance to push bet sizes. But it was not to be. Being the constant cynic life as a trader has made me (or is it the other way around? hmmm..), I spent the morning, between yawns and sips of fresh coffee, searching for a counter-argument to the bearish case. On the hourly SPX chart, I found an argument compelling enough to scare me back out of my shorts:

stock index chart

This one is really a beaut. Both down legs measure equally. The bottoms of the down legs created a monster divergence in MACD. The middle pivot point nailed an important support/resistance level (SPX 850). And today's rally ran out of steam right at the loop line. I don't know about you folks, but this chart makes me want to position long. I spotted the potential for this pattern mid-morning as we tested yesterday's low. I figured that if the low held, price was going to make a run for the trend line, and when the low appeared to be holding, I closed most of my shorts. Only two things stopped me from going outright long: fear and common sense. (<== Okay, someone name the reference). There are just too many negative indicators lurking out there to lure me so quickly. Besides, I figured there would be plenty of upside left if the pattern completed, so it was wiser to wait for confirmation.

Of course, double loop ending patterns can fail, and when they fail, they do so miserably. So all you adamant bears may still see your cascade to SPX 740. However, if the pattern resolves higher, the target for the impending rally is exactly the January highs just north of SPX 940. If price etches out a crawl beneath the loop line and then breaks higher, I will be taking a new shot a the long side, though in diminutive size compared to the shorts I just squeezed off. On the other hand, if we fall away from the line, I will be ready to fire off the shorts again. Given the expectation for a quick 100-handle move one way or the other, a third potential play would be to straddle the SPX at 840. However, February straddles are currently commanding nearly 80 points... kinda pricey.

I noted that I closed most of my shorts in the morning. The one I left open was AZO, and I got bounced out of that one late in the day at much worse prices. C'est la vie. I am now sitting almost entirely flat, only being long the May/June crude oil spread and a smattering of RJA. In the trading world, being flat means being free, mentally-speaking, and I intend to use this freedom to ponder the possibilities about the postulations above. (Alliteration... a sign of keen writing skills or of Aspergers?)

I know some readers may be a bit despondent about the recent flip-flopping of views promoted on these pages. However, unlike in politics, flip-flopping is a very valuable habit in trading, and the recent environment has made it a necessity of preservation. But just for the hell of it, I'll throw another bone. Check out Treasuries:

treasury bond chart

An A-B-C correction in bonds was a potential pattern I proposed (damn that alliteration) back on the January 12 post. So if we are only seeing a correction in bonds and not the start of "the big one," the end of the bond correction may also mark the end of any equity rally.

The markets certainly sport interesting dynamics these days. You can see why I've been keen on reducing my time horizon for trades. I look forward to the days, should they ever arise again, where I check my portfolio quarterly and live off dividends. Call it nostalgia for the future.


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