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March 8, 2009

Luck Trumps Skill

Friday's equity market was not a terribly tough session to trade, at least not between 9:45 and 3:30ET. Stocks basically leaked impetuously lower along a baseline initiated during Thursday's session. The tricky part was navigating around the two short squeezes at either end of the day:

stock index chart

Thanks to Gary's nightly e-mail, I was aware that a long-term Fibonacci existed in the low-660s. Regular readers know that I don't care too much for mystical indicators such as Fibs, but I do respect the fact that others watch them, and so the belief in them may be self-reinforcing. Knowing that a ramp might be attempted off this level, I decided to place a closing limit order just above the Fib line at... what else? ES 666. It turned out to be one tick off the low. Luck often trumps skill. I did not re-apply the position before the end of the day, however, primarily because the SPX sported a potential reversal candlestick:

stock index chart

I just rode a short play for 80+ handles on the S&P 500 and wasn't in the mood to potentially give a big chunk back on Monday morning. The lack of standout volume tells me that any bounce from here will likely fail. The spyders also netted $78 million of selling-on-strength despite seeing strength for all of about 45 minutes during the session. The massive $800 million of SoS from Wednesday still lingers in my mind, as well, so I am on the hunt for a spot to get short again and await a panic.

It was nice watching stocks fall while all commodities rose Friday. For a change, both sides of my portfolio were working in my favor. The move in oil, specifically, is encouraging because I suspect that once we see a climactic sell (and, of course, this is still an assumption), I expect a large counter-trend rally to develop. In fact, it should begin explosively much like the rallies out of Oct/Nov 2008. The reason a rising oil price is important is because energy is the largest sector of the S&P 500. Its strength therefore lends potentcy to the idea of a strong equity reversal.

The Sprint Nextel trade is still on. The stop is a close below the breakout level. For better or worse, the late-day ramp in equities kept the trade alive.

stock chart

So I remain long copper, oil, and silver along with a smattering of equity positions. As far as trading index futures, the plan is to give the market some room to betray its next big move. Honestly, I won't be terribly remiss if I fail to get short ahead of a panic because such a development would raise my confidence in a larger counter-trend rally which I will be prepared to ride.


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