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June 1, 2009

Post Mortem

Okay, ouch. That sucked. Friday's late-day ramp extended and took another bite out of our bear legs. Even as the dollar recovered later in the day, stocks refused to give up ground. I find it amazing how I can so easily make money in the precious metals arena and sit dispassionately through 20% drops waiting for the eventual reward, yet trading equities through 2% swings drives me absolutely batty. Perhaps it's just a matter or trading a bull market versus a bear market or perhaps there are just too many painful ghosts from past equity trades that need to be punished. I don't know. If I could figure out how to be as dispassionate about the equity market, I'd surely have a more profitable career.

Anywho, here comes the post mortem. I missed something obvious, and I apologize. Not to you, to myself (jk). I was viewing the hourly SPX chart as a topping triangle rather than its true form: a rounded base / continuation. And now I'll share a little secret you won't find in any technical analysis textbook: a rounded base usually breaks higher once it forms a symmetrical triangle on the latter side.

s&p 500 chart

While neither the descending triangle nor the rounded base are textbook (they never are), I should have been alert to either possibility, as the potential for the latter would have had me reducing, if not closing, my position. The break higher now targets SPX 980 (!!), though at some point we should see a back-test in the 920-930 area. You may ask if I would try a long trade once we see a back-test, and the answer is perhaps, but not in any meaningful size. Any long attempt would be designed just to stay intimate with the market and keep a feel for spotting the roots of the next big down leg.

At the beginning of the rally in March, I expressed my opinion that we were entering the primary counter-trend rally of the bear market and as such, traders would be fooled by the usual signs of rally exhaustion. Indeed. Of course, I was referring to oscillators, but the data that fooled me were the selling-on-strength figures of early May. I suspect we will see another bout of heavy SoS before the market rolls over. Therefore, unless the market quickly performs an end-run on that triangle, it would seem the primary counter-trend theme stands until further notice.

As always, there is a catch. In fact, there are two in this case. First, since the market gods finally found a way to shake adamant bears out of their positions, the present would offer a spectacular point to start a major decline. Second, the dollar bounced off the December pivot:

dollar chart

As mentioned in the weekend post, how the dollar behaves off this pivot is going to determine not only future market behavior, but the future of the USA. I will leave the political rhetoric for another time, but suffice it to say that a weak bounce followed by a hard break lower, puts us in an accelerated inflation environment. We will then witness an interesting battle between a collapsing bond market...higher rates being bad for equities... and a collapsing dollar... the printing presses being good, nominally, for equities. If such a break were to occur, I think I'd leave the equity market to the lions and just buy as many commodities as I could stomach.


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