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July 13, 2009

Stop It

Today's post will be chartless due to time constraints. As with so many other points during the rally out of March, equities were handed a delicious setup for price to break strongly lower, yet did just the opposite. This action is quite unfavorable to bears. My concern would have been muted save for the fact that the S&P 500 closed back above its 65-day moving average and on volume acceleration. Just to ice the cake, selling-on-strength data showed no eagerness on the part of the big fellas to unload into this mess.

My system gives me only two options in this scenario: either lighten up on shorts or close them out altogether. I chose the former. Coming action will tell me whether I should flee or re-apply my shorts. If the SPX manages to gap or close under the 65DMA tomorrow, I will likely sell back into the market. Such a gap is entirely possible given that a couple short-term indicators I watch are stretched on the overbought side. Any additional closes above the 65DMA will have me out completely. You can see the pattern here. Of course, this methodology gives the market gods the ability to pump moola out of my account if the SPX keeps straddling the moving average, but it's better than being short during a larger squeeze.

I also added to my silver position. We did not have the pleasure of a blowout day to help Mr. Market relieve weak hands, but today's nice reversal candle looks good to me. This position should also act as a hedge toward my remaining stock shorts. For the moment, I remain shy of what I would consider an aggressive futures position because I anticipate further sideways choppiness.


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