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November 2, 2008

Weekend Review

Is the mid-term rally here or isn't it? This question is on everyone's mind over the weekend, and I think it's safe to say that whatever your conviction, the market will be throwing curves your way. Personally, I believe the rally is here. Over the last three weeks, we've witnessed panic selling, a launch off the bottom, and a gruesome test of the low on lower volume. Whatever emotions are running through a trader's head at this juncture should be tamed by objective analysis, and objectively, the action formed a classic, successful test of a bottom.

The next questions are: how far does the rally go and how long does it take? The answers are simple: I don't know and I don't know! And it doesn't really do anyone any good to try to guess those answers. I've always had an issue with using targets because keeping a target in mind tends to interfere with day-to-day objective analysis. The key here is to trade what one sees and then try to spot when the story changes, and if a trader is focused on a target, it is difficult to recognize changes should they occur short of the target. That said, it is important not to confuse targets with behavioral analysis. For example, if we are in a major countertrend rally in this bear market, the SPX should take out the 65DMA:

index chart

The 65DMA is not a target per se (price should go beyond that MA), but rather a tool that tells us the rally could have some legs. In fact, it would be perfectly normal for the countertrend rally to turn the 65DMA upwards before it has exhausted itself. From a purely psychological standpoint, I sense an enormous amount of tension over whether last week's rally will hold. That doubt should be enough to fuel the rally further. As for the immediate future, I'm leaning toward a mild pullback to set up the next surge higher.

index chart

Any such pullback will be met with buying on my account, but I've already got a base long position to cover me should the rally continue immediately. Over the course of this rally, expect the market to be quite choppy save for one more explosive move upward to get us off the ground. If we do see another explosive move higher in the near future, I will likely cut my position a bit just to give myself holding power, mentally-speaking, during the choppy phase. This way, I do not have to put too much energy into timing my ultimate exit and therefore can free up my energy to concentrate on other opportunities such as what commodities may serve up.

Speaking of commodities, they seem poised to serve up big gains.

oil chart

silver chart

stock chart

gold chart

For the record, I have a small silver trading position and a moderate GDX position.

So the game plan is set. Now we just sit back and wait for the market to open up opportunities to trade it.


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