Tuesday, July 19, 2011

A Rally For Traders.

For a while now I have been trying to tell people to ignore the noise and look at the big picture. (http://bbfinance.blogspot.com/2011/07/big-picture.html ). I keep saying that price action makes news and news have no effect on price movement. And I put my money where my mouth is (http://bbfinance.blogspot.com/2011/07/i-feel-fear.html ).

 Of course we have to be lucky but not being biased in trading helps.  I wrote not to short the market in the face of all gloom and doom and be in cash for buying opportunity. Problem is, in this market, the window of opportunity is very short. From yesterdays low, we have already come up over 30 points in SPX.  If you were not long yesterday, do you want to chase the market now? The market will possibly open gap up tomorrow morning. I am not so sure that chasing the market now is a good idea.

We have been selling from March onward. If you had held “SPY” on 1st of Feb, 2011, you have not gained much nor have you lost much. Yet if you read the news and financial blogs, you will think that the end of the world is upon us now. All the market has done is to create trading opportunities. But in many ways, it was like getting in or out of a moving vehicle. Chance of tripping and falling is very high.

 In each phase of sell VIX or VXO (whichever you like) has been reacting differently. Except in March, VIX did not go up beyond 23, while we know that selling is not over unless VIX reaches a much higher level of say 30s. The sentiment in the market is not balanced till then.

So when we see both the charts together, they  tell a very interesting story. The charts say that the stock market is in the process of forming a top.  And that selling is not over yet. But will the sell resume tomorrow? Or will the SPX dive to the 1250 level of March by next week? I don’t think so.  Let us look at the McClellan Oscillator of today from McClellan Publication. It gives an idea of the market breath. The Oscillator is at -42. Hardly a level where major sell will be triggered. The RSI is not even 50 and MACD is just turning over to the positive side. I think that this current rally has some more days to go but then the risk is high. It is not a game for investors. Only day traders can survive here.

Apple came out with a stunning result today after market. The effect it will have on the overall market is only imaginable. One of the best chartist I have come across is Chris Kimble and he recently pointed out something interesting in his blog.  Apple was moving in a down trend line in 2010 and when it broke out of that channel, it went from $250 to $ 350. Again it went in a down channel from March 2011 till now. And once it breaks that channel, Chris thinks Apple can very well go to $430 range. Not surprising, it is already at $ 395 in aftermarket today. Being a market leader, it will take the rest of the market along with it. How far and how long, is to be seen.

The drama and political grand standing not-withstanding, the debt ceiling will be raised. When that happens, euphoria will swipe over everything and there will be talk of SPX reaching the moon. Already Birinyi is taking about SPX 2000! As always, the reality is nowhere close.

As a trader, I am happy with the volatility but as an investor I would rather wait on the sideline for the right opportunity. Better be safe than sorry.