Thursday, January 12, 2012

Head Fake?

Regular readers know that I am neither a Bull nor a Bear. I take trade based on expected market direction. Most of the time the trades give positive results fairly quickly. However there are times when I have to sweat it out a bit. Sometimes bad karma hands out a loss. Now is the time for sweat. As I wrote yesterday, I took the short trade 4 days ahead and now 16 SPX points wrong.  Out of many parameters, few key parameters gave an early signal of market turn and I think I was impatient. Lessons learned and system strengthened. But I am fully committed to the short trade.

In the morning post  ( ) I wrote that now is not the time to close the short on equity. Remember the saying; “Be fearful when others are greedy and be greedy when others are fearful”. Now is the time to be fearful.  In the early morning when Emini futures were flying past 1300, was there someone dreaming of SPX 1400 very soon? Obviously retail is chasing the rally. VIX is in 20s and for 2nd day running, index only put/call ratio is at 1.25 and equity put/call ratio is at 0.57. In other words, retailers are super bullish and why not. SPX 1400, here I come!

But nothing really changed. The charts of DOW and SPX of yesterday are still in play. The long term resistance did not break. Overbought became more overbought. Extreme reading in many indicators became more extreme. As there is no QE in operation, these extremes and divergences cannot exist for ever. Sooner, rather than later, we will see the market balancing itself. The longer this imbalances continue, severe the correction will be. I can go on listing various divergences and extremes and present many charts here but the bottom line is, these indicators are there for a purpose. If all parameters and indicators fail for all the time, there would be no trading.

Once again I quote Phil Davis; “Anyway, the point is - I DO know how to be bullish and we WILL be able to make money if we have a genuine bull rally and we are NOT going to miss anything by simply waiting to see if the data matches up with the enthusiasm.  I simply am not seeing it yet.” I could not have said it any better. Only thing I did wrong, I did not wait, when my first intuition was to wait out and not take a position before the direction becomes clear. Now I am paying the price of my lack of discipline. Talk of leaving cash on the table!  

If you look at the charts above, you will see that most of the gains of October were given back in November. There is no defining trend. We just play between overbought and oversold. January option expiration is next week which is horrible for bulls, at least statistically. So we will see what tomorrow brings.

Tomorrow morning I will be off to Asia and would not be able to see the fun. But I am back by 19th January and I think I would have the pleasure of closing the position with profit. I will be posting on and off for the next few days so please keep visiting.

Thank you for your continued support. Please join me in my Twitter (@BBFinanceblog) and refer your friends to . I need more readers / viewers to keep myself motivated.

P.S Modified the chart of DOW