The resistance that the market found yesterday afternoon is likely adding to the churn we are seeing today, as the S&P 500 is around the mid-point of the 1300-1330 trading range we saw in May. Although the indices are slightly in the green, commodity and emerging market stocks are noticeably weak in the face of global risk aversion. Beyond that, I do not see heavy, prevalent bearish sentiment amongst traders, but rather an expectation that we have either bottomed or are in a range. Thus, I am respecting the risk of another rollover next week, making new price lows in this ongoing correction.
My style as a trader enables me to usually miss out on some of the most dangerous periods in the market, when most traders see their accounts get chopped to pieces in a high risk, low probability environment. The upside to moving to a heavy cash position in those periods is that I also do not feel compelled to “chase” losses when the market sees the inevitable reflex rally. Indeed, chasing is the downfall of many a gambler and trader. True, I will usually miss out on the absolute bottom, but that carries little relevance to me as I am in a position to wait for charts to set up again before getting aggressive.
Remember, if we are on the cusp of a sustained move higher then by definition there will be plenty of time to get in and profit from the trend. The key is not allowing every single oversold bounce we see to convince you that all of the damage from the 11% correction is about to reverse. That process will take some time, even if we have bottomed. Until then, beware the traps.
http://www.youtube.com/watch?v=dddAi8FF3F4 (But you knew I’d post that 😉 )