(I had to re-type this from memory, since the first entry was lost when the browser crashed before the post was saved or published. Arrgg.. Lesson learned – Save Draft every few sentences).
“[investors] should try to be fearful when others are greedy and greedy when others are fearful.” – Warren Buffet
When the market is showing signs of breaking down, it is most natural for traders to run for the hills. Sell their positions, and/or go short. It is normal, and I share those feelings along with everyone else.
Acting on those feelings can lead you to miss out on some wonderful trading opportunities, on the long side. This is, to me, the core and basis of the type of hybrid driven trading we did very successfully last summer: buy at O/S, sell at O/B (or, at least, after a nice bounce), repeat as necessary (I choose to stay out of the ‘short at O/B, cover at O/S’ part of the cycle, which leads me to miss out on making money on the down side, but I sleep better at night for it). It works because (for most part), as Fly says, Nothing Moves In A Straight Line! The market, no matter how bearish, no matter how down-trending, WILL, from time to time, bounce back up. As traders (as opposed to investors), we can and should make money on those bounces.
The Russell 2000, since the highs of the morning after Bin Laden’s death was made public, has pulled back some 5.4%. With another down day tomorrow (something I’m very much hoping for), the index will most likely get pushed down below its 100DMA and outside of the daily BB, bringing the pullback up to about/over 6%. On no real news, just a general feeling of uneasiness , combined with May seasonality, and some vague fears about the Eurozone. Hardly anything new or newsworthy. Compare this to the pullback RUTX suffered from the back to back Libya and Japan situations: 7.4%.
Add to that the fact that we seem to be, today, in an equivalent of a PPT hybrid O/S situation, and with another down day tomorrow, most definitely will be oversold by EOD tomorrow, and we have the makings of a great bounce play opportunity.
I know, I know – everyone is getting bearish, everyone loading up on inverses, who the hell am I to call for people to go long, and go long with the likes of TNA to boot!!!!
Let’s assume a realistic worst case scenario: that we are, currently, at the start of a last-summer-like multi-month long correction. Fine – let’s see what happened to the Russell last May:
Hmm… What do you know?? Pushing down through the 100DMA and outside of the lower BB were amazing buying opportunities, for Russell instrument!
Yes, that’s right – at the start of a multi-month long correction, buying into the Russell 2000 when it first crashed through its 100DMA and poked outside of its lower BB were excellent buying opportunities.
Buying the Russell at the 50DMA was a great trade in the past few months, but that’s over, for now. The 100DMA trade is on deck:
Following my own strategy, I added some TNA and ERX today.. TNA because, well, it’s my favorite 🙂 and ERX because energy has been really punished lately, and maybe it’s due for a come back. I’m not betting on any specific market sector move here, the PPT O/S bounce play is for a market move back up. Between small caps and energy, at least one should give me a nice bounce…
But these things can take few days to setup, so in the meanwhile, let’s not panic on every tick up/down.
If we fall through, to a lower “O/S”, I’ll buy that too. Still have over 50% cash in reserves…