The two can be mutually exclusive.
I have been bored lately. Simply put, I have had very few trades to make, for over a week. There just have not been any setups. Since a large part of what I trade are mean-reversion strategies, the fact that there have not been many reliable setups should have told me that the market might be in for another rough slide, a la January. Since my profits come from trading bounces and spikes, I should be in 100% cash when the market is sliding downward. I have no edge in these situations.
Still, how boring.
It was all I could do not to buy up some [[QLD]] this morning. Yes, there is a slight edge in that trade, but there are much larger edges, just around the corner. I am glad that I was able to talk myself out of creating some excitement, through trading. Had I succumbed, I would have taken one step backward away from my goal of being filthy rich. And so I don’t want to trade; I want to get rich. Or rather, I want to be sure that my trading is not getting in the way of my getting rich.
Enough self-analysis, more technical analysis.
I thought it was a fairly significant technical break when I wrote about the NDX (The Nasdaq 100) breaking down from the triangle patterns. After a quick re-test of the triangle on Monday morning, the NDX reversed hard on the Fannie Mae [[FNM]] Freddie Mac [[FRE]] bailout by Comrade Pinky Paulson, and the momentum continued to the downside today.
The index is oversold on multiple daily measures including RSI(2) and number of down days in a row. The failure of the NDX to muster a bounce here should not be ignored. The weekly chart is not quite oversold which suggests there is more room to move to the downside.Â
To make matters worse, the VIX is approaching a level which has seen reversals occur. If a bounce, even a 2-3 day bounce/stabilization does not take place very soon, the market could reach a level of fear which may precipitate a capitulation-style event. In simple terms, everyone realizes there will be no bounce, and selling takes over.
Note that I have added the 2-Period Average True Range. ATR(2) is a very simple yet effective measure of very short-term volatility. If volatility is a proxy for risk and fear, the NDX is approaching a level that has coincided with stabilization and bounces, since February. Should the ATR(2) on the NDX break above 57 without a bounce occurring, we will likely be experiencing a capitulation-style event.
A capitulation is not a 100% guarantee of a bottom, but it is usually associated with a counter-trend move.
Where is Support?
Of course, the March lows will be tested. The MACD shows a strong trend has developed. I see no reason why it will not carry through to the previous lows. The March lows are trenches where Bulls will likely put up some resistance. If the market blows through the lows, well, what that means should be obvious.
If the March lows are broken, start looking at Fibonacci extensions and prior lows for support. The chart shows how well the downtrend line has served as resistance (can you imagine getting short last October and having the courage to add to your position every time it bumped the line?) and so I think it makes sense to continue using trendlines to gauge support. Using the intermediate trend line, I would look for some support around 1570.
The Market Wants to Bounce
Remember, the market wants to bounce. Most investors and money managers do not actively short equities. The good managers may hedge, while not having a short-bias, but the short-biased managers are few and far between. Most of the financial world is looking high and low for a tourniquet, to stop the bleeding. The money managers who are short-biased and skillful have long since built their positions, up near that trend line I talked about.Â
Its times like these when rallies can materialize out of nowhere.
Good post man. Easily the best blogger at iBC.
Thanks M. Hope all that lawyerin’ has been good to you.
You could at least hit me up with some positive karma for that one! JK. All my fancy book learnin’ is finally paying off…comes in handy when stocks are gay, lol.
I likes the self-analysis better, good night, wonder what Lemon (leh) will say in the am?
Whenever I’m bored with the market, I have my wife shave and wash my balls. It’s such a treat. I usually feel better after that, and less inclined to overtrade.
MM- why don’t you drop a few lbs, and then maybe you’ll be able to shave your own balls.
Shaving myself is no fun. It’s much more fun to spread the legs, kick back with a beer and watch the little lady do her thing.
Ew, I’m revulsed.
Wood, tell me what’s going on with UPS… are we talking “buyout” here?
Jake, someone is still selling the rips. UPS sure has been tough lately though. I smell what your steppin’ in.
What are the options saying?
And who would buy them? Our comrades at the USPS?
Opec just cut production 500K.
So, I guess when Saudi’s said they wouldn’t let oil go below $100, two weeks ago, It looks they meant it.
I’m 100% long commodities, from end of day.
also,
FDX up 4% in AH.
Dow futures up 61, just like my VIX chart said it would be.
Wood, Great post. Do you ever (or have you tried) to alter the proportion of capital to mean-reversion vs. trend following (or other) systems based on the character of the market?
I dunno. I’m actually very long term long UPS, but have been attempting to hedge it as I think it should revisit the 50’s.
The only thing I can think of right now is the oft-bruted rumor that they’re taking themselves private again.
Excellent post. The short side right now is so obvious that the Cramericans are doing it. I believe that you are correct & that the majority of money managers who did go short would be covering into the last day or two. Just like selling a stock into a climax top, smart short sellers would be looking to cover into weakness.
Again, good post.
I beg to differ as far as seeing no meaningful setups. There are beautiful charts out there for shorts. They have extended over the past week from break down points, but i have had an enormous profit over the past two weeks. New positions added to or intialized over the past week: SDP long, CLX short, SMG short, ANF short, BBY short, SDS long, CCJ short. THat’s it.
Fubsy
That’s some good crap, Wood.
Aces.
I’m seeing the same things.
And why is it different this time? Well for one thing the govt bailed out FNM and FRE in a major event and the market barely sneezed at it – then sold off. Then we’ve heard about the hedge funds going out of business. The hard trade right now is to go short because it appears obvious and barely oversold (but its not). Today’s upmove mostly wiped the slate clean.
You know how sometimes things can go beyond that oversold/overbought threshold for several days without reversing like it normally does? The current downmove is likely to be that because of the way it was acting on its way to being oversold.
All the old leading sectors are just cracking down in the last 3 – 4 weeks, while the worst sectors have caught a bear market rally. Think about the obvious trades this year and that they continued to be obvious until they weren’t. Oil, Ags, Steel, Gold, US Dollar..all of these continued on above overbought and have continued down below oversold. Momentum has ruled. Would anyone care to say which way momentum is pointing right now? I see no reason why the ATR couldn’t reach the levels it saw in Nov 07 and Jan 08.
I’m short and biased. I see you posted this yesterday that doesn’t include today’s up day.
Hi Wood,
I didn’t get the SF e-mail. If you sent it, maybe it ended up in bulk. What forum on SF do you usually post on? I’ll contact you there 🙂
Renn
I sent it. I’ll try again.
I rarely post on SF forums. If I do post, it is for help with code.
If blogging was any measure of your motivation, I’d say you just wanted to trade a little, while working (if possible).