Luna $ Ticks

August 10, 2008

If I were short…

Filed under: Financials,Trading SPX SPY — moontrader @ 4:27 pm

I would be quite worried. Playing the opposite side role is something I usually do, which helps me set up stoploss levels, especially in volatile times. There’s nothing more frustrating than being whipsawed to then see the market do exactly what you were thinking it would. Actually, there’s something even more frustrating. It’s when you spend days planning a strategy and then you call an analyst or friend which opinions you respect – it can be also a subscription letter (still worse) – he/she/it has an opposite outlook, you follow his strategy rather than the one you spent hours on and then… BAM! He/she/it was wrong, you were right. But then again, this is not about being right or wrong, this is about making money, and in order to do so you have to develop your own set of criteria and rules and trade according to them.

Back to my playing the role of a short. The market showed its strength on Friday and if I were short, I would be a hairline away from my stoploss. Which would be 130. However, I was short before and my stoploss was 129.15, which was triggered when SPY reached 129.30, but then I re-entered and my stoploss this time is 130. But wait a moment. That’s a rounded number and many people might have their stoploss set at this level. So, let’s raise it a bit, let’s say: 130.5.

If SPY reaches that number (suppose, for instance, that SPY opens at that level) it should jump to 132 or even higher.

This is my idea for the market psychology at this moment. Now let’s go to my dough, the charts.

There’s something important I learned from Tim Knight and that is: a good chart is a simple chart. I’ve been seeing around many charts with hundreds of ideas about where we’re heading to and why, but these charts are splashed with so many lines, indicators, signs, numbers, texts and colors that you can barely recognize the price of the stocks. The market is constantly telegraphing what it’s going to do next, and it’s up to the chartist to decode the message, which is usually a simple one. The first message was clear on Friday: we’re heading up. We’ve breached many resistance lines, and MACD and Stochastics are way way to the upside – useless to show them here, since they’re already pointing up at the end of Thursday’s session after a huge drop. The question that remains: where are we going?

People tend to draw Fibonacci lines using tops and bottoms, but usually they get the wrong ones. Notice in this chart how the all time and the 05/19 top, both linked to the 07/15 bottom, result in divergent retrace levels:

Now, look how the Fibonacci levels converge if we use different Tops:

The numbers are quite close: 132.59 and 132.49 (average between them = 132.54)

Now let’s go from the bottom up:

Bottom = 120.02

Top on 07/23 = 129.15

Difference = 9.13

Bottom on 07/28 = 123.42

Just do the simple math:

123.42 + 9.13 = 132.55

Simply amazing. I look forward to see how things go the next couple of sessions (probably Monday or early Tuesday we should hit that number).

My guess is that the boost will come from the financials sector. This chart shows that the Dow Financial Index has plenty of room to the upside, probably above the 383.69 level.

Plus, I wouldn’t be surprised if we wake up on Monday with Oil below 110. After all, it’s been falling day after day. Oil and Financials could be the reasons the market is waiting to give another shot to the upside. As I said before, the market sentiment has to change before the downtrend resumes – if it will ever do.

Now, my strategy for those wanting to go short:

Patience is the first thing. As SPY goes above 132, buy puts. Stoploss shouldn’t be too far from 132.55. Let’s say 133.5. Remember, we would be trading against the short term trend, so keep stoplosses tight. Once that level is reached, downtrend should resume soon, and a confirmation of a short term reversal would be a big drop in the few following sessions, plus a sell sign in the MACD and Stochastics.

Finally, just something to have in mind: longer term, this is still a bear market. You can see that in the weekly chart. Notice MACD down (however Stochastics is giving a shy buy signal):

And if that’s not enough, go for the monthly chart:

It’s all about context…


1 Comment »

  1. Another excellent post! Thanks!

    Comment by Jigsaw — August 10, 2008 @ 8:31 pm | Reply

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