Friday 12 October 2012

Do We Need Plan B?

Today SPX was down about 4 points, Nasdaq was down 5 points and Dow was actually up. So why does it feel like we have a huge down day and the bear market is upon us?

I think it is because we had expectation of upswing and that expectation was not fulfilled. Before we go any further, let me repeat an analog: the weather man said it will be sunny and bright. But you look out of the window and see that it is cloudy and may be a drop or two is falling. You will have to go out. Will you take an umbrella with you just in case or would you think, the weather man said there will be no rain, so why bother?  Will there be a plan B just in case?

Now, coming back to the market, do we need a plan B?

What was the plan A in the 1st place?

I know I have this bad habit of quoting from my earlier posts and some of you think I am just boasting, which I am not. It just saves me from repeating myself and we normally read and remember what we like. So, at the risk of offending you, if I may again quote from yesterday’s post:

It looks like a giant topping process is going on. Nasdaq is definitely the sick man in the town. But I still think there will be one last push from the 24th Oct till 12th Nov. We will see renewed bullishness in the market during that period. I do not know whether SPX will cross 1500 but looking at Nasdaq today I am becoming sceptical. Between now and 23rd Oct. I expect there will be lots of backing and filling.
I also said : The short cycle was supposed to bottom yesterday and by the price action of today, it seems that things are on script. Yes, it did sell off after the 2nd hour but that was only to be expected. The down momentum for the last two days was very strong and it cannot reverse on a dime.
I also said I am not going long equities, that the correction in gold and silver is not over yet etc etc.

OK, fine and dandy, so what the hell was Plan A?

Plan A was that the correction was to stop around SPX 1435 and bounce from there and chop around a bit till 24th October. Then we go straight up till around 12th November. That what the weatherman said. But today we have some rain cloud. Do we need to change the plan?

I do not think any major change of plan is needed at this time. You see the short term cycle which caused this correction, has bottomed. At the risk of repeating me, cycle analyses are not an exact science, or let us say it has a better track record than all the Economists. But it can sometimes off  +/- few days. The last cycle top was expected on September 7th  but came on September 14th.  It gives us a general sense of direction and tells us to be careful. So maybe we will see some more weakness on Monday morning but there is no sell signal yet. So I am not even thinking of going short. Surprisingly, Nasdaq was stronger today. I think Apple has found a bottom and I stick to my earlier call that it will test its earlier high or come close to it.

In the worst case situation SPX can start Monday by testing 1420 level. This is the level from where the earlier breakout took place and it is common to see prices come back and test that breakout level. If that level holds, it will become the support for the next up move. During the day I tweeted that /ES ( SPX futures held 1420 and it’s a good sign). The following chart explains why:

You can clearly see that it is the level from where /ES took off last time around 6th September. Not too long ago if you think of it.

PM sector is going through its correction, which I think will be short term (may be another 10/15 days) and I think we will be pleasantly surprised to see their prices by next February.

That’s all for this weekend.

If you ever think that at any point of time I am being arrogant, just say “Memento Mori” and I will come down to earth. I just tell you not to take every trade, be patient and wait for the grand opportunity which is coming soon. I would also tell you that from time to time, my calls will be wrong because if I am always right, why should I spend my time writing a blog and drumming up support. Rest is up to you.

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  1. BB, I would imagine that most people that follow you get a few other opinions as well, at least, but you always present a good case for your highest probability move and that is why those that have followed you for a long time know that you do alot of homework that has value to be well considered, more than I have time to do so...keep up the great work, we will call it reiterating, not repeating points well made. And as always, thanks for sharing!

    1. Thanks for your kind words. But we sometimes do pick up bad habits and if you ever think that I have picked up some bad habits, do not hesitate to tell me.

  2. Hi BB, as always, thanx for your efforts and insights. Just an observation to a swing trader, i've had great success over the past year playing Bradley dates (+/- 2 days). One notable exception was the timeframe that included uncle Ben’s QEI release, but otherwise, the trend changes have been amazingly accurate...and very profitable. Again, just an observation to consider...and of course, past performance does not guarantee future success... Thanx again, BB--have a great weekend all!

    1. That's awesome! I have always wanted to learn about Bradley dates. Will you teach it? Also, may I request you to do posts here.

  3. BB, thanx for your interest in Bradley dates--it's more art than science, but it's also been a great year thus far. Sent you an email with background info... best to you and your trades!

  4. The twitter page on Bradley dates doesn't exist.
    Thanks dc-Bear for alerting us to this new idea and BB for following up on it.

    1. Don't click on the "read more on twitter". There is some problem with Twitter button in google bloger and I am using this button as a stop gap measure.
      Yes, thanks a lot to dc-BEAR and would try to bring it out regularly here for the readers.
      Would also request all readers to come up with their good ideas for sharing.

    2. You're welcome, and thank you for sharing your ideas. As always, please do homework before using Bradley as no method is perfect--Bradley is simply another tool in the old bag of tricks. Early next week, I’ll share a chart from Tim Knight’s Slope of Hope that compares past year performance with S&P trends. Enjoy your weekend--best to your trades! (fellow readers, please send some stimulation package to the blog)

  5. Thanks for your efforts. Since we are all talking about what we like to use. I find the VIX SKEW to be a good indicator. Extremes at/above 130 or at/below 115 often mark turning points. Nothing is 100% but this is a indicator of smart money making directional trades with options - rare. Smart money is usually net sellers of premium.

    1. You are absolutely right about Smart money being net sellers of premium.
      Can you please send a link of the chart which you use? I can then incorporate it in the weekly report.

  6. Actually, Smart money loaded on premium (or to be more precise they loaded on front end by selling long end), see here
    Definitely a redflag...

    1. Interesting. But when mom and pop investors read this and want to make fast money out of it, they will lose hand over heel. Guaranteed. Playing in derivatives is not for everyone.
      My models predicted selling the last week and high till mid-Nov. and down there after. We will see how this plays out.

    2. mom and pop investors would better learn what vix futures are trying to tell them about 401 future :)

  7. >> So why does it feel like we have a huge down day and the bear market is upon us?

    I can tell why :)
    I've been in and out nasdaq futures each day last week. First my feeling were hurt because I covered on Monday my shorts from the end of the previous week with the average price of 2806. The more week progressed, the more it hurt :)
    But I continued with some shorts, it worked ok. And whenever I tried to buy it, it felt just terrible, there were absolutely no chances anybody wanted them whole week.

    Will they want it next week? Hmm, I really doubt. The rationale is this: weak hands (like me), who shorted earlier - they already covered. Smart money sold it at 2850-s in nasdaq and at 1450-s in ES. There were no indication they were covering it, and when it gets back higher, they gonna sell more.
    Now, who is going to be the buyers here? Some technical traders, I think. Some more weak shorts (and it is going to weaken market even further by removing buying power). Too late shorts going to be squeezed as well next week.

    Plus sentiment... BTFD has been working far too long, time to kill them as well.
    And also there are signs of problems in the market everywhere: crude is weak, gold is dying, 10 days realized vol is super low (and VIX is not coming down to realized); eur is stuck at 1.30; bonds are green. Feels like parts of puzzle are coming together...