Don't worry, I am not leaving the internet forever. I am changing locales. You can now find me, under the same name chessNwine, over at iBankCoin.com aka the house of The Fly. I will probably keep this site up for old times sake, but you will find my latest work over there. Thanks to everyone who read and all of the feedback you gave me over the past few months! Hope to see you at iBC!!!
As many of you know, in addition to my own personal blog here, I have been writing over at ibankcoin.com for the past several months. "The Fly" has decided to hire another blogger over there for full-time duties. I am in the race, and the vote is taking place as we speak. As much as I enjoy my own blog here at Double Dip Trader, the fact is that iBC is a phenomenal web site that is growing rapidly.
I would greatly appreciate your support in going over to ibankcoin.com and voting for me right now.
Thanks!
Even if the crash had not happened, we were still well on our way to having another bearish day, with weak, short lived bounces and constant selling pressure taking out many levels of support. In light of what did happen at 2.45 p.m. today, however, it seems foolish to even look at charts, let alone try to analyze them. That is, until I perused the weekly $SPX.
Make of that chart what you will, but I take the price action in the market seriously AT ALL TIMES. Was it a fat fingered trader or a computer glitch? I have no idea. What I do know is that reward relative to risk remains at an unattractive level for me to put on any swing trades at this point. I have been preaching that you should hold very high levels of cash, and I still believe that. If you are an expert day trader, then by all means get your game on. For everyone else, however, cash is king. You should never panic, but any bounces–however exuberant–should be used to lighten up. Yes, gold is looking good, but don’t forget the ease with which it deflated in 2008 during all of that deleveraging.
Given the volatility, selling volume and uncertainty, this market is not healthy, not bullish and, in my humble opinion, not currently investable.
The title of this post is a variation of the title of a short story by Joyce Carol Oates, “Where Are You Going, Where Have You Been? featuring one of the most evil characters in modern American literature–Arnold Friend. Ironically, many literary critics have argued that Friend was not even a real character in the story, but rather one imagined by the story’s protagonist, a teenage girl who may or may not have been murdered by him.
In the stock market, traders also battle villains every day. Often times, however, that antagonist is looking back at them in the mirror, or is even just a figment of the imagination. Your money is made in the markets by punishing other traders for making mistakes. Thus, it follows that you had better contain your mistakes as well. Whoever wins the battle of mistakes gets the money.
In a market such as the one in which we currently reside, many traders have a tendency to fight the change in character that is occurring. Since mid April, we have seen an increase in price swings, volatility, and selling volume on down days. The bounces have been fast, exuberant, but ultimately short lived. Yesterday, we finally broke down below that volatile range on heavy volume and powerful breadth. Today, we had more follow through to the down side, despite several attempts at a rally by the bulls. The fact that each and every single bounce was weak and short lived should be a blinking red light to you that this market wants to go lower. To put it in simple terms, demand of stock is being overwhelmed by supply. Sure, we could see a bounce tomorrow, but consider the concept of overheard resistance. The $SPY Hourly chart below should illustrate this point.
Gold, however, is an asset that is looking better than equities these days, via the ETF for the underlying metal, $GLD. Given the odd mix of both risk and safety that we have seen attributed to $GLD over the past few years, I would not average into a position until we see a confirmed break out above the neutral range, seen in the chart below.
Going back to my opening point, no one can accurately predict every single move in the market. However, that fact does not mean that you should chalk the whole game up as a random walk and turn off your computers. Rather, you should be listening to the market and all of the messages it is sending you. I have no idea whether we are starting a new bear market, or if we are simply in mild correction. But, I’ll be damned if I am going to get caught up in the tide. As promised, I sold out my remaining short positions, $SKF and $QID, today. I am now in 80% cash, waiting patiently for better setups, content to not be my own antagonist.
After we found a bottom from the late January correction at 1043 in the $SPX in early February, many traders became incredibly frustrated with how one sided the market had become when we rallied up above 1215 by late April. Volatility had seemingly disappeared off of the map, as had short sellers who had all but given up on the idea of pushing stocks down. Around that time, going into earnings season, I advocated raising more cash than usual. Since that point, the market has seen increased uncertainty in the form of erratic price swings coupled with spikes in volatility and selling volume. To see uncertainty resonate in the market in the form of volatility usually occurs at inflection points. In particular, after the run we have had since March 2009 and February 2010, it can be seen as a sign of a top.
The question now, of course, is what kind of top? One that lasts a few days, weeks, or quarters? Despite what the Elliot Wave types may say, that is a known unknown. As a swing trader, the most realistic thing I try to do is look for the next direction of the market in the coming days and weeks. As the chart below shows, we have broken our recent choppy and sloppy range on heavy selling volume (note big red volume bars relative to buying volume at the bottom of the chart).
It is a positive for the bulls that we bounced off of the 50 day moving average today, but many traders often misinterpret the purpose of using moving averages in their analysis. A moving average is merely a reference point to gauge the sturdiness of underlying support to the market. To simply say, “when the market hits the 50 day moving average, I will have limit orders in place ready to execute buys,” is not a profitable trading strategy.
Rather, you should watch the action closely to see if the market can stabilize and catch a strong enough bid to bounce off of that general area. It does not have to be a precise bounce. Applied to the current market, we need to see how the market follows up on today’s bounce off of the 50 day. Does it go down and break through? If so, on heavy volume? Or, does it simply consolidate right around the moving average as bulls and bears slug it out? Or, in the bullish case, does the market test the 50 day again tomorrow and bounce sharply higher to close above today’s highs? These are all questions that you should be asking yourself when we come upon a reference point that is closely watched by the majority of traders.
As the title of my post suggests, now is most certainly not the time to turn off your computer and hope that all of your long positions will sort themselves out of this mess in one piece. You never want to panic in the markets, but if you are all-in long at this point, I still think it is correct strategy to sell off your laggards and raise cash into any minor bounce we may get tomorrow. After several months of seeing aggressively bullish strategies handsomely rewarded, many traders are having a hard time shifting gears into a more defensive strategy right now. Although it may seem boring to do so, there are worse things in life than sitting on high levels of cash and waiting for a better investing opportunity, to paraphrase Charlie Munger. Personally, if we gap down again tomorrow I will look to sell out of my remaining short positions in the form of long both $SKF and $QID. I am currently in 65% cash.
The $SPX bounced back from Friday's pullback to close up 1.31% at 1202. Despite the impressive day for the bulls, we remain in a broad channel after our most recent rally since February. As the 30 minute chart of the $SPY below shows, we have violently swung above and below the 120 level (or 1200 on the $SPX) several times in the past few weeks.
Moreover, our resistance and support levels are clearly defined, as I note in the chart above. Until we breach this choppy range either way, I continue to believe that holding a very high level of cash is the correct strategy. If you are a nimble day trader, then you will likely find this current market appealing. However, I do not see many good swing setups developing quite yet. My $SPX chart, updated daily for you below, supports this idea that we are working through an increasingly volatile range.
The bears have several facts in their favor right now, namely the loud disagreement (in the form of increasing price swings) between the bulls and the bears right at the 20 day moving average and the 1200 level on the $SPX. Some of the key momentum names of the past few months have seen profit taking as well, such as $GMCR and $AMZN. Moreover, in the face of the Austrailian tax hike on miners, several marquee names in the materials sector are seeing multi quarter break downs, including $RTP, Rio Tinto (see chart below).
The bulls, on the other hand, can point to the fact that the overall market has done an excellent job of hanging tough given all of the headlines over the past few weeks. In fact, part of the reason why I reduced half of my short hedges today is because of the strength in the transportation sector, traditionally a leading indicator.
With my cash position currently north of 65%, I am content to wait for better setups. A major part of being a profitable trader is knowing when to lay off of the action. In my view, trading without an edge has a negative expectation. To drive a point home, it is a big time money loser over the long run. Believe me, when the time is right I can be as aggressive as anyone else. Now, however, is not that time.
Top Pick: Cash (and observe the action closely)
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