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Wednesday, February 06, 2008


positioning update

remember the plan?

  1. treat current long holdings as a first-bounce trade with 5-10% upside from s&p 1380 -- a range of 1450 to 1520. watch 20-day highs and lows -- and close the long with extreme prejudice, particularly on any untoward expansion of new lows, even a single suspicious day. accept that each and every 5% move is unobtainable by your methodology.
  2. short any first-bounce reversal anticipated by 20-day new lows with the expectation of a retest.
  3. buy very aggressively on price retests of the intraday lows. often, 20-day hi-lo data will anticipate bounce timing, but downside risk should be quite limited.
  4. be unreasonable about cutting the long trade until either the second test is in, or a very plainly successful first test is in.
  5. be open to the possibility of much higher highs, in spite of whatever you think is happening. trade the charts, not the rationale.

the presumption of a bottom at s&p 1380 should be replaced by s&p 1255 -- which changed bounce price targets to 1380 to 1440. recent trade put the s&p back up to 1395. i gave some thought to closing longs thereabouts.

but i didn't -- because of the notion that i should watch 20-day highs and lows... particularly lows. and i frankly can't find much to be frightened of there. looking back at past examples of new low washouts of this kind which experienced a retest, one can find a change in trend of 20-day new lows and issues within 5% of a 20-day low relatively near the peak of the bounce. that's true of august 2002, of september 1998, of september 1990, of november 1987 -- also of late march/early april 2000 before a sharp retest a couple weeks later. the same metric would have pushed one out of the post-9/11 rally in mid-october as well in anticipation of a retest that never came -- but better safe than sorry.

the market may be in the process of building such a divergence in advance of a retest, but the divergence isn't apparent now -- so we hold in anticipation of at least a return to 1395 if not a rally beyond it. in these cases, though you may not have caught the top of the bounce by waiting for the divergence, you would have been led out well before the complete retest.


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