Wednesday, October 10, 2012

Confused and Conflicted.

Before I start today’s post, can I draw your attention to the post of October 3 There I wrote the following:  Normally the 1st break, up or down is a head fake and the real move is opposite. After 5 trading days, you can see the validity of that statement. SPX broke the triangle to the up side and now stands at the bottom of the Bollinger Band.

The cycle low which was expected today did come on schedule. However it closed below my target line which was 1430 in SPX futures. At the time of writing this post, /ES (Futures) have broken below that line and is sitting at 1422 which is convincingly below the line.

Few things are conflicting and need to be resolved before I can make the next call. While both SPX and Nasdaq are on sell zone now (not a sell signal, mind you), I am rather expecting a bounce because:

·         SPX had 4 red days in a row and is sitting on the lower end of BB. However, one more scare is due around 16thNovember.

·         McClellan oscillator in Keltner channel is deeply negative and a bounce is due.

Therefore I expect the market to behave in line with the cycle and go up from here. What I am not sure, whether we will see 1500+ by mid-November but definitely it will test 1470 again before the final good bye.

·         SPX and VIX are both red together on the same day.

·         Cycles indicate a bounce.

The earlier low in SPX futures was 1424 on 26th September and today it broke below. This is a warning shot.  But the 4 hourly chart is oversold.  You can see the red line in the following chart and I do expect a bounce from there. This is the point from where the earlier breakout happened and normally prices come down to test that breakout level.

Euro 2 hour chart shows a double bottom:

Unless we see Euro breaking down from this point and goes below its low of September 29/30, which is 1.28, I think a bounce is more likely.

As of now QE infinity is not giving the desired result that Bernanke hoped for. On the other hand, all past QEs have resulted in a 5% sell before taking off. Therefore, fence sitting is warranted and unless I get a definite sell signal, I am not going to short. Just because the market sold off for four days, does not mean the end of world is here, more so when the cycle told us before hand about this sell off. The same cycle is showing a higher high by Mid-November. In all these confusion, commodities behaved rather well. Silver actually gained 0.18% and gold lost 0.03%. Oil sold off but I have written before that oil will settle around $88.

I see market technical weak but liquidity plentiful. I see short term cycle bottomed and an important cycle showing major top by mid-November. Unless a clear picture emerges, there is no reason to jump in a trade. Just imagine had you gone long after QE 3, you would be so unhappy now. I decided to sit out then and I am willing to wait now.  The rules of this game are simple but very difficult to follow:

1.       Do not lose money.
2.       When in doubt look at rule # 1.

Most of the time we lose money by being impatient and following what we believe not what the market is telling us.  It is possible that the prices will bounce from here and this is indeed just a correction. Therefore, I prefer not to front run and wait for clear direction. Hope you get my drift. There will be many opportunities in many sectors, to either go long or short and we will have to pick up our bet.  I quote from Josh Brown of reformed broker; When in doubt switch off the TV and read a book. Better still take a walk. The fall colours are here and it is looking beautiful outside.  So often we forget that there is a life outside the stock market. In the honour of the fall, I have changed the look and feel of the blog, just for the fun of it.

So we wait to see what tomorrow brings. Don’t worry that we are going to miss out the big move. No, we will catch most of the major moves. Rest, we will give it a pass.

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