Click chart to enlargeTGIN... Thank God it's November! We've gotten out of the descending triangle and now face a series of important resistance lines. We're at the first one right now. It's the highs of Oct 20/21. the next would be the high of Oct 14 at 9800, and then the lows of September from which we broke down at 10370. We look for decisive breaks of support or resistance, using the market's closing price only. Intraday breaks are usually meaningless. It's important to be aware of these breaks of resistance levels as the market climbs because once broken, they become support.
This is exactly what Nick Darvas referred to with his "box theory" in his book, "How I Made $2 Million in the Stock Market". It's an old book, but the market still trades in ranges, making his theories applicable today. In the spirit of Darvas's teaching, the Dow is now in the 8200/9400 box. The huge range is a sign of the times. A decisive break and close above 9400 would place us in the 9400/9800 box, where 9400 would be support.
We sold off another 1/7th of our longs today, with a sale of DDM at 38. We held off on adding to FXP just yet, as we need a low price to offset the first layer bought at 114.6.
We suspect the market's rally to continue, although that's just a pure guess based on the fact that the market's uncertainty about the elections will disappear next week. If the market does rally, we profit from our net long position. If instead it heads lower, we revisit the bottom of the box with more capital than last time because we've lightened up on DDM twice now, and we've added some FXP.
We put a 200 day moving average on the chart above to show how oversold the market still is. Our thinking is that the bottom is roughly 8000 and the "top" is roughly 11400. The 11400 number comes from the top of the downtrending channel the Dow is trading in... ahem. So that makes the center of its overall range somewhere around 9700. This means we're just below the center now, which means if the rally continues, we'll soon have to start flipping our position to be net short. It's too early, though, to talk about a net short position just yet. We're personally still at a point where we'd be perfectly content remaining net long if the market fell from here. We would in that case start rebuilding our long position on the way down.
We are only up .2% since June 1st, which is by no means an impressive gain. However, we've managed to remain in the game without getting slaughtered through one of the most unforgiving months we've ever witnessed.
10 comments:
Hi Snot,
Don't you think the volume was very light during the last couple of days ? Even the 900 point rally we had on Tuesday was not on big volume. Do you see any reason for this lack of volume on big up days ?
The volume doesn't look all that anemic to us. We notice a huge uptick in volume for the index ETF's, suggesting that people are doing much what we're doing... trading the market rather than individual stocks. But big board volume is only slightly lower than what would be expected. We never really understood the importance of volume because each 100 shares bought is also 100 shares sold. It is not a directional indicator.
Modification to above post:
Range of Dow is considered in the post to be 8000 to 11500, because 11500 is top of channel. In reality, as time goes by, the lines of the channel move lower. Therefore, a more realistic "top" is the center of the channel, an ambitious enough mark, at 10900.
This puts the center of the overall range at 9400/9500.
We're at or near that midpoint right now. As for becoming more aggressive on the short side, we'd like to see FXI reach 27.50 before going into FXP too heavily. This will help offset some of the risk.
snot,
You mentioned that FXI reach 27.50, then you will start aggressively buying FXP, so you think FXP will go to 70-72 before you add another layer?
Snot and the gang (almost sounds like a rock group),
I was in a high-tech town tonight for a birthday party. This town is built around aerospace, military and defense industries. Next to me at the party were two engineers. They said all over town people were fearful of the election because Obama would likely mean a significant job loss and downturn in the local economy.
How should people trade this election? Something like PPA has taken a beating of late, but what hasn't? Would PPA become a viable short? Not a short for a hedge, but for a position? We can't buy stock in the government. That has been growing by double digits lately and will likely continue with Obama. So how should one invest under Obama, Pelosi and Reed? I'm not concerned about politics here, just how to invest.
Anon, we don't have a target for FXP, we'll just be buying if/when FXI can close in on its 30dma, whatever FXP is at that time.
Anon, let's face it, at least for the time being, a bet on PPA is just another bet on the broader market. The charts of the indexes and PPA are virtually indistiguishable. This is true for most charts now, unless you own Almost Family (AFAM), lol, kidding... there are always these anomoles. But for the most part, you may as well just stick to the indexes (or reverse indexes) during a bear market. As for trading the election, we were looking for a rally, but we've already gained 1400 points or so in almost no time. We still think the market will move higher short term, but it has to meet profit-taking in here, especially at this 9300/9400 resistance level. We try not to time the market based on events, but rather place buys and sells based on where the market has just been... swing trading/channels, etc. During a bull, we'll be the first to cite fundamental reasons for buying the stock of a certain company or sector, but in a bear, we turn our attention away from company and sector specifics because it generally doesn't matter where you are, you're just moving with the market. If that's the case, then, why not just benefit from the added protection afforded by the diversification the indexes offer? In simple terms, if you're right about PPA, you'll outperform the market by 5%. If you're wrong, you'll underperform it by 30%. This market is punishing, not rewarding. During a bull (and we're far from one) you'll be very well rewarded for choosing the right sector. But in a bear, choosing a sector or a stock is futile at best.
That makes sense as far as a short goes. For the long side, however, some sectors should be relatively safer. E.g., consumer goods and health care have both outperformed the DOW, S&P and Nasdaq over the past six months and they have outperformed them over the past three months with the exception that the DOW has outperformed health in the past three months. Possibly some other sectors have shown some similar relative strength.
Snotwheel,
Off topic, but am curious whether you developed your own software for the logrithmic channels, or whether it is commercially available. Thanks.
The charts are from TDameritrade's software called StrategyDesk. It's free if you have an account with them. The channels are drawn with the linear regression tool.
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