Yesterday's was a "nothing" day, which is fully expected after a big directional move. Invariably after a big down or up day, the market pauses to sort out the streak, and store up more energy for the next chaotic move.
This nascent downtrend is now in a critical spot. If it just keeps extending down, then that would be compelling evidence that this could be a whopper of a downtrend. The further down this first leg extends without a meaningful bounce, the bigger the projection for the mid-term downtrend. But it's too early to say that, really.
Right now, the market likely needs to bounce a little more meaningfully, to stoke up a consensus that it's "just a pullback". It was interesting to see how traders reacted to yesterday's opening bounce. While prices drifted up in a tight range, the VIX started dropping -- in typical bear market fashion. Nobody wanted to use the bounce as a chance to load up on puts. At one point early on, the VIX and the SPX were both down.
The market should make one more valiant effort to claw into Monday's big red candle. I wouldn't be surprised to see a push back up to SPX 927 or so, before the next selling wave starts. In fact, that would be the most typical course in a longer downtrend -- even though you have to look askance at anybody foolish enough to use the word "typical" when talking about the markets.
But as I said the other day, it's nice to have a road map for the markets, as then you have something useful to compare to the actual price movement. If the market doesn't conform to your expectations, then that's valuable information. For me, a move back up and over Monday's big red candle, with the SPX closing over 942, would be a surprise, and would indicate clearly that it's... uh... not a downtrend. At least not yet.
But actually, a move back up and over 935 would tell us this same information, and would throw the market back into a neutral position. So if you're in the stop-and-reverse trade, and short from SPX 932 -- and I know you're out there, because I'm getting the e-mails -- then put the stop on your short at SPX 935.
If the bears really have the offense on the field, and a fear epidemic is truly spreading among market participants, then prices shouldn't rally past that point. We'll also exit Rydex positions if the SPX looks like it's going to close over that 935 level. Again, I'm not expecting this -- but you never know! Whatever happens, you've got to have a plan.
As well, if the market does as expected, and moves up to SPX 927 or so, and then sells off, that will be our cue to enter the other 50% into the Rydex Venture Fund (RYVNX), which gives 2 to 1 leverage on the inverse performance of the Nasdaq 100. If the NDX goes down, this fund goes up at twice the rate, on a daily basis. (You also lose at twice the rate, if the NDX goes up).
I'll send out an intra-day update if action is necessary on this, as such a move up that falls back would be setting up another 30 or 40 point slide in the SPX, down below 900. Once that happens, then the chaotic wheels will really be in motion. The markets would be in a very vulnerable position, and depending on the inputs into the non-linear dynamic system at that time, we could see a much bigger downtrend develop.
Which brings up an interesting point: Once this chaotic streaky downtrend got underway, it was amazing how the bad news started flowing; or more accurately, how the bad news was being received by market participants. During a strong uptrend, the raising of a Terror Alert would have been greeted with yawns. But during a downtrend, this news supplied a chaotic energy bolt, sparking a new urge to sell. The way news is received is actually one of the more interesting ways to gauge investor sentiment, and the overall trend.
I've had some questions about how much "speculative capital" people should be using for these Rydex trades. This is an easy one for me to answer, but might not be as easy for you to answer -- because it involves a little self-reflection on your part.
The right size position for these trades is one that lets you feel calm and relaxed at all times. You want to keep emotion completely out of this process.
If you find yourself pacing the room, staring at every tick, tossing in bed at night, then it's simple -- you're playing too large. You want to be able to stay detached about the proceedings, knowing that you have a sound decision-making process in play, and letting the odds work in your favor.
In the markets, there is always going to be risk and stress, and things are not always going to work out the way you want. The key is knowing this ahead of time, and using a position size that allows you to profit (you don't want to play too small -- it's got to mean something), but that won't make or break you in the bigger picture.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank filled up 1 point to 10% full of negative sentiment on Tuesday, up to the top of its recent very low range.
SHORT-TERM: The hourly gauge bounced around a bit but remained in a decline phase.
MID-TERM: The mid-term gauge progressed by 2 points in its new decline phase to 9%. Our daily Confidence Diffusion Index (CDI) gained a point to a bearish 2 (out of 7).
LONG-TERM: The weekly gauge progressed fractionally but remained at 3% when rounded off. Our weekly CDI gained a point to a bearish 2 as well.
BOTTOM LINE: Given the strength and the extremely bullish money flow achieved during the just-expired advance phase we could see this intermediate-term top take some time to form. Over the last two days the CBOE Put/Call Ratio has been an impressively high 1/1. That may represent a very short-term bottom (on a contrarian basis). It's even possible that price could push to some nominal new highs. However the extreme low level of fuel (negative sentiment) in the tank will make it really tough for the markets to break key resistance levels (e.g. SPX 965). I continue to expect at LEAST a significant retracement of the March-May rally during this mid-term decline phase. What bolsters my confidence that our gauges are telling us something reasonably important? Historical precedent as illustrated in the Closing Bell of May 15 (scroll down to the last chart "Dashboard Oscillators").
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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