The markets may have gotten ahead of themselves on this uptrend.
No kidding, you're probably thinking. It seems traders were pricing in a "regime change" in Iraq by this weekend. How else to explain this white weekly candle?
This is a what a true panic capitulation by the shorts looks like, coupled with a big pile-on effect from money coming out of bonds into the stock market. But in order to entice money out of its deep hiding-holes, and for this panic buying to continue, the news flow needs to be perfect. This weekend it wasn't.
So back to reality. The futures are down big, and this looks to finally be the start of a larger correction -- one that is way overdue. The backdrop is right for this, as a mid-trend correction needs to look and feel dangerous. Only then can it set up another push in the direction of the main trend.
Since there was such a big intial up move, this correction has the potential to be a big one, yet still leave the markets in a good position to eventually continue moving up. The SPX can drop all the way back to 834 -- which would surprise and scare a lot of new bulls, and make the bears feel smug again -- and just be gathering energy for a run at the neckline, at SPX 965.
If you're in the "stop-and-reverse" trade I outlined painstakingly during the panic bottom, then you're now sitting on a profit. I purposely introduced this strategy for such an uncertain time, because it carries little risk, yet it keeps you involved in a runaway market that is difficult to trade otherwise. The instructions were to stop-the-short-and-go-long on a move back up through SPX 817 - 820, by using the index proxy, the SPY. (Due to large daily market fluctuations, and the general wackiness of all financial markets, I haven't recommended Rydex positions during this war period.)
Now it's time to set a stop for this long position. The SPX 875 level is the spot that should now hold, if the bullish case is going to reassert itself quickly. It was actually a big surprise that the markets could poke through there so easily; now that they are above, this area should act as support. If it doesn't, then a bigger correction will be unfolding.
So on the SPY, this equates to $87.30. Put your stop just below this, as you don't want a fake-out move to the line to take you out, right before it zooms back up. This locks in a quick 6% gain off this up move.
Since this should continue to be a tricky market -- hell-bent on stopping out everyone -- we should go ahead and make this SPX 875 level an important stop-and-reverse point, to continue trading in this same way. This is still the best way to play a volatile, news-driven market. I would continue to use the SPY for this trading.
If the SPX falls below 870, it's time to go short. However, on a move back up through SPX 875, you will definitely not want to be short -- in fact, you'll want to "stop-and-reverse" and immediately go long. On the SPY, this equates to the $87.30 level as the important "line in the sand". You don't have to be exact with this -- and I want you to pick your own levels right around here to act -- but don't let it get too far away from this level with you positioned on the wrong side.
Again, the rationale behind this is you pick an important price level, and decide that below it you'll want to be short, and above it you'll want to be long. But you have to be fully committed to this strategy going in, and not alter it based on what you see happening in the news.
In a volatile, emotionally-charged market like this, it usually works out better to have mechanical triggers lined up to tell you how to act. This way you take the burden off your own judgment, and let the market tell you how to behave in order to capture profits without undue risk.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: On Friday the tank drained 5 points to "42% full" of negative sentiment.
The VIX closed Friday at 33.62. That's higher than it has been 92% of the time since 1987 and higher than it has been 76% of the time during the bear market (the last 3 years). So there's still plenty of negative sentiment stored up in the VIX. No question.
The 20-dma of the Put/Call Ratio (also a contrarian indicator) has sunk to 0.736, down from a near-3-year high of 0.94. The highest "trough" level on the P/C 20-dma is 0.72. So, we're close to what could be a market top on this sentiment measure, but not quite there yet. The 3-dma of the P/C Ratio is at a definite trough level. So we probably need to work that 3-dma higher with a market dip.
The divergence between these components of the tank (VIX still at bullish level, P/C at short-term bearish level) is unusual and reflects the unusual circumstances of the military conflict.
SHORT-TERM: The hourly gauge broke into an advance phase on Friday. Given the weakness in the futures this morning it will very likely roll over and head into a decline phase today.
MID-TERM The mid-term gauge advanced a whopping 12 points to 73% on Friday. However the Confidence diffusion Index remained at 3. The internals looks short-term extended. A market retracement would put the CDI in position to advance.
LONG-TERM: The weekly momentum of sentiment progressed 1 point to 54% in its decline phase on a W/W basis. However intraweek the gauge had been as high as 58% so the internal momentum is negative even though the gauge has not yet rolled over. The weekly CDI is at -2, which indicates that the internals all suggest the gauge will turn up into an advance phase soon.
The tank's drop from 85% to 42%, associated with the anticipation of a war rally, and then the onset of war, may have extended itself short-term. A market pullback here before further advance would be healthy. In the press the market pullback will be associated with tougher going for coalition forces in the war. Fears of another crash will probably crop up. But the market is also ripe for this. It would be healthy to see the tank fill up some from here in order to fuel further advance.
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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