Too often, we watch each tick of the day (or night for futures traders out there) and question the rationale of our setups. Each tick in the opposite direction is torture and it becomes impossible to remain rational. For this reason, I stayed far away from my desk this morning and most of the afternoon. Why bother watching? I knew from analysis earlier in the week that we were headed up today - I did not have to witness the action. I knew based on analysis and historical statistics, that the gains today would peak in the afternoon. When I finally looked at the market, and saw it all came together as anticipated, I allowed my gut to take over and trade.
Gut is not emotion. Gut is a core combination of intelligence and instinct - it is a sudden overwhelming awareness of opportunity. Something that you must learn to trust and follow. If you hesitate, you will lose.
David Einhorn of Greenlight Capital manages a fund of about $6 billion. In a letter that he sent to his investors 3 weeks ago, he said that the fund has sold almost all equities into this rally and has virtually no long position. Further, they have purchased a fairly substantial S&P Puts position, believing that the summer rally has built in an assumption of a very strong recovery (approximately 25% of the fund is now in SPY Puts). Their sizable investment in physical gold reflects their concern that this assumption may be faulty and premature. David Einhorn is showing his guts in a very big play.
Guts - the ability to act on instinct based on intelligence...
On the monthly chart, the S&P has retraced 38% of the decline from the high.
We are up against the 200 period MA and the 20 period MA is coming at us like a hammer. Historically, reversals at the 38% retracement level are the most brutal - especially when contact with MAs and trend lines are involved - and often these reversals lead to new lows (or highs) in the primary trend. Remember, the primary trend right now is down, the secondary trend is the recent bear market rally. Everything else along the way are short term swings...
If you are short - stay calm and try not to get squeezed - however, there is no shame in taking down your positions and waiting for a confirmed correction. Nobody calls a top perfectly, nobody calls a bottom. Better to be late to the start and early at the finish with all the profit in between!
Have a nice weekend!
9 comments:
I have been reading your blog for a few weeks now and appreciate your thoughts ,so thank you.It was nice to see you also shorted friday afternoon . I would have liked to see the market close with a small sell off but I still think we will see gap down next week . I rode it up to 1014 and then went with a full short so im with ya. Lets look for some nice downside next week .
I also appreciate you posts. Do you think we ultimately retrace to 50%, or is this it? (I can't find my crystal ball).
DNA , I also appreciate you posts , great great work . Leeb Funds newsletter also states, they have gone 100% short on SPY. I also expected to magically float higher Friday on low volume, but I didn't have they confidence to play in the party, so I just sat on my shorts
from 1028. I did take a additional
position at the end of the day on FAZ ,it would seem to me the financial s took us to this party, they should take us to dinner on this correction.
One step at a time on the correction, 975 needs to happen and see what happens there. Did
anyone see the rapid up rally in July off 879 ? I am still timid
Two big old Bear traps sense July
will do that to you ( the recent B2 reversal and the July 13th and beyond rally). One can expect but, but not count on the death of the zombies and the trash rally in this correction. Is it just me or is Spy not forming a head and shoulders ? Im I wrong there ?
Happy trading to all.
Hey KJB,
The volume was very thin on Friday and with the Holiday weekend upon us, I was not surprised to see it close up. I think the pullback at 1:30ish is a signal of what to expect next week. I lot of folks covered into the close and that is why we have the rise.
Attitude - There is still some upside potential from a technical standpoint - the 50% retacement remains possible - but I just don't see the catalyst and more importantly, I see some very bearish indicators - run-up in GLD and SLV for example. Regardless, one strategy to consider protection for your shorts with some call options longer term call options.
Good luck to you both, and thanks for the comments!
Hey Anon,
I have seen more than one reference to a H&S top forming on the S&P. I have been watching for that development as well. I was hoping for a breakdown to 978 the other day but we got hung up in the congestion between 1004-998. That stole some of our downside momentum and we couldn't break the 993 and 990 support. As a result, the neckline would have to be drawn on with an uptrend line, and we would then be forming the right shoulder as we speak. If that is true, we will see further upside movement in the next couple of sessions as the should rounds and heads for a test of the neckline again. Since the neckline is rising, that would put the test closer to 1000.
Hard to say - I prefer my H&S topping patterns with a flat (or falling) neckline!
Let us see.
Cheers!
PS -> My prior comment relates to the daily chart of the S&P with specific focus on the last 25 or so sessions. Create a neckline from the start of the left shoulder on July 30 through the start of the right shoulder on September 2.
I think that Einhorn will be disappointed with his puts because I do not think we are going to go down with velocity. Instead, I think we'll be herky jerky. Personally, I have built an acceptable short position into the close Friday, but the way I play it I likely won't increase the size unless we get a bit more upside.
Hey KPH,
I agree with you - meaning I think there is some upside potential here - I just don't want to over calculate my position. We may see a test of 1040 and perhaps a final top at 1060 - but when corrections do take place, they are often swift and violent. I prefer to be in position now and focus on genreating short term income through intra-day futures contracts. I can play both sides all day long there without too much concern of predicting the top.
I mentioned several posts ago that we will see a good deal of volatility during the coming sessions and all positions (long or short) will require RESOLVE! I'll consider some call options to take the "edge" off if needed.
I wish you luck with your setups, I think you are on the right track.
Cheers!
PS-> Einhorn is working on a scale that is incomprehensible to me! I think his puts are long dated - but I could not verify because expiration dates for his contracts don't seem to be published.
Gutzy move - no doubt...
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