Monday, December 28, 2009

Let the games begin...

We are at the end of the year. S&P has pushed to it's 2009 highs - trading at 1127 as I post - yet, we all know that this amazing 9 month rally is changing. It is tired - running on fumes and built on low volume. The fundamentals are not in place, the government is now faced with a tremendous debt burden and has much more to finance going forward. For those of you who have not read the news this morning, a very important signal has been sent to the market by El-Erian - get out of equities.

El-Erian of Pimco

Having placed my short equity bets early, I have an especially difficult challenge. My first target for the S&P is around 960 followed by 880. My average short position is slightly above 1000. The risk reward profile of this setup is a horrible and in retrospect, I should have abandoned the position three throw backs ago. The question now is how to maximize profits as this corrects. The answer is leverage and the solution is the ES. I will be matching 1 ES contract to every 500 shares of SPY in an effort to compound my gains and/or mitigate loss. This is a dangerous solution as it involves leverage.

I will be trading in a 20 point range based on a core short position, scalping to keep in the money when needed. I have been using this technique for the last 10 sessions and I have managed to build my core short position at 112250 - with no losses recorded. This is important as I opened my core position much earlier at a much lower level and have scalped to effectively raise my entry more than 15 points.

Though I could have waited until the first week of January to enter this position - avoiding some of the hard work scalping - who is to say that a sell-off is not in the cards before Jan. 1? The technicals sure suggest it is possible.

The fact of the matter is that calling a top or bottom is a losing game. You can wait and miss it. You can jump all in too soon and lose it all. To succeed in a trade such as this, you need to anticipate change and scale into play - fighting as hard as you can against the tide to be in position when it moves your way. That is where I am right now - and it is where I trade my best.

So, let the market drift higher on low volume as the VIX starts to perc. I'm trading in lock step, building substantial potential energy in my positions. This will break soon and I will profit from the big move soon enough. Bring it on baby!

Good luck out there...

6 comments:

KendallTodd said...

Can you explain more what you mean by matching 1ES for every 500 SPY?

David O said...

Hi Kendall,

Each S&P point translates to $50 on the ES. So a 10 point move in the S&P is $500. A 10 point move in the S&P translates to a $1 dollar move in the SPY. 1 ES contract can therefore be matched to 500 SPY shares.

Hope that makes sense.

Cheers.

payline said...

Hi David , I was thinking we where the only Bears left , nice to have Mohamed with us.
I read a good quote today ,Ill share
" Topping is a progress, Not an event "

In Ewt I see three possible counts
(its a mess to count )
1) the HOD today was the top
2) the HOD was wave3 of 3 , with
much more upside.
3) Hod was 3 of 5 , leaving one up to go 32-35ish,

1116 may be the first key break to the downside.

Waiting for it to come our way

Cheers

David O said...

Hey Payline,

What do you make of the FED announcement regarding the "CD like instruments" to soak up liquidity? I think when you combine this action with the recent TARP paybacks, the free money cycle is coming to an end. This is a fundamental requirement for a proper correction.

I read "Too Big to Fail" this weekend - quite a tale. Currently reading "America's Great Depression" - very good book if you have not read it already.

Cheers!

payline said...

I think it interesting , that we are " again " talking out how it with draw liquidity and in the same breath take action such as Christmas eve , lifting the 400 billion $ lid on Fannie and Fredie s access to funds.
I think the liquidity leaves the system but not via any fed plan.
There is also a belief by some the
C and BAC trap paybacks where done
in large part with fed funds , left pocket right pocket, could be the Fed need not tell anyone what they do.

I do think the Free Money time is about over, Volkers comments, Ron Pauls audit bill , McCains new Glass/S bill , may all go no place , but they point to a political mood change.


I read Herry Hazlitt , economics in one lesson, this weekend quick easy read.
and can be found on line here.

www.hacer.org/pdf/Hazlitt00.pdf

"America's Great Depression" -
is on my to read list.

K-Wave Theory tells us we been here before and made the same mistakes before......

Cheers

Here we go again :)

Paulus said...

You are not the only bears left.
Some bears are just silently hiding from the bull's stampede.
Thanks for reading tips.