Saturday, March 30, 2013

Easter Weekend Trading Notes

Stay Healthy
I have been fighting a stomach flu all week long. Professional traders know how difficult it is to concentrate on trading while they are sick. Some have a general rule to follow the market and monitor the existing positions, but refrain from putting any new positions on. Trading requires clear thinking, dedicated attention, and rigorous emotional work. It is practically impossible to entertain any of those while you are seriously ill. So if you thought I was cranky before, I will take it up a notch. Just kidding...

Divergence Galore
I want to be an optimist, for we are in a "secular bull market", or so they want us to believe (like they really know). I want to plug my ears and stop hearing that "we are going to have a correction", "it is inevitable", "this is the way all markets work", "just look at all of the divergences around SPX". But I myself joined the choir and said that this time will not be different. And yes, divergences not only continue, they now have widened and the amount of them has increased, even as S&P 500 hit all-time closing high on Thursday. If I showed all of them, this post would never end. So I will add some more to the ones I already showed in the past month. These are not just outside of SPX, some are important internal leading components, without which I cannot imagine much more upside before a short-term correction occurs (on this at the end of the post). Why do I concentrate my attention on divergences so much? Because they are usually a precursor of possible short-term reversal, which always comes when SPX is in a steep uptrend (on this at the end of the post as well).
Before the stubborn bulls discredit the following charts on the basis of "it has not mattered lately", I have a few words to say. It is perilous to stay perma-bull in market which is driven by sentiment about central bank liquidity, as it can reverse at some point. When long, I always look for an excuse to get out. The charts I am about to show are my excuse to trail and/or tighten my stop. Can SPX go higher from here? Sounds like a rhetorical question in current environment. I know what the stubborn bulls will say about these charts: "copper follows China", "euro follows Germany", "rates are manipulated by the Federal Reserve", "Google and GE are just taking a breather"... While I may somewhat agree with the premise of their argument, I strongly disagree on the eventual outcome of these divergences. I believe that SPX cannot make a solo move higher when it continues to lose more of its correlated assets, markets, and leading components, as the companies inside the index do not operate in a vacuum.

click on charts to enlarge
Annoying Cliches
We constantly hear that corrections are healthy. Who are they healthy for? Talking heads say it as the market moves down, which may be right after they told the folks to buy the high.
Granted, it is not easy to see the correction until it is structurally visible (hence my lengthy discussion of divergences). Market climbs a wall of worry, then gets hit in the head by the brick of irrational exuberance, and falls down while being swallowed by the avalanche of mass exodus. Nobody really knows exactly when to buy and sell on fundamental basis, even though the saying that market is always right is supposed to guide the investing public. The truth is that market takes the underlying issues that underpin or worry it to the extremes. What exactly was the market looking at in 2007 and 2009? Where was it exactly right, at 1576 or 667 on SPX? Who is the market anyway? Those folks who gobbled them up at 1576 could be the same ones who puked them up at 667. And that is after they were told to average in all the way down. I get annoyed by all of these cliches. I do not know how to apply them to my trading. So charts help me navigate SPX trading. And the simplest instrument of the navigation is a channel. I said above that SPX builds a steep uptrend (like the one it is in now), lets nobody buy the pullback, and then breaks down catching late (chasing) bulls in awe and disbelief. I really think it is that simple. So I leave you with the chart of the index and its myriad of channels to trade. It certainly looks like just north of 1600 is achievable (top of two channels), with aforementioned correction coming shortly after.

Pick your entries and exits wisely, and have a blessed Easter!

click on chart to enlarge

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