Monday, November 24, 2008

Is this the bottom?

Previous Trade Day
Well guys, after thursday you could see how frustrated I was with the outcome. We had an extremely bearish sign due to our capitulation - my anticipation was further drops to find the low 700s and possibly 650 as the bottom but I think I was wrong and overly frustrated.

Friday setup just as I was anticpating with my bearish sentiment, a quick rally that was sold off instantly to create a new low. We had a quick retracement that was not able to break the next high - however, here is where it started to get interesting. For the remainder of the day we had a very tight trade range of 760-750, something I was very surprised at, to top if off any break out was instantly matched with an equally strong reversal to get back into this range. Normally during option expiration Fridays you see this sideway action but this was occuring on strong volume. The exitement I had the previous day was coming back to me as I let my emotions and anger cool down and rationalized what was going on - it was setting up to be the potential bottom, I started trading the long side of things in the early afternoon but I still had fear in the back of my mind so I was rather careful and had to exit a few positions. With one hour left and on option expiration friday I decided this is it and closed my computer, just to get a text message 20 minutes later from one of you guys to tell me its rallying. Immediately I turned the computer back looked at what was going on and analysed the situation - This could be the turning point for us, finally, too bad I was off by a day but oh well.

Mid Term
Well the market got exactly what it needed. The promise of new leadership and the bailout of Citi over the weekend will give the market the confidence back - yes some will look at the Citi bailout with a negative view but I think rationale is out the window again - I said 2 days ago that investors need an excuse to go long, an excuse to buy - this is it. You can go back to my previous posts that I made back in October stating that we will now have a minimum of a 2 months rally with a top that could lead us back into the 1100's of the S&P. My final targets will be around 1080 or 1160. I will be able to determine the top by the end of this week so bear with me please.

Having given the mid term outlook first you can expect me to look for a strong up day. I would not be surprised at another 6% day today. It is my feel we will be able to hold on to our gains and close of course in the 800 range.

How to trade this?
Well, the first piece of advise I need to give is DO NOT TRY TO SHORT. I know it looks tempting but this could be a bad mistake. I know the past 3 months any short position you entered gave you the results needed. Be careful here when doing this. Some had asked me on Friday if this is a good short at the 770 range and I highly recommended against it.

There are 2 scenarios today, a very likly scenario is a large gap opening and a continuous rally to add another 2-3% on top with a close at the top of the range. We could be closing above the 850 range possibly. We have some resistance to overcome at hte 845 range so watch action carefully here.

Second scenario would be of course the gap open that would retrace back to either 820 (if it opens above), 810 or possibly 806. If we are to get to 806 after a substantial rally we can safely go long here. Entering a long position at this point gives you a great protection mechanism as a break of the 800 on the downside will lead to a potential retest of the 760-770 range. Again this does not mean we can go short. I know I said it above but short positions cannot be protected. The only trade I would potentially engage in short is the 845 range and this only depends on momentum once we get there.

The Long Term Investor
As my readership is growing I am adding a new section for you guys that are in it for the long run. Many of you guys have experienced severe losses with the promise of holding and recovering. You all know what I believe in regards to buy and hold. Give it another read if you want

The long term investor wanting to stay in this market needs to change his sentiment and become much more active. I am not talking about day trading but at least use the morning of your day to review this blog and some news on CNBC - stay involved and be cautious.

So what to do from here - keep your positions at this point until we have established the first leg of this rally. We should find our top within the next 5-7 trading days and should top out in the 900 range, potentially 980. Here is where you would exit your mutual funds and other long term investments. I would probably go cash 100% at this point. We should retrace back and either retest the lows or retest the 800 range. By now you will have protected some of the gains and have a new chance to go long SSO (the leveraged ETF of the S&P). Holding this towards the end which should be December/January you should be able to recover a lot of your losses.

Of course I am posting this before we have our final confirmation of the rally but I am pretty confident.

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