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Post Market Analysis, Monday October 5: Bullish

nice pop in the markets today

The markets bounced today on moderate volume. The VIX posted a 6.24% drop which confirms the move. I normally like to see the VIX move three times the inverse of the markets. It is important to note that the volume was not very high today, which detracts from the significance of this bounce.

This recent down turn over the second half of September could be forming a bull flag on the SPY daily chart. If that is the case, we could easily see a nice run past the highs for the year, testing major resistance at the 110 area. After that, the next major area of resistance would be the 120/122 area. This pull back could behave similarly to the pull back we saw in June.

On the other hand, we are still in a downtrend as long as we continue to make lower lows and lower highs. The thick orange line on my chart is still relevant. I would like to draw your attention to the mediocre volume today. Also notice the negative histogram ticks and continued bearish indications of the MACD. I expect to see the SPY lose momentum again and put in a lower high around 105. We have support at 102.5, 100, and the 50 day moving average. If SPY starts busting through those support areas, things could get very hairy and very fast. As long as the market remains bearish, I will trade it to the downside.

Week in Review: September 28 – October 2

This week I sat on my hands. However, I still managed to grow my equity by 3.78%.

I chose not to make any trades because the market looked very indecisive these past few weeks and I wanted to wait for a confirmed trend. In hindsight, most of September’s erratic market behavior looks like topping action. Now the S&P has a confirmed downtrend.

Towards the very beginning of September, when spy broke down under 100 from 104, I started a short position. I did this by buying SPXU (the triple leveraged inverse S&P ETF). Now that I look back on it, it was the wrong time to start shorting the market. That’s easy to say now because hindsight is 20/20, but there was no confirmation of a trend reversal on the SPY daily chart. I continued to make rookie mistakes throughout September by averaging down as SPXU plunged from $54 to $42.50. It is almost painful to write that, because I know that it was a mistake. In fact, I knew it was a mistake as I was doing it, but I made the wrong trade again and again by averaging in about five times. The recent drop is different from the drop in the beginning of the month in that we have a lower swing low followed by a lower swing high (see Thursday’s post about the drop). I will continue to add to my short position as long as the SPY stays in its downtrend. If the market turns north again, I plan to drop this short position (for real this time).

Some of the lessons I learned so far in this SPXU trade:

• Cut your losers fast (if it is a winner, then give it room to run)
• Do not average into a position unless initially planned for (averaging a loser is a very bad Idea)
• Follow your risk management parameters and do not let your position size get too large (this only leads to stress and exposes your account to increased draw-downs)
• Wait for the trade set up to be confirmed (being early may be enticing, but will often prove to be a big mistake)
• Do not fight the trend (you will not win)

Market Review, Thursday October 1: BIG Drop in the market today!

We had the biggest drop in three months! This excited me, not because I am a bear, but because we are starting to see definitive direction again. I do not care which direction the market goes. I will play what I see, no matter the direction. Whether we go up or down, the more movement the better. The beauty of trading is that we can make money if stocks go up or down. In fact, studies show that stocks drop 66% faster than they rise.

The charts are indicating a confirmed down trend. The SPY (S&P tracking ETF) made a lower swing low and broke down out of a major rising wedge. We closed on a minor trend line which might prove to be minor support. It is important to note the lower swing high(shown by the thick orange line) as well as the fact that SPY touched the lower band of the Donchian Channel. Both of these factors indicate a downtrend. Expect SPY to find some support at the unfilled gap in the 102 area. Anticipate more significant support around the century mark (100) as well as 98.