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Market on a roller coaster

Interesting trading these days! I entered some bearish trades last week on Thursday by buying puts on SPY and XLE, when both equities were showing weakness and unwillingness to continue going higher. I collected some nice profits on this three day downtrend ($248.5 on XLE and $254.5 on SPY), total profit of $503 within a period of three days! But do not be excited (as I currently am), because Mr. Market can take those profits quickly out as well. At this point I was able to ride it with the trend although the trend was (and still is) quite bumpy. I decided to sell when I saw the last hour rally and after-market trading data confirmed I was right to take the money off the table. Of course, that doesn’t mean anything as well. Tomorrow, the market can go down again and if that happens I may go back and buy puts back to ride it further down.

Change The Way You Trade Forever

The point was that the market was supposed to close under the pennant lower line (see the magenta lines showing the pattern). Well it didn’t happen. The last hour rally kept the market within the pennant. That may be a beginning of a new trend – a bit bumpy, or still a bearish correction undergo.

Note: this chart is from Sep. 09, 2011

Where will we go? I still think, the market will show more weakness and it will go down. If it breaks this pennant line (the lower diagonal line on the chart) on higher volume, we may see another drop in price which will be equal to the length of the pennant poll (see the perpendicular magenta line to the two diagonal lines). And that translates the drop of almost 100 points! Thus we will go down to $100 level (SPY) or $1000 level ($SPX). I will wait for confirmation and plan on going for this downtrend.

Right now I am not sure which direction the market will go. It didn’t have enough strength (or weakness) to break down (and therefore I decided to sell my puts) and it also doesn’t have enough strength to go higher, so let’s wait!

From this perspective I can see a positive thing on $VIX.X showing elevated volatility. That can indicate more action on the market. However, since it is elevated, it may also point to a situation of calming down the entire market (why? compared to Europe, the US looks like a healthy safety heaven). If you take a look at 2010 correction in the middle of April, it took 18 weeks. Currently we are following the similar pattern. We may be going thru the similar correction and we have just 8 weeks behind us. That’s why I am cautious to say where the market will go and try to enter positions only when I am sure about the next step. As the rule say: if in doubt – stay out.

Happy trading!

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