2009-06-21

Correction! What correction?

S&P500 (ESu9)

Sell up to 932, Stop above 957, Target 810-780

Fashion is like swine flu, easy to catch and difficult to understand and it tends to take over a clear mind. Recall when you last heard the "green shoots" and now it seems every one is talking about it. So much so that the real meaning of "green shoots" when it was first used is almost forgotten. We are talking about the impressive spring 2009 recovery in world markets and Indices have not looked back after hitting their lows in March 2009 (in case of Asian/Emerging markets the lows were since in Oct-Dec 2008 period). The rally has taken many pundits by surprise. They were talking it down all the way up, first calling it a bear market blip, then a bear market correction and then a bear market rally. But markets needs no pundits and the rally did march on. The green shoots were firmly in ground.

Now that most pundits have become a firm believers in those green shoots that they are overlooking their lawns. The green shoots appear to be overgrown and need a good mowing.

The rally which started in March 2009 appears to be halting at key technical levels as the supply of good news seems to be drying up. The weekly S&P500 seems to indicate a double top. Also the MACD on daily charts have started showing signs of fatigues.

The markets are divided in two camps, those who missed the rally and waiting for a chance to jump on and those who were lucky enough to climb at start and looking to get out with fat profit. And there is no doubt that a lot of money is sitting in low yield "safe" accounts and that wall of money can hit the market any time.

Given this outlook, I still believe in the rally which started in March 2009 and if the money on sideline start coming back into the market on pullbacks, we can soon see next wave (wave 3 which is usually the juiciest) of this bull market. But for that to happen a healthy correction is needed.

I expect a pullback to 810 - 780 region on S&P500. This would likely to bring down the cyclical PE ratios near enough to the lows of the previous bear cycles. If market could hold this area, the next bounce up should take us to 1126-1234 region. However if the green shoots get burnt by excess fertilizers or scorching summer sun, March lows could easily be taken out. This indicates that these markets are delicate and nimble trading is required.

I am positioning myself for the pullback with a cautious shorts, hoping to hop on to the next bull wave soon. It would be interesting to review the situation when we are in the next buy zone. Since this trade is technically a counter trend trade (the major trend is still bullish), a safe way to play this is also via options (850/810/770 Sep 09 PUT). If a profitable position is created and pullback materialises, 810 puts can be sold and then shorted to create a risk free butterfly.

3 comments:

  1. VS,

    I’m with you on this one, not buying the tea cup formation.

    Here are a couple of charts from this weekends HW.

    Although Allan does not apply whisky theory to timeframes other than 1 and 60 minute, I am a firm believer in the fractal nature of markets. I also believe the longer the timeframe the more powerful the signal.

    Daily ES showing MacAllan sell signal and 807.50 target

    Weekly SPX showing possible H&S failure and indicators pointing down


    Good Trades,
    Quin

    ReplyDelete
  2. Thanks Quin,

    Actually I used to Apply MACD only to daily and weekly. You guys introduced me to the subtle flavours to be observed in MacAllan 60/MacAllan 30!

    Nice to hear someone talk about Fractal nature of the markets! I knew you guys were smart but did not expect followers of Mandelbrot in OMNI Trading academy. Well one learns every day!

    Thank you for your comments!

    ReplyDelete
  3. This trade did not work as expected, the pull back was not strong enough. It reached 865 level but rebounded strongly since then and made new highs. The momentum for the time being appears to be with bulls.

    ReplyDelete

Thank you for your comments. Please keep the comments to the context of the discussion. Comments are subject to moderation and inappropriate comments may be removed by the Author of this blog.
-VS