Archive for May, 2009
Opportunistic Trading
May 18th, 2009 | 
Author: Stocks are rallying intra-day, bouncing off the support levels we highlighted in our most recent post. The 20-day has acted as very key support throughout the rally and a move upward today on the Dow and S&P 500 was crucial for a continuation given the more extended correction in the NASDAQ.
While opportunities are available particularly for day traders, more patient traders may wish to evaluate market strength at key resistance levels overhead. We’re taking a cautious-cautious approach to the market, and are leaning towards bear calls. Why? Because even if the market moves higher, the bear calls profit once underlying stocks are below the short call strike prices. And bear calls essentially are statements against aggressive rises in the markets. After a market has risen substantially, and a very substantial further rise is unexpected, a bear call can profit in a slight uptrend (provided the bear call is out-of-the-money), a flat trend or indeed a bearish trend!
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Pinpoint Accuracy & Profits
Technology bellwether, Apple, leads the NASDAQ lower while the rest of the market clings to support. Our bear call on Apple right at the peak was timed to pinpoint perfection again. But which way is the market headed next?
If you are a new reader, I strongly encourage you to listen to some recent postings where we projected in early May that the market would like encounter resistance by mid-May. In fact, we gave a 10-day horizon whereby we cautioned that trading bullish positions was not a high probability play. In short, the potential for reward was overshadowed by the risk of taking a long position.
At these times, only the greatest market timers should be playing aggressive positions. For most, prudence dictates taking a ‘wait-and-see’ approach. Nothing is lost by watching the market test a substantial resistance level to see if it is broken. Nothing is lost if the market fails at that resistance level. And nothing is lost even if resistance is broken and the market moves higher, other than an opportunity cost. Certainly, money could have been made. But the great traders don’t look merely at whether the markets could rise higher and whether they could make money on such a move.
Possibilities are for amateurs. If you want to join the elite ranks, you need to focus on probabilities too. If the probability of a move higher is low, entering a long position can be classified as either aggressive or just plain silly! In a recent video post, Gareth Feighery evaluated the probable outcomes for the market as May expiration approached. The most unlikely movement in the market, he stated, ahead of expiration was an aggressive move higher. (For more on the definitions of aggressive move higher, please click here). So, recognizing an out-of-the-money bear call could profit if the market stayed flat, rose slightly, or dropped, he favored a bear call on bellwether, Apple. And the analysis was spot on. From the moment the trade was placed, Apple started to pull back. Of course, such perfect timing requires a degree of fortune. But the analysis itself was no accident.
But that was the past. The pertinent question now is where are the markets headed? And for that we must move to the charts of the indexes.
It is obvious from the chart above of the S&P 500 that the 20-day moving average has been acting as support throughout this move upwards. So, while the commentary above pertained to a recent correction in the indexes, what can we infer now about the future direction of the market by looking at this chart? With the S&P 500 sitting on that same support level, we know the market is precariously perched and so alone we cannot with confidence infer that a further pullback will materialize or that the 20-day moving average will act as support. But that’s unhelpful! So, how can we gain greater insight? Q the NASDAQ!
The NASDAQ provides greater insight because we can see here that the technology-laden index has already crossed below its 20-day moving average. This is an ominous overtone for the immediate future and would lead us to be on high alert for a corrective move down in the S&P 500 and the Dow. The one caveat is that this decline has been on declining volume.
Like the S&P 500, the Dow is barely clinging onto support at its 20-day moving average. And it may well hold on. But deploying capital to a bullish position with this chart as a backdrop would be akin to gambling on a 3-legged horse. Sure, there is a chance that it will hop home a winner. But do you really want to bet that it will?
If we revert back to our probability argument again, the answer would be immediately clear. Let the market prove itself first. If it can use this 20-day as support then with greater confidence we could trade bullish. But with all the clouds looming, the safer choice is to simply show a little patience, and scan for opportunities so no matter which way the market is headed we can capitalize.
To learn more how to discover such trading opportunities, simply login for free at www.MarketTamer.com
Market Outlook May 11
Wondering which way the market is headed? We nailed the market direction yet again last week so make sure to view the video below to find out this week’s market forecast. And if you would like to chat with us simply click here.
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