"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Tuesday, March 24, 2009

Let's Play Musical Chairs

The current bear market rally reminds me of Musical Chairs, a party game where the one looses, who recognized last that the music stopped playing (market eventually goes down). The longer the game, the fewer people are in the game (volume drying up) and the more nervous the remaining players get because of fewer chairs (opportunities). Despite the fact that you know the music will stop playing, you have to be in the game and run around the chairs (be in the market) in order to win.

The higher prices move, the more pressure market participants feel to be in the market in order to not underperform. Remember: there is still a lot of cash on the sidelines. Here is a quote from the CNBC website this morning: "
"When you start to see the market just climb after weeks and months of being sold out, you have to participate."

The key as always is to listen to the market and find the point when the music stops playing. Some signs, among others, I'm looking for:
- Drying up volume, momentum, breath (obvious ones)
- Extreme predictions ("This is a new bull market, the DOW will go to 10000 before summer", predicted by the clowns on CNBC")
- market goes into what I call "overdrive mode" and starts to ignore (negative or any) news.

Enjoy the ride

Wednesday, March 11, 2009

Do the Opposite...

The Markets tend to do the opposite of what people expect them to do.

It makes perfect sense if you think about it: if everyone expects the market to go down, market participants obviously sold already. If there is no one left to sell, the market can only go up. We had a nice example yesterday: predictions of "Dow 5000" were piling up and Wall Street reversed.

Today, it seems like everone is expecting this rally just to be a short covering event with no legs (just read the Journal or various blogs). What that means is that market participants are still on the sidelines. Should we go higher, these players will be forced to buy in and push prices up even more. So I wouldn't be surprised to see a rally until the end of this week.

Nevertheless, this rally is creating nice setups on the SHORT side, so I will start to build up short positions pretty soon.

Tuesday, March 10, 2009

What will Happen IF...

Economic news have been terrible the last weeks, major indicees lost more than 20% YTD, SHORT positions are pilling up and a record amount of cash sits on the sidelines. Do you imagine, what could happen if we get just a little piece of positive news? A major bear market rally, which would shoot up the Dow by 1000 points in a couple of days. That's why I'm very careful shorting here.

To make that moon shot happen, we need a catalyst of course and I have no idea, what that catalyst will be. Could be that Washington finally wakes up or China is taking the lead. Both scenarios don't seem likely to me, but who knows.

Sunday, March 1, 2009

The Rhythm of the Market

Niederhoffer writes about how the market sometimes reminds him of music with similar patterns and themes. It is fascinating to try to find harmonic occurances in speculation.

These days, the market seems to have a certain rhythm: the S&P 500 is in a nice downtrend since Feb 9 with some short term bear market rallies. The 30 min chart reveals a tradable pattern: when plotting major resistance levels, one can observe that the S&P moves in 30 point steps. For example, on Friday, the former support at 750 was converted to become resistance. Prior to that 780 was the lower resistance level.

So this is the trade: go short once a support level is broken and cover as soon Mr. Market ends up 30 points lower, so our current target is 720 for the S&P. Also note: like in music, patterns don't last forever, enjoy them while they occur.

Good luck