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The Market’s Next Moves.

  • Written by Syndicated Publisher No Comments Comments
    August 8, 2011

    Yes moves, plural. Quick analogy to how investors and traders need to prepare for markets. It’s bottom of the 9th, runners in scoring position, you are up by one run and there is one out. A ground ball comes to you at third base. The time to decide what to do has passed. You knew before the pitch what you would do based on where the ball went. Trading in volatile markets really should be no different. Defining your strategy while the ball is in play makes for an emotional decision and when emotion is involved error almost always follows.

    I’ve been studying the 2007 and 2008 markets to look for patterns.  My gut tells me the market bottoms around 1160-1165 intraday Monday morning after the initial flush and then buyers step in ahead of the FOMC meeting. I’m actually considering going long SPY for a trade at that level through FOMC. Beyond trading the FOMC meeting the question becomes do you put on a longer term short and write options against the position while you wait for the trade to develop or do you simply go shorter term options realizing you’ll need to trade this volatility.

    In studying the 2008 market (chart below) I have two observations to share.

    There were a series of very major bounces (each bounce is highlighted in green with the first percentage the amount the SPX rallied off the lows and the next the percent it retraced of the previous move lower). If you traded that market and were willing to leave some money on the table in terms of taking trades off early you did very well.

    Note the first candlestick pattern in the far left green shaded area. Similar to the 2007 candlestick pattern and exactly where we left off on Friday. That is my rational for possibly going long SPY into FOMC.

    Below is the 2007 pattern we have been following so closely with Point G where I suspect we currently are in this market. In 2007 after Point G the market actually found a bid and moved higher into the spring but there are two important factors to consider during that market.

    Q4 2007 GDP was announced around Point H and was 2.9% even though the recession later was found to begin in December 2007 and Q1 2008 would register (0.72%). So the macro picture “appeared” stronger in 2007 than it does now.

    Point K is the purchase of Bear Stearns by JPM which was the first of many bailouts. When bailouts first happen markets tend to rally for a while yet as bailout after bailout after bailout the shelf life tends to diminish.

    I’m being somewhat vague right now beyond a possible long trade into FOMC or if you are short a possible time to exit all or part of your shorts on Monday. A lot depends on how the EU bailout of Italy and Spain are received, the affects of the downgrade on non treasury markets like municipals, bank letters of credit, etc all of which can have negative affects on the economy.

    Bank Of America is also in trouble right here and if the slide continues then this market will continue to sell off. BAC could be a $6 stock within days based on limited support levels. You have to wonder are they being shut out of markets based on perceived counter party risk?

    Bottom line is this market is a fluid situation and we need more time to see what is the best way to play both the short and long term. Perhaps we should intentionally walk this batter to better understand our next move.

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    The Market’s Next Moves- Macro Story.

    Images: Flickr (licence)