Friday, November 27, 2009

Quicknote on Developing Action

I'll chime in briefly, since I believe a couple of important elements are now quite clear in the market.

I'm not so interested in the catalyst for this week's negative development (Dubai World) as I am the behavior of the market leading up to it. Action in recent weeks has been clearly distributive and sentiment in recent sessions reached extreme readings. With today's break, even though there is a notable bounce from the opening levels, we have what I would argue as an Intermediate term top now in hand.

This does not, again, suggest the degree of downside and I am not going to sell myself either way on that regard. I prefer to address it as it develops. I'm not against buying stocks on the way down if I am protected and action is favorable (leadership is behaving well, relative to the major indices; charts remain formidable; and signs of accumulation are evident).

I suspect you are looking at the bounce right now. Last night's extremes in the futures markets occurred with very little liquidity, setting up a gap-lower + bounce today; which cannot be surprising. The catalyst, which is not so important, is so far a perfect excuse to buy the gap-lower (sentiment and animal spirits have been very high; we had not yet broken-down in terms of price; many traders chasing performance can argue Dubai is not our problem and they had better buy the weakness).

Upside should be limited though, short-term and as such I believe today is your best bounce to counter. The last hour could go either way, but breadth is extreme enough negative that downside in that last hour, even though we have been only straight up since the open, should not be surprising.

I'm really not so concerned. I'm scaling into a short position here (which, among other things gives me a better ability to accumulate stocks lower if I am so inspired) and I think the levels for benching losses on these shorts is now readily defined (not so far away either, in terms of percentages). Thus the risk/reward equation is rather simple at the moment; for this trader.

Don't do what I do. But as long as we hold our defined highs now, I'm selling strength.

I'll update my position later. If interested you can review the trades live on my Twitter page in the meantime. Good luck out there - keep it simple and keep emotions in check.

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