So…Now What?

I’m not one for making prognostications about where the market is headed, therefore I have a hard time saying that we, at the very least, will retest the lows from August (nothing in the stock market is a foregone conclusion)…but we are going to retest the lows from August. 

And more. 

The trend is down…the trend has been down since the start of August, like my post from Friday, why fight against the tide?  The ‘easier’ money is going to be made going short…but you need to respect risk/reward when going short.  Trying to emulate a breakout strategy to the short side is asking to have your face ripped off by bear market rallies.  You have to wait for the bounce. 

I know this technique may seem difficult and/or counterintuitive for traders to grasp because many have been trained to employ strategies that buy stocks at/near a break of previous resistance.  Since this market correction started, in earnest (August), this is the exact time you should have been getting out of your longs and thinking about putting on short swing trades.  Just look at the charts…they aren’t lying to you.

August 17

SPY 2011-08-17

This could be seen as an “orderly consolidation” before the next move higher.  Wrong.  Volume was drying up, which means that the ability of bulls to push this market higher was running out of steam.  Ok, say I’m completely off in this interpretation…what is my risk to the short side?  Not much…I’d place my stops above the highs from this consolidation.  Here is where a dynamic approach to the market is necessary.  If you are looking at this from a long-only perspective, sure it looks like an orderly consolidation, but this isn’t an orderly, nor a “normal” market…you need to be prepared.

August 31

SPY 2011-08-31

Here we go again.  Ok, the market was able to push through the previous high…thus making “higher highs and higher lows”…which is a bullish development…IN A BULL MARKET.  I can’t stress the importance of context enough here.  I went short $C, $USB and $ACI (via puts) all right around this time.  I would know I was wrong if price pushed through the upper BB and the quarterly EMA.  It didn’t happen, and was actually rejected the very next day.  Needless to say, I nailed the shorts that I put on here.  Again…you can see price stalling…this doesn’t mean “orderly consolidation”.  This is not a bull market…those ideas do not apply.

September 19

SPY 2011-09-20

Uh oh.  I can see a lot of people getting trapped here.  I can see it setting up…this is the classic “lower volume consolidation”.  Many thought the clam would step in to save the markets again…therefore it took real balls to go short in size here.  I didn’t go heavily short, but I did have put positions on in $XRX and $MYL.  Risk was again clearly defined at the quarterly MA and upper BB.  The trend was down, but in a news driven market a face melting rally is one comment away…so I was nervously confident in my positions.  I was also going short stocks in industries that had underperformed the market during the early September rally…which provided an added level of security.  We all know how this turned out.

Now that we have taken out all but the lowest of the August lows on the $SPY, where do we go from here?  I am going to continue to look for 2-5 day swing trades using ITM puts. 

But the real question is: what stocks should I be focusing on?  Do I look for stocks that have, so far, resisted the decline, as they are just delaying the inevitable?  Or should I keep looking for beaten down stocks that continue to underperform general market rallies? 

I’m leaning toward the latter, as I never like to short strong stocks.  The problem with many of these stocks is they have already declined to such a degree that I am finding that they are running into long-term support, which makes for a dicey proposition.  Then again, I’m only looking to hold the majority of these short positions for less than a week anyway…so maybe that should not be of too much concern.

Additionally, I’m also looking to go long index ETF’s (via ITM calls) after sharp sell-off’s (for nothing more than a quick intraday-5 day trades)…so I’m not turning total bearshitter on you here (see my call purchases in $QQQ and, to a certain degree $SLV on Friday).  I’m just trying to use all of the tools at my disposal to navigate through this mess as best I can….and that means keeping a HUGE cash position (80+% at all times).

Stay nimble and light…this shit is tough and is not for newbies/amateurs.  Going ‘all in’ (or anything even resembling that) on anything here is, IMO, fucking stupid.

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