Mid-week Market Review, October 15, 2008

[caption id="attachment_381" align="aligncenter" width="500" caption="S&P 500"][S&P 500][][/caption]

The only thing for certain at this point in the market is that there're a lot of uncertainties. Notice the several big swing days near the October low but with open and close near each other (a.k.a. the doji's). Are we at the bottom yet? I don't know. Have we started a rally attempt this week? Definitely! Is it going to hold? My intuition says likely.

Why do I say that? Three reasons. Fundamentally, the joint effort by world central banks to inject billions of dollars into the capital market isn't going to be unnoticed. Secondly, the up days this week has been marked by some strong late-day climb across the market. This suggest the pros/smart money are buying. Thirdly, also notice the significant volume at the doji last Friday, when the market reached a new low. Subsequently, the decline in the last two days has been on much lower, and declining volume.

[caption id="attachment_370" align="aligncenter" width="500" caption="SPDR S&P 500"][SPDR S&P 500][][/caption]

On the other hand, the fear and panic are still very much alive. Profit-taking will create some serious resistance going up. Also, the market has been very irrational lately, so any fundamental or technical analysis could very well be thrown out the window.

Bottom line is, I believe an intermediate term bull phrase is taking shape, yet be very cautious in your approach and use a conservative risk management approach. I am not going to repeat my errors from last month when I entered full long just before the biggest market crash of our generation.

[S&P 500]: http://traderpau.files.wordpress.com/2008/10/spx.png [SPDR S&P 500]: http://traderpau.files.wordpress.com/2008/10/2008-10-15-spy.png

Posted 15 October 2008 in stocks.

4 errors and lessons from being long just before the October 2008 crash

[![S&P 500 review][]][] : S&P 500 review

I have been waiting to go long in this bear market for a few weeks now, hoping for a bottom soon (first of my errors).  Then on week of September 29th, I decided to go all in (error #2).  S&P closed at 1099 that Friday.  A week later, on October 10th, the Friday close of S&P 500 was 899 points, and I am still left holding on (error #3).

Error #4 though, requires some explaination.  Simply put, I was not reading the chart as I should have.  While both the price action and contrarian sentiments were bullish, I totally missed out on a basic technical analysis indicator â€â€Â? the volume.  Looking at the above chart, it’s easy to see that the first downward break of the trendline in mid-September was confirmed with volume.  The volume on that day (left blue arrow), and for that entire week, is substantially higher than usual.  The subsequent mini rally attempt before the next break has been marked with little volume.  This suggests that market participants, particularly the longs, still haven’t flocked in yet.

Seeing that, I [should at least reduce my position size by exiting some of my most weak positions][] (i.e. least profitable positions) before the weekend.

While this is not my costliest lesson in trading, it illustrates some very fundamental lessons which I should reiterate, because I should have known better.

  1. Never try to pick the top or bottom.  Which I thought I learned from my futures trading already.
  2. Manage risk according to volatility.
  3. Exit at any cost if it doesn’t look right in a bear market.
  4. Don’t get fixated on the individual stocks, look at the bigger picture.

Actually, I think this all boils down to proper risk management.

[S&P 500 review]: http://traderpau.files.wordpress.com/2008/10/week_spx.jpg [should at least reduce my position size by exiting some of my most weak positions]: http://www.quantisan.com/didnt-cut-losses-as-planned-and-now-paying-dearly/

Market capitulation under way

[caption id="attachment_316" align="aligncenter" width="500" caption="YM (mini-Dow futures)"][YM][][/caption] [caption id="attachment_317" align="aligncenter" width="500" caption="DJIA and VIX (volatility index)"][DJIA and VIX][][/caption] See graphs. DJIA closed at 8580 today. This is history in the making!

WSJ: Industrials Drop 680 After Late Collapse

[caption id="attachment_319" align="aligncenter" width="500" caption="S&P 500 weekly from 1990 to 2008"][S&P 500][][/caption] The DJIA is too manipulated. GM was downgraded today by S&P, conveniently when GM is testing it's long term low. Just where the heck were these guys a few weeks back? Do they think we're idiots? This is blatant market manipulation! Anyway, enough with the vent. I was just going to point out this week's market plunge with respect to the longer term picture. S&P 500 at 903 today is just shy of its 900 support. Next support would be 750. The million dollar question is, will we see 750 or 1000 first?

[YM]: http://traderpau.files.wordpress.com/2008/10/2008-10-09-ym.png [DJIA and VIX]: http://traderpau.files.wordpress.com/2008/10/2008-10-09-vix.png [S&P 500]: http://traderpau.files.wordpress.com/2008/10/2008-10-09-spx.png

Posted 09 October 2008 in stocks.

Reducing overall market exposure according to market volatility

[caption id="attachment_311" align="aligncenter" width="500" caption="S&P 500 and VIX"][S&P 500 and VIX][][/caption]

With VIX at a multi-year high and the current market turmoil, it seems to be a good time to write about market volatility.

Market volatility is a two-edged sword. Day traders dream of catching the 800 point swing in the YM contracts. Yet, most would lose more being stopped out before giving up and then missing the swing. For long term traders, these 800 point swing could cause panic (if you're on the wrong side) or doubts (should you or should you not take the profit?).

Based on my brief experience in day trading and futures markets, I am not one to play with fire. For my longer term plays, I am feeling the pain as we speak. Thus, it is important to realize that although market volatility is very tempting for quick profits, greed never pays in trading. Another characteristic in a highly volatile market is that there're a lot of emotions going on. As you know, emotions can cloud our judgement. It's more difficult to trade when you're filled with panic, fear, greed, excitement, etc.

In other words, market volatility is bad because 1) large swings both ways at any time and 2) lots of emotions in the market and yourself.

To minimize your risk, it's better to minimize your exposure to the market at times of high volatility. Thus, I use the rule that...

If 50 dma of VIX > 20, then reduce position size to some % (i.e. 50%) of usual amount.

As a corollary, here's another interesting idea. It's widely known that markets tend to creep up and plunge down, i.e. rising slow and steadily, and fall quick and hard. Looking at the 50 dma VIX, it's actually a quicker indicator for the 2007 top than my previous 2-line EMA indicator for market sentiment. Conceptually, if we accept that bull market is slow and bear market is fast, then this idea of using VIX to signal bull/bear sentiment do seem viable. However, there's already too many IF's and assumptions for me to take this seriously. Therefore, let's just stick with using volatility for managing position sizing only.

[S&P 500 and VIX]: http://traderpau.files.wordpress.com/2008/10/2008-10-08-vix1.png

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