Once the market gets into virgin territory, like it is now at 8451, it gets free of any resistances, but naturally breakouts are not perpetual and they do fail. So basically I'm looking at 8451, and what the next possible resistance level is. Once resistance levels are not apparent, where one can punch a stop, then it becomes imperative on a threader to start looking at psychological levels, and these psychological are landmark numbers. I would also go back and see how market performed at 7500 to see what's going to happen at 8500. For example, when we were looking at SPA 1000, I always said, since my post as early as June/July, that the target SPA 1000 would be very difficult to negotiate and I referred to my experience decades ago when DOW was trying to break through 1000. I referred to the break of magic number 1000 many a time that, once it took out 1000, we were up there 20% higher in no time. Back then I started looking at TA quite dismissively because of the fact that 1000 on the charts never looked a number to talk about, neither did 1000 on SPA or for that matter 992. The case I'm trying to make here is that one should now look at psychological levels, look at the locals, how they are playing the game. To know how locals are playing, look at SPA performances. For me, SPA 1033 is a support; with a close above that, we are looking at levels above 1040, but this is exactly what we say: that once it breaks 1000 its going to shoot up like a rocket.
It is a typical error of inexperience where you short the market at 992 expecting that the market will come back to you; that's an unpardonable sin, you just don't do it.you don't stand in front of a freight train. That is what most of my e-mails suggest that right at the breakout people were shorting the market or writing covered calls. One lesson to learn is: Don't underestimate the potential of the market when its trying to make a new breakout. As far as habit is concerned, of correction after a breakout, markets do exactly opposite to what people want. It climbs on the walls of fear and falls from towers of optimism. We are in this area which is completely a virgin territory, and we are seeing how merciless the market is, the levels are being whip sought; anyone who tries to call for intermediate trade with little regard to locals, look at the trade of the locals, that is what the bottomline is. Look for where you think the stops are punched in, like we had levels the day before yesterday of 1033 and for the supports, the stops are punched in at 1022. Locals tend to take it down much higher or much lower where the stops are punched. Basically, that is the hallmark of trading.
Let me tell you what happens in the pits...the locals in the pits, without any external news like the Gulf war, start with a different ball game, but in a normal day if the market opens say 10 points higher on S&P, someone is a seller and someone a buyer. So, on a typical day like the 17th, the market opened at 1030, and the moment it opened there, Ray told me that Ike this is a trap, you just don't long when locals are the shorts; it is this reason that usually a stronger opening ends up in a weaker close, but sometimes if good news comes, the shorts would have to run for cover at 1033 or 1034, even the purest breed of the professionals who are ready to lose a million dollars on a single trade in a day will not put beyond 5 points from where they are short as a stop-loss. So on 17th if you'd seen the market taking out 1034 it would have just gone up to 1040; this is because of the fact that locals short at 1030 would cover their backs unlike our heroes who tend to run positions from 850 short and are still adding on to the short positions, as if its a free game making it look so easy. Here one thing is very simple when you're doing S&P trading, your stops have to be very very tight, but for a small investor S&P should not be a tool of trade, it should be a guide to understand the direction of the market, and that is what I'm aiming for on this thread that let's take a cue from S&P. If we need to protect our profits there are four ways:
1. if you are very careful and don't mind losing your established position, cover calls against your core portfolio. That can be done if 1008 has been broken on two consecutive days;
2. you can buy some puts, if 1022 is broken;
3. there will be a certain divergence in SOX and S&P and that divergence will be if SOX takes out 320. In case that happens, SOX has all the potential to move up to 380 exactly the way it came down to 320, maybe that could be the back of summer rally. Here I'm looking at SOX and its quite a good configuration; I see a possibility of earnings surprises, so for me SOX 280 is a great resistance. Even S&P pulls back, SOX will show resistance below 280 so the pullback in SOX will be less severe than S&P; if someone wants to be more aggressive, one can also look at SOX going long 2 closes above 320. So you can be very careful on S&P and hedge yourself, but on some indices long play still looks an attractive option, only if 320 is taken out on two closing basis. Do all your trades, not on levels but on a double close. Get your confirmations right. A double close above a certain level is a confirmatory signal that serious money is winning. So one can think that odds are in his favour. A single close or a quick dip is a false signal, you just cannot get trapped in that.
4. In this market one can look to book his profits (as I've said many a time that this is a volatile market at these levels) you will see it moving between 992 and 1070 so depending on your risk profile and sleepless nights threshold, you can always go into beaten down sectors coming out of more lucrative ones, and I look at various things and in Technology, with the exception of computers, communications, semis and software are sitting at key resistances here and that is quite explosive. If money starts going into these sectors you can see even S&P taking out 1070 very quickly. One bigger external factor I'm looking at in Europe and even Asia is new highs of CAC-40, DAX, and FTSE.all these countries who were so far running on austerity have been paying back the national debt, rather, reducing it well below 3% of the GDP. Now the profitability levels of these European companies is going higher. And you can see that these companies can only become leaner and more profitable and are following the pattern of Dow Industrials. In this global integrated economy, a lot of push will come from Europeans rising from slumber. I expect higher volatility but 992 will for quite some time become the 900 of this trading range, 950 being the 850 of this previous trading range, that is what is called the higher highs. It was unfortunately called the start of a bear trend last year and now we are right in the middle of one of the largest moves which, of course, should consolidate within 5% of these levels. So one needs to take some action on core portfolios so as to maximize the profits.
Iqbal Latif |
