The markets are still within the same trading range which established the lows in early August and established highs in early September (see chart). The trend is in front of us as I’ve been writing about often, so just play the small trend with reduced positions or sit on the sidelines and wait for the direction to become clear on whether we break above or break below the ranges. My bias is we go down, but I’m not going to bet on it until it starts to happen. I’m not here to make predictions, I just identify the trends and try to make money with it. Predictions gain a lot of exposure, making crazy predictions would get me many more viewers. However, that’s not safe for the individual investor to get caught up in these predictions and I refuse to make these predictions just to garner more attention as I do quite fine without them. Remember that as you see everyone making wild predictions as the market doesn’t care, the market is moving by each major headline and unless you know the daily headlines before they happen, you are unlikely to know the big moves coming. Stick to the trends instead until they end.
Markets are boring lately because the swings make it very complex to trade one direction on. Many traders are still gone on vacation trying not to force action in a bad market and potentially rack up big losses. Market participation is down dramatically and even views on financial websites like mine are down dramatically in this seasonally slow time.
Momentum traders like myself have to adjust strategies for this market or simply move to cash in order to not rack up losses. The momentum is to the downside from the overall chart, but the trading range has not been broken yet. That means if we do want to play, we should acknowledge the ranges and play a hedged strategy that has reduced longs and increased shorts near the top of the range and increased longs and reduced shorts near the bottom of the range.
Right now, we are finding buyers to be reluctant and bears starting to speak louder as we move towards the top of the range. I’m still hedged both directions, but looking to increase my short exposure via long ProShares UltraShort S&P500 (SDS) on breaking below Tuesday’s lows (momentum) in the S&P 500 (SPX). I’m not interested in building long swing trades here as I would rather reduce overnight long exposure than increase it at these levels. However, I will still play long day trades, but find myself using very tight stops as my pain tolerance is low here after the recent bounce.
If you are going to play the market, consider hedging both directions and trading around core positions rather than trying to bet all in one direction and possibly being caught in the wrong one. I’m still less than 40% invested (near 100% in bull markets), so I’m keeping positions much smaller than normal to keep risk reduced which allows me to do easy damage control if I’m caught in the wrong direction as I have ample amounts of cash. I’d rather bet heavy when a clear directional trend is established than a small trading range.
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As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was long SDS but positions may change at any time.
(SDS: 24.68 0.00 0.00%, vol: 1,000, avg vol: 45,067,800, 50-day: 24.27, 200-day: 21.96, yield: N/A, cap: N/A, short ratio N/A, 52wk: 19.48 – 30.07, 1yr target: 0.00)
(SPY: 115.145 0.00 0.00%, vol: 5,400, avg vol: 294,248,992, 50-day: 117.76, 200-day: 127.77, yield: 2.12, cap: N/A, short ratio N/A, 52wk: 109.55 – 137.18, 1yr target: 0.00)
