The volatility continues to chop and slice and dice like a Ginsu knife. Follow through is fleeting in a market where computer’s are running counter-intuitive programs to punish “conventional” thinking.
Certainly, if you got short on yesterday’s weakness, while in the long run you may be correct, the market moved violently enough to most likely stop you out of your position with a loss.
Day to day, one must manage losers properly. Deluding yourself that your position is correct and the market it wrong, is folly. Accepting slippage and taking heat is one thing, however, riding losers in an attempt to salvage your ego is a recipe for disaster.
How to deal with this volatility? Trade smaller. Cutting your trade size in half lets you absorb more volatility and hence draw downs in your account.
Briefly,
I had a sneaky suspicion that a grain sell off from the Chinese rate hike would be nothing more than an opportunity for the Asian and Europeans to buy grain cheaper. One colleague of mine has a theory that the Chinese are buying futures on any drop. Especially on drops they know are on the way (ie yesterday’s ‘surprise’ rate hike) if you knew it was coming, it was a great way to get short in front of it, and then cover and buy more on the breaks. When an individual does it, its called front running and insider trading. When a sovereign government does it, well, that’s politics.
Anyhow, my colleague has a theory that the Chinese are buying futures every chance they get. They are doing this in anticipation of cash buying which is on the horizon buy the Chinese. Buy the futures on a break, buy the cash grain, and then have your futures profits supplement the price of your cash grain purchases… Actually its just common sense that a government would do that. In fact not to do so would seem daft. Time will tell if this is the strategy that is under foot.
As for the Stock indexes, I like to talk about the Dow , more so than the S&P. This is a personal preference, due to the 8 years I spent in the Dow futures Pit. I will, note, however, that if you are trading the stock indexes, you should be aware of which is leading the way. When actively trading the Dow, you have to be watching key support and resistance levels in the S&P.
Sure enough, I awoke to read in the morning paper that, the “fall below 11,000 in Dow signals more weakness ahead”.. Such a simplistic cut and paste analysis. No mention was made of the 5 month 1200point rally from the July lows down at 9600, oh no… That’s not scary enough. I have said it before and I will say it again, mass media looks at the stock indexes in the following way, similar to that of a third grader’s outlook on life—– a 1 point rally is reason to pop the champagne corks and go buy a new car. A 100 point break, even with the index at 11,000 (does any one understand percentage moves?) is met with shrieks of “Shark, Shark, get out of the water!!” but media commentators main job is to keep you reading, or watching, so they can go about selling ads. Scary news keeps the viewers and the readers watching. Hence the hyper sensitivity to reality.
One caveat I want to cover… What happens if the next rate cut from China is 1% instead of .25%? That could be a blood bath for weak longs with out intestinal fortitude.
Just food for thought. As long as I am talking about scaring people… might as well be hypocritical and join the fray…
I still want to be short the Dow if we happen to challenge the April 2010 1 year high at 11,210. If we get a good, powerful settlement above that level, then I would cover shorts with buy stops. However, first time up, you gotta sell it.
Corn and Beans look strong like bull. Sloughing off yesterday’s pull back. I wrote yesterday I though if we had a good bounce back, that would be incredibly bullish longer term. The low at 542 3/4 may hold here. Basically, we back filled 1/2 of the gap higher from 7 sessions ago. That gap is now just 14 cents wide, down from yesterday’s low at 542 3/4 down to top of the gap at 528 3/4…If we can take out 590 tomorrow, the 600 print should be a slam dunk.
Above 6.00, several things will happen. 1) General media will grab a hold of the story, with talk of food shortages on the horizon, or food inflation…2) farmers will be buying 700 calls in earnest, dreaming of the 07/08 highs…3) We will be looking for soybean in the teens as well.
In short, I wouldn’t be in an hurry to pick tops in this market. I would, instead by buying dips, however, Every dip bought would have to have a sell stop exit below it. A good idea is a good idea, but you better have an exit plan prior to entering a position.
Good Trading
