Wednesday, December 1, 2010

Bullish EMAs crossing but...

... the market remains too close to the 1177-1200 trading range to call the game in bull's favor. As I warned you many times EMAs crossing does not work when market is trendless and in my opinion that is exactly what happened in the last two weeks, we had a big move on the downside, big enough to trigger the sell signal but the signal was not confirmed and every single time bears tried to push SPX bellow 1177 bulls recovered nicely. On the upside the same thing but in reverse did happen, with 1,200 being touched four times followed by a mini-plunge. Today market went outside the trading range but not by a lot. Is this bullish move for real? I don't know, it could be but most likely is not. If it's real we will eventually see a pullback towards the breakout point, 1,200, but SPX should find support there and move further up. If market closes bellow 1,200 on any of the following 5 days the slightly bullish momentum on intermediate time frame is going to be canceled.

This is a pretty rare situation (thanks God) when market is trading in such a tight range. Last time this happened was exactly one year ago. That was a textbook range bound trading followed by a textbook breakout. SPX may not behave exactly the same this time but it's worth having a look at November-December 2009 period. Notice that SPX traded between 1090 and 1110 for almost six weeks. It had a false breakout, SPX went to 1115 but was followed by a pullback that went bellow the breakout point. Just before breaking out for good SPX did not go all the way down to the lower edge (circle). Notice that SMA120 (SMA18 on daily chart) was crossed many times. Also notice that EMA25 did cross EMA50 many times during this period (approximately EMA4-EMA8 on daily chart).

 What's next? Is hard to say. My guess is that we are going back to the trading range in the next few days and stay there for longer than two weeks but it's just a guess. I speculated a little bit today and bought a few puts on TZA based on this guess. It doesn't matter if this works out or not, I used very little money. The big dilema is what to do with the rest of the portfolio, should I cover here, take the loss and switch sides like I usually do or trust my instincts and believe that SPX will continue to trade in range and therefore EMAs are going to cross again on the bearish side? I am going with my instincts and hold my shares here. I am 15 points down at this moment, if SPX goes another 20 points up, above the November high, I am going to cover so I am willing to give back a maximum of 35 points. The thing is if I buy/sell according to EMAs and market continues to trade in range I am going to lose more than 35 points. I hate when I have to make this kind of decision.

No comments:

Post a Comment

Thank you for your feed-back