Tuesday

Incubation Period

Post a Comment October 20, 2009 – 7:12 am |   | Permalink |  Print This Post |

We have fired most of our bullets establishing both naked and hedged positions (hopefully) without breaking Rule #1 ie Do NOT overleverage. It is time to wait for this rally to boil over. It will, and this is probably the easy part. The real problem begins when the market has pulled back to a “the middle of no where” level. Now we know the rally is already at unprecedented levels, and close to technical targets. So plus another 5-10% OVER those targets, we still have an end in sight. The problem lies when the market starts pulling back to Dow 8800-9000. The short term path then will not be “so clear” then. It could retest lower lows, double peak, make a higher peak, ie do anything. The Technical traders would then recount all their counts and have an explanation for any aberation. Our indicators have not been moving much lately despite markets going up, which makes trading difficult because it has more head room to go up (suggesting markets have more room to go up too). What we would like is for it to be at the brink (if not slightly over) resistance levels. We will try to get a screen shot when we get a chance to later. Meanwhile, we have been down with a flu so we will take this opportunity to rest and let our trades incubate.

We have read somewhere that this rally does not have many retail investors riding it - they were too afraid to take any positions back in March when markets were collapsing. Instead, it was the smart money who jumped in back in March, and are now selling out in droves. They therefore conclude that when this rally pulls back, there will be ONE more large rally to make higher highs. This final rally will be retail investors who have “missed out” in the current rally who are now sitting on the sidelines because things have gone up too much. They are forecasting a pull back to 8000-8800, where things will get cheap enough to entice the moms and dads to come out and play. Then with some help from the Smart money, this rally will go one step higher than the current - this will be the FINAL WAVE UP (and final chance for the institutional investors to divest all their holdings) before a cataclysmic collapse. There are just so many convincing stories out there on what MAY happen it is hard to know. We will look at all our indicators again soon - and present them for your scrutiny.

The Hang Seng is up another 1%, clearing 22400, whilst the Nikkei’s lacklustre performance sees it dipping below 10300. We opened another short Hang Seng position at 22370 ($1/point) and long Nikkei at 10314 ($2/point) earlier - yes “the same old losing trade” as one reader would put it.

We received a comment from a fellow reader who (sounds) like he/she has jumped into the Hang Seng/Nikkei trade with us - not very happy that this trade is still out of the money. This is time to emphasize on 3 things:

1. DO NOT TAKE OUR POST AS ADVICE. We are NOT licensed financial advisers. Seek your financial adviser before making ANY investment.

2. (Now that the disclaimer is out of the way) Rule #1: DO NOT Overleverage !

3. Be Patient. If one is not overleveraged, this position WILL be profitable in time. We are prepared (in funds) for what we feel is the worst case scenario and will hold on until ALL our positions are profitable when it comes to the Hang Seng and Nikkei. In the meantime, look elsewhere.

On a brighter note, gas is cooking with gas! Bloomberg has had a few headlines on a “colder than expected winter coming up”. It is a joke on how predictable the manipulators are. Slaughter the price of gas down to the pits, now that they have loaded up with Gas positions, manipulate the weather! Well, we are not selling out until hell freezes over.

Our agriculture trade was beautifully timed. We waited ONE YEAR before we pulled the trigger for a position which was proportionate to our level of bullishness in soft commodities. We were holding on to 1000 units of Agriculture ETC for a long time, and finally loaded another 5000 units (thats 30k worth of CFDs!) at 6.07. At the time of writing, it is trading at 6.503.

The point is one can never pick turning points. As soon as you fire your shots, expect to be down. And expect to be down/wrong for longer than you think, and more than you expect. Hence, be very very light. Same rules then apply when you start unloading your winning positions. You will not pick the top (or bottom if you were shorting). So release them gradually. This process of titrating your positions is like treating a diabetic with high sugar levels with insulin. Giving too much all at once will overdose the patient, whilst not giving enough will do nothing to their high blood sugar. So we take our time in gradually administering insulin in a sliding scale manner.

In the meantime, stay happy that markets are rising. If you are not and are watching your screen and charts on a tick by tick basis, then you are Over leveraged. Just remember that this gain will (probably all) be given back. So, lets be grateful the big boys are flogging this donkey further up.