Wednesday

Three Ways To Profit From an Unconfirmed Rally

Post a Comment March 11, 2009 – 4:56 am |   | Permalink |  Print This Post |

Dow rallied a whopping 379 points Tuesday - in the midst of our countdown at D minus two/three. We missed the turn, but am pretty happy with a 2-3 day margin of error. Whilst many were predicting armageddon and a target of 5000, we felt that the turn was imminent and missed it by 200 points. It is easy to fall into the trap of being vague or making opposite calls to be right both ways - but we are happy to stick our necks out based on our interpretation of indicators. As long as our portfolio is on track for retirement in <10 years we will be happy!

So, the question now is, do we put our faith and money in this rally? Or was it a pseudo-rally to give more height for further drops? Last night’s rally was news-driven, the “excuse” this time was from Congressman Barney Frank, who suggested the SEC restore the uptick rule and a revision of current mark to market accounting rules. Whilst there is no sure way of knowing, we suggest three things you could do to ride this (and yet have less downside if it was a pseudorally):

1. Buy stocks which are cash backed. Capped downside, maximal upside. If markets were to recover another 15% (ie about 60-65% of entire fall from 8250 to 6480, we are looking at about 7550-7700), at least you will cashing something in after waiting so patiently.
2. If you had absolutely NO positions, then as we have said in our previous post, have a small anchor on weakness.
3. Short EUR/AUD (1.9720 at the time of writing) OR USD/AUD (0.6408 at time of writing) OR EUR/GBP(0.9230 at time of writing - riskier but close enough to all time high): the EUD and USD have risen artificially during this decline, so we would expect a correction in market rallies. We expect a decoupling into the future in our favour, ie the decline of the USD and Euro Dollars.

If you had read our previous post on The Anatomy of a Crash, you would know that a 6% rise is nothing for a recovery rally. Within the first 3 days of a rally, it retraces by >60% of the total recovery (not the same as the drop; most crashes recover by 60% of the drop, hence first 3 days of a rally expected to gain 60% of 60% of the drop: in this case 630 points ie target of 7130), so we should have more gains ahead (if this rally is a true technical rally). 9/10 blogs we follow say the markets need to hold this level for us to trust the rally. Of course. “Will it?” is THE question. We feel that we have anchored our way down (perhaps heavier at lower levels would be a good way to refine our future trading strategy), and have also bought stocks close enough to the “bottom”. Our highest unfulfilled order to open was at 6450 (market low was 6480).

6% rally is a BIG move. To punt and take a big position now would meaning risking 6% (ie rally gains wiped out) plus X % down if this was just a pseudo-rally. It has happened before in the past, it can happen again. Gut feeling is just not good enough to put good money on the table.