Tuesday

How To Trade Against The Trend

Post a Comment October 6, 2009 – 8:35 am |   | Permalink |  Print This Post |

The NIFTY finally showed some cracks on the wall - whilst China is up 2.47%, India’s NIFTY is down 87 points making a low of 4894. Since it broke 4900 clean ie fulfilling our Round Number Theory, there could be a recovery to test the resolve of Bears like us. If the NIFTY goes back to 5000 intraday, we will open another short $5/point. We will hold our positions and not be greedy. The last time we tried to double dip by closing our Hang Seng shorts in our personal portfolio at 21700 (our entry at 21900 it turned out to be the high of the rally - hindsight!), it went all the way down to 20000. It is a matter of time before the NIFTY sheds a significant 10%. We will play our longs in Nikkei with shorts in the DAX and NIFTY. So far all our trades are in the red, but we are comfortable holding our positions and letting it cook. When markets turn over, our pairs will come good.
For now, let us NOT celebrate prematurely. Our indicators suggest more upside (which we are happy not to participate in) in markets. The final wave up could be upon us - the S&P rising to the 1040 pivot (previous high of 1070-1080, hence thats the next stop) with decreasing volume and lots of panic buying and short covering. The Dumbest Money is going to push this rally up to its final destination before markets head down. This final high could be a high for years/decades for the Dow (look at the Nikkei in the last 20 years).
The Big Boys will be more than happy for markets to turn over. With all the talk against using public tax payers money to bail private companies, the next wave down could see businesses getting turned down from government assistance. The ultra big boys (who already have been bailed out) will be licking their lips - these ruthless vultures will be circling to snap up good businesses cheap.

Meanwhile, natural gas continues to head up. Our ETFs are now back to 0.62 after a momentary pull back. We are undecided whether to load up more on our longs (contrary to taking profit). We will wait for an uptrend to establish itself and then buy on dips. This is what trend followers do: buy on dips or sell on rallies and ride the trend. BUT the trend is only your friend until it ends. In this instance (where gas have been punished for so long and so hard, plus the fact that there is a floor to prices), we suspect the manipulators would want to push it up next. That’s where they make their big bucks, and we hope to be on the receiving end too. Bloomberg is already beginning to have news about the coming winter being “colder than expected” as we predicted. Do not worry, there will be more headlines like these. We will start worrying and consider closing our longs when there are daily headlines about how cold the weather is! It makes us laugh seeing the media try to manipulate prices (alternatively they try to explain moving prices by making up all these “reasons” - which is the chicken and which is the egg?). Obviously, gas could go back down to bottom feed for a while. In fact, that is our preferred bottom (instead of a V-shape recovery). Our analysis of bottoms suggests true bottoms usually exhibit significant consolidation prior to the rally: in our view, this is the best way to avoid everyone riding the rally. So it stays low for long enough for those bullish to lose interest and to “give up”. Then it moves up when everyone is not watching, and by the time the media catches on to it, it would have gone up to a degree where the Dumb Money would think “its too late” - only to participate at the final stages of the rally prior to the crash.

Our sights are on Agriculture at the moment. The agriculture ETFs have continued to be pummeled, staying close to their lows whilst hard commodities have surged significantly. Staying true to our buy low sell high rule, we will aim to buy more agriculture ETFs.

Our game plan for tonight (we apologize for not giving daily trade plans lately - we have stayed on the sidelines hoping to retain our capital for our nikkei vs nifty/dax trade) is to wait for a rally before shorting. The S&P at 1041 is watched by many technical traders, who are waiting to pounce either way. They normally give +/- 7 points to confirm that the pivot has been broken. So if one is bearish (which we are), we would short only at >1048 once the rally is confirmed and have a tight stop. We feel that THE PULLBACK is closer than you think. This market could still surprise us in a number of ways:

• Truncate i.e. to break down earlier than most technical traders expect (many expect 1070-1080 to break and for the S&P to hit 1200 (Bearish case) and for the Dow to hit 11500
• Overshoot.

We have no doubt more pain is ahead, and that the Dow will go close to its previous March lows. The problem here is when to fire your last bullet. We suggests 3 phases to our shorting strategy:

1. Short VERY light to start with. Example, $2/point at 9600 (current level).

2. Average up your shorts by adding more shorts as markets go against you. (say we continue shorting to $10/point with an average entry of 11000. For us to have an average of 11000, the Dow would be say 11500)

3. STOP adding to your shorts once you have hit X. X is your ceiling where you will add NO MORE to your shorts, whereby you are able to hold on until Dow gets to previous 2007 high (If X is 11500, and using 14500 as the all time high, we would have 3000 points of pain to hold. At $10/point, this amounts to $30k, ie 30% of our capital).

4. Add the rest of your shorts ONLY when markets turn and is in your favour ie <11000.