Friday

Make Money Following The Trend

We are sticking by our forecast that markets have another week to run out of steam(up or sideways). Looking at most charts, most bearish technical traders are relieved and reassured by the fact that despite the biggest rally in the entire bear market, key resistance levels have not been broken - hence this is just like any other bear market rallies. Although we are bearish and often trade counter trend (by virtue of the trend being counter fundamentals), we feel this is a correction of extreme acute over-selling. So, do not fight the markets - we have said many times over, do not short at these levels (not yet).

3 reasons why we think the market has more upside in the short term:

• The exact reason above - whilst technical traders feel bearish that markets have not broken resistance levels (and may pull back at those levels once achieved), we feel bullish at least until those levels are reached if not slightly overshot (case of glass half empty/full). This is a different type of bear market rally - ie one that is designed by the power that be to give you hope (and greed for “not wanting to miss out” on a secular BULL rally). So, start shorting when the technical traders say this is a secular bull market! 
• Fundamentals are still bad with rising unemployment - having said this, the bulls say the markets are forward looking hence markets are defying current fundamentals (there is always something to say to explain the movements in the markets on both camps)
• Round number theory: We wrote this earlier this week -  

May 4: We see another 2 weeks for the top to be formed. It may go sideways or make higher highs (more likely). Sentiment between the smart and dumb money reported by most blogs are surprisingly neutral.
May 5:  Our concern is markets are very near significant round numbers - the Australian 200 was 80 points to 4000; whilst the German Dax was 60-70 points from 5000. It would make nice headlines to achieve that in the next few days. Even if markets pull back tonight, we feel that it may be transient until our round number theory is fulfilled. This may drag on for another 1-2 weeks.

So where from here?

Our plan is to wait for another week at least ~ 18-20 May (before shorting more). We had an initial ball park minimum target of 8850 (monthly key resistance levels), but the Dow is awfully close (8590 at the time of writing). A 3% distance seven trading days away from our turning point is not much. And usually markets reach terminal velocity at the turn (ie acute spike in rally and acute drop/capitulation in a decline). So with projected 3% of runway left is not much at all. So we suspect markets will rally above the resistance (8850) to squeeze the bears - nice round number would be 9000. One can say at those levels (even at current levels), a very light short (by this we mean $2/point by our standards of a 40k capital - yes we are still trading as if we have 40k in our account) will see the light of day again despite some potential discomfort. 

Although we have no naked long positions on the indices, we do have long positions in Agriculture (doing well), Natural Gas(doing very well here thank you), stocks in our Warren Buffett Index (great returns in 1 week), and short USD. We are fighting the temptation to take profits at the moment (instead putting a trailing stop). A better strategy would be to short something with poor fundamentals (or the index) when the time is right. 

At the time of writing, the Dow is fighting a resistance held strongly by the Bears (SP 930-935). Do not be surprised for this to give way and for markets to push higher.