Tuesday, November 20, 2012

This market's making a fool of me!

With a wonderful sense of timing, no sooner than I commented publicly on Friday that a couple of potentially key levels in the indices had been breached (being Dow 12,500 and DAX 7,000), then the markets decided to do an about turn and shot up. This continued yesterday with a strong start to the week. With my current bias in my portfolio to the short side, this resulted in an erosion of profits. To top things off, my remaining long positions decided to stay flat!

What is worth remembering is that, during market downtrends, the rallies can be short-lived and quite brutal, and this volatility can catch a lot of traders out.

The most vivid example in recent times was in October 2008, when there was a reversal on the Friday 10th (after a trading halt was called early in the day), and the Dow shot up over 1,000 points the following Monday. It was also up some 400 points or so on the Tuesday (I think in pre-market) yet it lost all those gains in a couple of days, and despite trying to bounce again, did not breach that Tuesday high. The downtrend re-asserted itself in the early part of 2009, before forming the final market bottom and the end of the market downtrend. Below is the chart from that period, with an arrow highlighting that sharp 'up' day.

Now, while we are nowhere near being in such a market downtrend at the moment, the principle remains that these rallies can be brief and painful to those who are holding short positions. Yet, the current charts still show me that the downtrend remains intact, and there is no break either in the pattern of lower highs.

Please remember that I simply observe and comment on the markets from a trend following perspective - we never predict tops or bottoms in a market, but simply let the price action determine this, and to a trend follower one day's price action does not necessarily constitute a trend reversal.

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