Wednesday, February 16, 2011

Stock Market - Risk Definition

SP500 finally reached the target of 1340 stated on this blog in early January 2011. At that time, the market was still around 1260. Moreover, the final down-up sequence as discussed in Sunday's stock market analysis,  is also almostcomplete - please see Detailed Market Analysis (Mid 02/11) - Part 4. Therefore, it is time for the market to show its future direction. 

At this point in time, the trend is clearly up, but optimism is also extremely elevated, Elliott Wave structure is nearly complete, technical divergences are evident, and cycles have topped. In other words, this is a classic opportunity to short the market. However, major trend can stay up for a very long time. As John Maynard Keynes once said, "Markets can remain irrational a lot longer than you and I can remain solvent."   

Therefore, one should always have a clear, well-defined and appropriate risk-management strategy for successful and sustainable financial investments.

Risk Definition:
Based on analysis SP500 should not exceed 1345 in the near term. If it does break above this level then the risk-reward ratio, which is currently very low for shorting the market will turn higher. At that point it would be reasonable to go long again on partial positions.

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