Monday, March 7, 2011

Mid March 2011 Buy? - Inflection Point Model (Part 2)

Mid March 2011 Buy? - Inflection Point Model (Part 1)

Like February, multiple posts will be posted as significant information becomes available and indicators become more enticing for long entries. Towards the end of March, a quarterly publication will be published by Understand, Survive and Thrive, discussing last quarter and projections for this year. If interested, leave a comment and we will try to include you in the mailing list.

Trading Nuggets:
1- It is not worth trading against the primary trend even if you know that the market is going to correct. This distracts the trader from exiting shorts at the right time. In others words, the expected returns are far less in counter-trend trading.
2- It is always better, easier, profitable and convenient to pick a bottom in an uptrend than to pick a top. And similarly, it is always good to pick a top in a down-trend than picking a bottom.

There are three scenarios in which this turn date can play out:

1- Market bottoms and turns up till the next turn date - Highest Probability
This is the highest probability scenario because of EW structure and strong breadth readings. A 2-3 weeks correction is a good pause for the market before the next leg up.

2- Market pauses (shallow rise/sideways), Resumes downtrend and bottoms at the next turn date - Medium Probability 
Although this is a lower probability option, if the market manages to decline below the 1260 level after the forthcoming turn date then it would suggest that market will continue its decline. In that case market will most probably decline till April 2011.

3- Market falls, and then rises into the next turn date - Lowest Probability
This situation is possible if market makes a bottom in late March 2011. The best technique to counter this scenario is to have a tight stop. Therefore, if the market falls below a particular level then one should exit longs. In this way, he will be sure of the new direction i.e. lower. As of today, the trend reversal level line in sand (on a closing basis) is 1260 for SP500. This scenario is low probability because over the course of last 2 years this scenario has played out very rarely.

1- If the market does not declines significantly or rises sharply after a trend reversal date, it would go sideways for some time: This kind of behavior is normally exhibited by strongly up or down trending markets.
2- Always trade in the direction of the trend. Even if there is a trend reversal date, wait for confirmation by other signals because "Markets can remain irrational, more than you can remain solvent."

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