Tuesday, August 30, 2011

Trading Algorithm Update - August 30, 2011

SP500 (Closing as of August 29, 2011) = 1210

Market: Bear to Neutral
Defining Level: 1207
Trend: Down
Defining Level: 1282
4/8 Trend Change Confirmation (Down to Up): Not Yet
Current Trade: Half long from 1167 and half long from 1196. Long Cost Basis: 1181
Profit Objective 1: 1216                                                Trailing Stop (closing): 1166
Profit Objective 2: 1250                                                EW Stop: 1179
Status: Long from 1181 (average). Hold long till profit objectives are achieved or stops are hit
Next Trade / Model Based Approach: Will be determined as current trade matures in 1-2 weeks
Stop:                                                                                  Risk: 
Risk Associated with trade: 
Turn Window: August 23 (+/- 4 days) è
Market bottomed in the turn window. We are now out of the turn window
1-       Market bottoms in turn window
2-       Market tops in turn window
3-       Market double bottoms and breaks out
4-       Market double tops and breaks down
Observations:  After one week of extra-ordinary market action, it is evident that the markets did bottom within the turn window. This observation in conjunction with a new found Wall of Worry, evident through investor sentiment surveys and news articles, suggests that we might be in for a solid rally. As mentioned previously, sentiment has been our best guide - identifying whether to buy the dip or sell short. Furthermore, recent market action in the financials and the small caps, is also very encouraging. At the start of significant rallies/Bull markets, these two groups outperform the broader markets. Since last week's bottom, Financial (XLF) have risen 12.6% and Small Caps (Russell 2000 - IWM) have risen 12.1% VS. SP500 rise of 7.8%. With next turn date in September, we have a rally window of around 2/3 more weeks. All of these observations suggest that we have seen a significant bottom in the financial markets. 

At this point, SP500 should hold above 1168 (closing) to keep the uptrend intact. As far as the bear market determination level is concerned, 1207 is the latest defining level generated by the Trading Algorithm. Right now, most indices are bumping their heads against this level. If we close above this level for 2 days then Trading Algorithm will switch to a Bull Market. 

An interesting observation about this rally is that market rallied despite the fact that Jackson Hole summit was a non-event with Mr. Bernanke delaying comments on possible QE3 till September. This kind of behavior underscores the fact that once the markets are in a rally mode, FED's statements do not matter. 

Note: Understand, Survive and Thrive is a market analysis, market timing, risk management and trade identification service. Until unless we have enough subscribers to take up Market Analysis as a full-time job, it will be difficult to publish real-time market signals with work and school. Trading numbers are based on our personal trades.

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