Monday, October 24, 2011

Market Overview - October 24, 2011

Market has risen very sharply over the last 2 weeks. Personally, I was not expecting such a strong move, especially since the market was in a well-defined down trend. This kind of market behavior reminds us of the importance of having a systematic trading approach and to not let our emotions govern our trading decisions. For example, UST Trading Algo got out of the market at 1114 after shorting at 1185. It then stayed away from the market, eliminating the pain of shorting and losing money (BGG).

A reader recently commented on the blog that market might have already completed the rally, and we might top over the next few days. Personally, I would like to agree with the reader. However, recent market action has been so violently positive that it managed to pass the 8/4 trend change test. This test confirms that we are now in an uptrend and in a Bull market. In Bull markets, surprises will be to the upside. Therefore, one should avoid being short and manage risk in long trades.

One of the primary tenets of UST is to trade with the trend. This is because, similar to persistent declines that we saw in August and September 2011, market can undergo periods of persistent rise: Rise after Mar 2009 low, July 2009 low, February 2010 low & August 2010 low. Under such circumstances, trading against the trend can prove to be catastrophic. Therefore, as long as we are in an uptrend, our goal will be to identify bottoms and not tops. 

As long as the Trading Algorithm levels are not violated, current market structure supports a continued rally. The following chart shows a clear 5 wave rise (Wave I) since October 4th low, followed by a 3 wave sideways correction (Wave 2). This kind of behavior suggests that the market is about to embark on the 3rd wave up. This could result in a sharp rally to 1300 level (SP500).

This pattern is supported by technical indicators, sentiment readings, IPM turn window calculations and supporting markets. In fact, technical indicators (NYAD, TICK, TRIN) are showing such a strong market rise potential as we saw in March 2009 or July 2009. This behavior in conjunction with pessimistic sentiment, suggests that we are about to witness a sharp rally.

Note: In one of the future updates, UST will send out Market Matrix analysis (if time permits).

In November, Understand, Survive and Thrive will publish its Q4 newsletter. UST might also publish a special report highlighting the significance of the current rally and potential Bull Market/Bear Market scenarios. Both of these publications will be available to the subscribers, as soon as they will be released. Like IPM these publications might be very useful in navigating the end of year market gyrations.

In any case, risk-management should be of paramount importance. Subscribers will continue to receive stop-loss levels and trailing stop locations.  

A special Subscription promotion is currently running through October 31, 2011. There are only 3 spots left. If you want to get information for subscription, please send e-mail to: After October, subscription will not be opened at least until January 2012.

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