Thursday, February 9, 2012

Bull Market

It seems like market has made its decision. After a brief pause, the market is about to rally. Please note that this pause was upward sloping, so it might not really appear as a pause in major indices like DJIA and SPX.

Trade: Long
Stop: Close below 1327

We are at very elevated levels, but this does not mean that we cannot go even higher. Next turn date is after 2 weeks. Therefore, it is possible that we might continue higher for next 2-3 weeks. However, stops need to be observed.

Update 11:58 PM
Although the market has passed through the IPM turn window, it is very difficult for me to say that one should jump into the market right now. Please see the following facts:
1- Individual Investors bullishness at extremely elevated levels
2- Newsletters bullishness at extremely high  levels
3- Insiders are selling stocks at very high pace
4- Small caps and DJT divergences

Keeping all of these developments in mind, I went back to my cheat sheet about market scenarios.

Scenarios: TPAP & IPM (turn dates) – Strategy
Low Risk Trade: Market in an uptrend - Pick Bottoms in IPM window using TPAP or near key moving average / break above highs

High Risk Trade: Market near top - Pick Top at TPAP & MM (Tiring indicators) & EW, IPM

Please note that although the market is exhibiting resilience, the circumstances point towards the potential of the high-risk trade. This trade takes on even more significance because we have just eclipsed the IPM turn window, hence more risk involved. On the other hand, if the market does top out for the short-term, we will see a sharp reaction to the down side for the next few weeks (till the next turn date).

Now the question is, do we want to take on such risk and make the long or short trade? Or do we want the market to show the direction (Up or Down)? I would suggest that one should wait for another day or two, and see if the market rallies. If it does rally then it would suggest that we are going to continue to rally, and if it fails then we might see a 2-3 weeks of correction.

In any case, according to one of the things that I have learnt during the past few months: One should not trade against the trend in an upward trending market. However, if the market is declining, then one can take small long trades at the turn dates. Therefore, in a bull market one should wait for the completion of the 8/4 reversal to the downside before starting to short. In short, i will not be shorting the market.


  1. Thanks Naqvi! A potential rise for 2-3 weeks? That just about finishes out the month of February. Due to the clunkiness of the funds I'm in (the funds trade at the close of the day after the order is made), I'll go into equities tomorrow. My plan is 70-80% of my portfolio leaving 20-30% in bonds.

  2. All aboard!! Choo choo...!! Time to have a ride.

  3. The next round of LTRO is end of Feb 29th...we will likely have a downtrend for the next few weeks to make prices more attractive for all that relatively free money to plow into...then the next rally will likely see 1370 get eclipsed all the way up to 1450.

  4. WOW! Thanks Naqvi for reviewing your cheat sheet and updating your post! It brings me pause to re-think my prior post about robustly re-entering the market. After seeing your update (and your rationale), seeing the premarket numbers, and the fact that I HATE buying into equities on a Friday, I'm already in bonds and I'll hold tight in bonds (its as close to cash as I can get) over the weekend until we get more clarity in the market's direction.

    The poster explaining his position on the next round of LTRO (I would assume LTRO alludes to the Long Term Refinancing Operation of the European Central Bank), also provides insight. It could very well be that the insiders are selling to set-up the pullback for the next step-up. The timing of this action would be NOW - hence insiders selling at a rapid pace. Yes, I'll hang tight over the weekend and see what next week brings.

  5. Don't fight the fed...throw out all charts, graphs, headlines, credit downgrades, wars, and Grammy Awards....seriously, I have been on the sidelines since SP1272 and feel left out and frustrated, but it feels impossible to jump in at this point..RSI's are through the roof. Apple daily RSI is over 85! Nothing makes sense...and if it drops - and that's a big if it seems, it'll probably happen so fast and furious even most bears will have missed it....and then it'll begin it's move back up when all looks lost, and I will probably miss that rally as well.

  6. Don't worry be happy


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