Sideways Gyration Continues...

For more than 3 months markets have been going sideways. This sideways action is not only boring, its very straining for investors, economists and everyone else. As market goes sideways, investments don't yield returns which frustrate investors and they try to do things that more often than not hurt them. It's a way of market to throw us off our investment strategy. But the goal is to be not be dissuaded by the market and keep following a plan.

Along side regular investors, it significantly impacts options traders. Sideways market action is disastrous for option premium. As a result, options expire worthless. SP500 is currently at the same level as it was in early July. So over last 3 months, market has not gone any where.

If anything, it has a slightly downward trajectory since August. On one hand, this kind of market action is positive for long-term market gains, as market is digesting gains and will most likely breakout, it begs the questions whether we have seen the bottom or market still needs to do some work on the downside.

We are blessed to be up ~20% (YTD), while SP500 is up ~6%. Detailed performance analysis will be shared at the end of the month.

Identifying Next Market Move
Identifying a top or bottom remains a very difficult job. In order to correctly project market's next move, we need to take into account 4 items:

1. Timing
2. Structure
3. Market Signal
4. Confirmation

Without all of the above items lining-up, its premature to assume that trend has reversed.

Timing

In regards with market timing, we are currently within the Inflection Point Model's turn window. Window is shown above in blue box and is shown below:

Turn window will expire at the end of next week.

Structure

Market structure remains corrective but there is a potential that we can see a decline before sustainable rally. Therefore, if the market rallies and can sustain the rally, it will be signal of bottom. If the market cannot sustain the rally and starts declining in the next couple of days, it will suggest more work is needed on downside. 

Market Signal

If market performance over the next few days generates a technical signal, it will show us whether market will top or bottom within this turn window

Confirmation

Once the trend is set, we would need a confirmation by proprietary levels to confirm the move.

Conclusion

Market remains in a sideways pattern. This pattern will soon end but will confuse many market participants along the way. At UST, we know that the market is within a turn window, now we just need to wait for a market signal and confirmation to confirm the next move. 

Overall, market remains in an uptrend. And in the next post we will see the value of adhering to Market Classification Model. We will also be writing a series of posts on how our proprietary strategy fared in a confusing sideways market. This will be an amazing case study and I am thankful for the fact that we have seen this kind of market action because it will enable us to see the benefits of certain key aspects of our strategies.

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Technology getting ready for a Break-Out

While the US markets have been going sideways, Nasdaq has traced out an inverted head and shoulders near all time highs (shown below):

These highs are 16 years old and there is vacuum above this level. If this pattern holds, we can expect a sharp rally in the near future. This rally can start in parallel with central banks announcements or it can start after a decline following Federal Reserves announcement. In any case, this is a very positive development for the market.

If Nasdaq can lead the market, we can be sure that the overall market will follow and that the recession talk will substantially subside. According to Market Classification Model, we remain in an uptrend. Uptrend typically results in rallies and market participants find reasons to be bullish even in front of negative news.

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US Downgrade: Market Crash or Rally?? - Episode 2

Today US lost its AAA rating: An event which was once considered unimaginable has finally taken place. According to the main stream financial median, a Debt Downgrade could have severe consequences, like rising interest rate and declining stock market. This kind of behavior would result in reduced economic activity, ultimately leading to another recession.

At this point, I would like to ask: Are we going to witness a dramatic sell-off Sunday evening? Or will this downgrade give way to a temporary rally? Based on our trading experience, current market structure and Inflection Point Model turn window of  August 17 - August 26, it would make sense for the market to shrug-off the downgrade news and rise for a few days. This rise would lead to a final decline into the turn window.

In any case, next few days will be very interesting with considerably choppy market action. Therefore, the best strategy will be to stay on the sidelines, continue to analyze the market, define risk and trade based on Trading Algorithm signals.

Note: I will be on vacation starting August 7, 2011, till August 11, 2011. After vacation we will thoroughly re-analyze the Market Matrix to decipher whether the market will bottom in the Turn Window or will give a selling/shorting opportunity.