Sunday, October 26, 2008

The Week Ahead 10/27/08

The US markets tried to go down Friday, but in the end finished off of the lows. The intraday pattern from Friday suggests that there will be some downside Monday morning, but unless the downside momentum accelerates by Monday afternoon, it is likely that Monday's low will be wave b of a large triangle that will terminate around election day.

This week the Fed meets on Tuesday October 29 and everyone expects a substantial rate cut which may provide the lift for wave c of the triangle. On Wednesday October 30 we get the advance GPD number. Anything less negative than -0.5% will also likely help provide temporary support. While I have no real proof of this, it seems apparent to many that the government's GPD deflator, a measure of inflation, has been rather low, which gives the appearance of higher real GDP than perhaps it should be. If this is the case, it would seem likely that the powers that be will do everything possible to make this GDP number look better than expected.

After reviewing my positions over the weekend, I have decided to exit my remaining index short positions on Monday unless the market moves down with volume and breadth early on. I will maintain the balance of my existing individual stock short positions and look to re-enter the index short positions near the end of the wave c retracement. If I am wrong about the triangle, I will re-enter the short positions on the downside breakout as I did in September. If this is not a triangle, but rather a flat, then wave c will show very strong volume and breadth, and I will wait for a retest of the October 14 highs to re-enter short.

The difference between success in trading and success in other areas of life is the ability to be comfortable with uncertainty. In engineering, certainty is paramount and one can rely on others to use verifiable references and standards to comfirm one's analysis. In trading, there is no certainty. The only confirmation of success is a rising, on average, account balance. The way we handle uncertainty in trading is by being disciplined in acting in a consistent manner with respect to the market with a clear understanding of what outcome will indicate that we are on the wrong side of the market. When that outcome occurs, we exit the market and wait for another opportunity or reverse the position. If we do this consistently, even with an otherwise poor trading methodology, we will still make money or at least not lose much. While I might have many ideas about what I think the market will do next week and down the road, I know what will confirm that I am wrong, and therefore when I need to exit the position. This is the best that we can do, but doing it consistently will lead to profits.

Wave c targets:

Dow - 9180.54
QQQQ - 33.07

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