Friday, February 6, 2009

Pushed To The Limit

It looks as though the Qs may break above the January high next week, but it is not a certainty by any means. Today was a Gann turn date and as the previous dates have worked out well, we may see a selloff on Monday. If the Qs do break above the January highs, then the likely target is 34. If that happens, then the decline into January 20 was wave (c) of a b wave flat as I had thought. It is abundantly clear that the rally from November 21 is an upward correction with overlapping waves, but just because it is doesn't mean that it can't continue substantially higher.

While the Qs may be making new rally highs, it is likely that the broader indexes and the Dow will not. The question is what will it mean if the rally continues for another few days or weeks. Most likely, we will be returning to the triangle interpretation in the Dow. If the Dow is in a triangle then we are in wave C up with waves D and E to follow.

Trading in this environment is tricky at best. For trend followers it is the pits. However, adaptability is a requirement for the job and each trader must have a plan for how to trade in a range bound market. One option is to change to a hit and run style exiting with smaller gains after a 1 to 5 days. Another is to trade long and short trends with wider stops and smaller positions. Sometimes the best option is to be in cash. I know I would have been better off if I had remained in cash from late November. I don't like changing my overall trading style because one must then rely on discretion to determine when to change.

Nevertheless, I have kept a mix of long and short positions while trading half positions in the indexes. The longs are beginning to pay off while the shorts have not worked so well. At this point though I am not expecting to significantly increase long positions. If markets do head significantly higher over the next weeks and months instead of falling to a new lows, there will be plenty of time to get on board.

1 comment:

dave said...

There is a notable inverted head & shoulders bottom building on WEEKLY gasoline charts. If one cannot track gasoline futures, use UGA. The right shoulder shows tremendous accumulation.

While that weekly gasoline pattern still has to mature a bit more, refiners TSO (my position); VLO; HOC have been in SOLID two month uptrends (higher highs & higher lows), not a dead cat bounce, nor short covering, but real buying (that’s why it’s been two months long). The cost of their raw material (crude) remains soft; gasoline prices have been rising; profit margins are good.

Refiners are a trade that is non-correlative with the stk mkt, not completely, but they can still prosper with the crack spread going their way. Refiners fell apart in the first half of 2008 when crude was racing up because the cost of their raw material (crude) was outstripping their sales of gasoline.

When i look at that WEEKLY inverted H&S bottom for gasoline, it really excites me. I like the refiners more so than playing UGA; a blip up in gasoline will turn into a real bump up for refiners.

Take a look at long term charts 5-10 yrs long. You will see some very long sustained moves by refiners when the crack spread is going their way. There is the added kicker of TSO being a takeover prospect.

Regards,
dave