THE TWO THINGS BULLS CANNOT ALLOW IF THEY WANT TO MAINTAIN CONTROL
It's important to remain in your comfort zone when attempting to ride an intermediate term trend. If you are overallocated then the potential exists for emotional micro-fractures, which eventually turn into raging gushers should the market fail to walk down the path you expected.
That's precisely the reason I took off the QQQ and FAS position in the morning. I had a decent profit and wanted to get into my comfort zone in order to be able to ride what I believe is a developing intermediate term uptrend. I am close to 50% invested of capital. One of my holdings is a 3X leveraged ETF (EDC) so my actual exposure is quite a bit higher.
What we have had over the past two days is a very real confirmation of the reversal day that took place on Tuesday. The price action is further confirmed by the sentiment picture and seasonals...both of which point to higher prices well into November.
Furthermore, there seem to be few that are properly allocated to the market at present. This all changes as the month wears on and the S&P moves over 1200. The market will begin forcing buying action as the uptrend continues. Doubt will turn into belief.
The first month of the rally (October) should be fairly choppy, allowing for a good deal of opportunity to buy the dips. The second leg of the rally through November should see the markets become smoother in terms of trend.
The bears have had every single opportunity available to them to take the markets lower. Everything from global recessionary fears. Rumors of bank collapses. Sovereign debt crisis. Governmental crisis. Emerging economy slowdown fears. Collapsing commodity prices. CDS spikes. Reallocation into safety assets.
The fact that we are more or less unchanged over the past two months despite all of these developments is a positive for the bull camp.
All the meanwhile, the headlines have become gloomier. The sentiment has become downright panic stricken.
I came into this week expecting to see a break of the August lows based on the setups in the major averages. I promptly got of the way on Monday morning, moving to a 95% cash position. I did this out of uncertainty as to whether the bulls would be able to withstand the type of selling pressure that would come from a break of the August lows. The potential for a waterfall type of decline was great. Crashes nearly always start from points where bearish sentiment is extreme and oversold conditions persist. The deception mechanism of the market breaks and the bears have their way.
I reluctantly bought the reversal on Tuesday out of respect for my research only. My hesitation and fear in taking on long positions should have been indication of the sentiment amongst bulls at the time. The only reason I bought was based on a model that showed a reversal back above 1100 within 2-3 days of breaking the August lows as being a highly reliable signal that an intermediate term bottom had been seen.
The possibility, of course, exists that we fall back to the lows of earlier this week. I don't think that it's a great possibility, however.
There will be two clues that hint at the fact the bears are regaining control of the market:
1. A decline in excess of 2.5% in a single trading day should not occur over the next couple months.
2. The market should not decline for more than three days in a row over the next couple of months.
If any of these conditions are observed, it will be amongst the first clues to become defensive in my positioning.
In the meantime, my plan is to buy the dips for 2-3 day trading opportunities through October and to hold onto my core positions in FCX, EDC and JJC through November.
