RISK ASSESSMENT WEDNESDAY: A LESSON IN CHAOS
During the first half of the trading day I tweeted the following:
The FAZ trade was initiated on Friday. Small position, small profit.
At that time, I didn't think for a second that we would end the day down nearly 200 points on the Dow. I should have known at the time that this market has figured out a way to condense an entire days worth of movement into the last hour of trading. It has been happening over and over again during the second half of this year.
I left some money on the table. However, I am happy to be in cash here. There simply isn't an edge to this type of trading environment.
In my earlier post, I illustrated why I think the bears suddenly have developed too substantial a following to see the market plunge the way some are hoping. Chances are great that if we do break out of the current consolidation to the downside, there will be a reversal given the current pervasive fear that exists.
The last hour plunge that we experienced today was simply too dramatic. It wreaked of a market that wanted to instill the maximum amount of fear while inflicting as little damage to the pricing structure as possible. If the market really wanted to instill damage it would soiled the pricing structure to a point where the bulls would be afraid to look at it tomorrow. That's how real breakdowns in important market averages take place.
For all the roaring, screaming and painful moans, we are simply at the bottom end of a clear consolidation pattern. In the meanwhile, the put/call ratio experienced a mean spike. And observational sentiment today was as bad as I've seen it over the past few months.
I do think that the next great bonanza in the markets will be on the downside. I am reserving most of my ammo for that opportunity. In the meantime, I would be looking for a short-term low to appear here soon.
If I do take a position, I won't be allocating anymore than 10% of the portfolio max. Especially if I decide to probe the long side.
Be careful on either side of the trade. This isn't a market where you are rewarded for being a cowboy.
