Plunge Protection Team?

  • Posted by
  • on July 27th, 2013

Spoiler alert…WE are the plunge protection team. All of us that participate, with our varied and infinite motivations, create these “out of nowhere” reversals that happen with regularity in the markets. We take profits, we cut losses, we sometimes rush, we sometimes wait too long, but our collective efforts dictate market outcomes.

“Plunge” has not been an apt description for many months(unless you count $VXX), but most of us have a timeframe or two in which we specialize. Mine is swing and position, with my efforts focusing on days and weeks. As I’ve repeated too many times to mention, I prefer to look under the hood in my analysis and see what the market of stocks is telling me first.

By this measure, I have felt that from a Swing perspective the market has been correcting since Monday morning. Not much of a price correction, but the number of stocks participating peaked then and dropped through the week even when marginal highs were made. Thanks to programming whiz Jeff Carroll, I no longer have to collect, organize, and store this data manually; take a look at the following graphic:


So we’re correcting through time and losing stocks along the way, and on Friday morning $SPY slices through to an 8 day low. No big deal, but every 52 week low starts with a 1 day low so we should always take note of higher highs and lower lows, right?

But alas, within minutes a swift reversal took place, and by day’s end we were back into the upper end of the week’s range. Mysterious buyers? Short covering? Yellen back in the lead vs. Summers? Sure, why not…go with any of those, headline writers.

As Steve Spencer at SMB Capital points out, “buying weakness at prior support in a bull market is a very high % trade”. A great trader specializing in the intraday timeframe was smart enough, and prepared enough, to recognize that buyers of some type would likely lurk below as longer timeframe levels came back into play. And unlike the chop of the past few days, the next frame trend is clear enough that as Jon Boorman would say, my kids could spot its northeasterly flow:


These are the easy trends, the ones we miss if dialed into just what’s in front of us. Tom Brady sees the blitz coming at him, but also knows that if it doesn’t break him, he may have an easy target downfield. Maintaining awareness of multiple timeframes is our version of seeing the whole field, and is essential to finding low risk/high reward trades. Thankfully, no predictions needed, just awareness and flexibility and the confidence to act with process and against noise.

I think it’s still noisy, and that the range can persist despite Friday’s positive reversal. A range can be a trader’s best friend if they focus on levels, and worst enemy if chasing trends. I’ve been on both sides and the best tonic for me is aligning with the strongest northeast(up) or southeast(down) trend even when it’s not my chosen timeframe.

There are enough stocks showing themselves resistant to the market’s pull that the better plays of late are micro vs. macro. But if this isn’t a bull market digestion, it’s an awfully good impression of one. No outside forces needed, just the collective effort of investors catching up with the moving targets. No matter what he may say, even ol’ Warren uses the higher timeframe and a little Fed support as his guardian angels; no reason we shouldn’t do the same.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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