Resting Up

• Posted by Derek
• on June 22nd, 2010

“Time makes more converts than reason.” Thomas Paine

Finally, the rally from the June 8 lows has run its course.  I think it provided some clues for potential leadership, but the low volume/low range bounce was beginning to get tiring through options expiration.  And while I wasn’t short, the Monday gap higher on the yuan news was exactly the opposite of how I had hoped the week would start.

I initially felt a need to allow a trend day to form to the upside, but got excited about the responsive selling that came into the Oil Service HOLDRS(OIH), the group with the most weakness before the bounce.  A short felt warranted, as it had finally bounced enough to offer a decent reward/risk into its downtrend.

In general, however, I’ve stated in recent posts that I’ve seen bullish evidence mounting in recent weeks, not bearish.  So what now?  A bearish reversal on good news does not exactly whet the appetite of this trader…any more of those days and the bullish case needs to be reassessed.  For now, it’s time to stalk.

We have a price low(SPX 1042) marking daily and weekly support, and a high(SPX 1131) marking daily resistance.  What we need now is time.  Time to agitate, time to wonder, time to question.  I need to see the following progression:

1) Time Structure-  Our emotions pass through certain phases with time, and I prefer to act when the psychological state of my competitors is most vulnerable.  The daily trend ends when doubting bulls and scared bears cave into the euphoria, after which we see relief by the bears for weathering the storm, and regret by bulls for not selling.  Day 1 and Day 2 after this are terrible places to enter a relative strength strategy, as the conversion from positive feedback to negative feedback means moves in each direction lack follow through.  I prefer to save my energy for at least Day 3 from the peak before recommitting myself.

2) Levels- I talked here about levels analysis as a weakness of mine, as I haven’t bought in to the precision of math in markets.  However, if I can find a confluence of numbers including Fibonacci, moving averages, pivots, S1/2, R1/2, prior highs and lows, then I can lean on a cluster as an area of potential support or resistance.

3) Sentiment- this is more of a “feel”, but I like to enter the following climates:

a) Buy Worry in Uptrend                                          c) Short Hope in Downtrend

b) Buy Belief of Breakdown in Range                   d) Short Belief of Breakout in Range

4) Clear RS- once a significant pivot is achieved, I like to enter those stocks with the best dynamics among the measures discussed here…hugging of highs, distance above VWAP, open to close strength.

5) Reward:Risk- once the climate arrives, and candidates emerge, I do my best to find not only low risk but high reward candidates using the stock’s memory as my guide to its potential.

Better late than never, I’ve laid out my plans for the week. In looking up Hank Pruden’s definition of stalking, I re-read this article by he and Dr. Van Tharp and realized how much it must have shaped my outlook.  Hopefully you can benefit from either my post, or the much better one from them.

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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