Friday, October 12, 2012

Do We Need Plan B?

Today SPX was down about 4 points, Nasdaq was down 5 points and Dow was actually up. So why does it feel like we have a huge down day and the bear market is upon us?

I think it is because we had expectation of upswing and that expectation was not fulfilled. Before we go any further, let me repeat an analog: the weather man said it will be sunny and bright. But you look out of the window and see that it is cloudy and may be a drop or two is falling. You will have to go out. Will you take an umbrella with you just in case or would you think, the weather man said there will be no rain, so why bother?  Will there be a plan B just in case?

Now, coming back to the market, do we need a plan B?

What was the plan A in the 1st place?

I know I have this bad habit of quoting from my earlier posts and some of you think I am just boasting, which I am not. It just saves me from repeating myself and we normally read and remember what we like. So, at the risk of offending you, if I may again quote from yesterday’s post:

It looks like a giant topping process is going on. Nasdaq is definitely the sick man in the town. But I still think there will be one last push from the 24th Oct till 12th Nov. We will see renewed bullishness in the market during that period. I do not know whether SPX will cross 1500 but looking at Nasdaq today I am becoming sceptical. Between now and 23rd Oct. I expect there will be lots of backing and filling.
I also said : The short cycle was supposed to bottom yesterday and by the price action of today, it seems that things are on script. Yes, it did sell off after the 2nd hour but that was only to be expected. The down momentum for the last two days was very strong and it cannot reverse on a dime.
I also said I am not going long equities, that the correction in gold and silver is not over yet etc etc.

OK, fine and dandy, so what the hell was Plan A?

Plan A was that the correction was to stop around SPX 1435 and bounce from there and chop around a bit till 24th October. Then we go straight up till around 12th November. That what the weatherman said. But today we have some rain cloud. Do we need to change the plan?

I do not think any major change of plan is needed at this time. You see the short term cycle which caused this correction, has bottomed. At the risk of repeating me, cycle analyses are not an exact science, or let us say it has a better track record than all the Economists. But it can sometimes off  +/- few days. The last cycle top was expected on September 7th  but came on September 14th.  It gives us a general sense of direction and tells us to be careful. So maybe we will see some more weakness on Monday morning but there is no sell signal yet. So I am not even thinking of going short. Surprisingly, Nasdaq was stronger today. I think Apple has found a bottom and I stick to my earlier call that it will test its earlier high or come close to it.

In the worst case situation SPX can start Monday by testing 1420 level. This is the level from where the earlier breakout took place and it is common to see prices come back and test that breakout level. If that level holds, it will become the support for the next up move. During the day I tweeted that /ES ( SPX futures held 1420 and it’s a good sign). The following chart explains why:

You can clearly see that it is the level from where /ES took off last time around 6th September. Not too long ago if you think of it.

PM sector is going through its correction, which I think will be short term (may be another 10/15 days) and I think we will be pleasantly surprised to see their prices by next February.

That’s all for this weekend.

If you ever think that at any point of time I am being arrogant, just say “Memento Mori” and I will come down to earth. I just tell you not to take every trade, be patient and wait for the grand opportunity which is coming soon. I would also tell you that from time to time, my calls will be wrong because if I am always right, why should I spend my time writing a blog and drumming up support. Rest is up to you.

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