Wednesday, August 10, 2011

a 4% loss, very healthy ???

I know, it sounds crazy.  The market lost over 4% today and I am suggesting it was healthy ...

Up until the last 30 minutes of trading, today’s action was very healthy.  Today reaffirmed what I mentioned yesterday that I think we have hit a short-term bottom yesterday.  Granted the last 30 minutes tanked the market and brought the close to the low of the day, which is telling and not good news. 

The action we are seeing is very normal after a long fall, granted we are getting an extreme version of it.  To use a really sick analogy … If someone Is running around on a roof of a building and they fall off and drop a few stories, they don’t just get up and start running again … it takes them a while laying on the ground licking their wounds before they try to get up.  And generally when they try and get up, they may fall back down a few times.  The market does the same thing after a big fall.  Once it hits a bottom, usually it will stay there for awhile trading close to this bottom.  This can take weeks or even months sometimes … eventually it will start to crawl up again as investors start getting more and more comfortable that we have put in a bottom.  If you look at a daily chart of the market, Two days ago, it ‘hit the ground’ and more or less stopped falling, yesterday it tried to stand up, and today it fell back to the ground again.

During this time, it is VERY likely that we will ‘test’ the bottom again (usually multiple times), so we should expect a few more down days at a minimum.  The purpose of this ‘test’ is to see how strong the bottom is and whether it holds.  This testing process is very healthy for the market as it reaffirms to the market makers that the market doesn’t want to go down anymore.  Also, the greater the fall, the more tests need to occur before investors regain their confidence, so all in all, we may sit for a bit at the bottom.

The volatility is quite crazy right now, where the market is moving a ton in very short periods of time.  a good example … the fact that I am saying today was ‘healthy’, but it was down over 4%!   After such a strong move, you get craziness in volatility as panic and greed set in, so this is also very normal although quite disconcerting.  With this craziness, this is a time for VERY short term investors and not longer termers.  Generally times like this, you want to sit on the side lines and wait it out.  Let the battle roar and once there is a victor (bull or bear), then follow the lead.  You wont miss much gain by waiting, and you risk a lot with the volatility. 

My trading plan is following the above.  I am basically sitting on the side lines.  I am placing a few small trades, but I see no reason to bet the farm in either direction, just too risky at this stage.

No comments:

Post a Comment