Thursday, October 6, 2011

a bit skeptical, but giving the benefit of the doubt

today was another healthy push up with the indexes gaining between 1.5 - 2%.  We have had quite a nice 3 days.

With that said, I don't trust the market yet.  I'm not bearish, but I'm nervous and as a result I pulled some profit off the table today near the end of the day, and tightened stops on a few positions that I dont want to go negative in.

Tomorrow is a critical day, and if this upward movement is to continue, we probably need to gap higher at the open. 

More or less on all the indexes (spy, qqq, iwm) we closed the day at the 20 day moving average (which should provide resistance) and more importantly, closed near the top of the most recent descending trendline that started from the high on 9/20/2011.  So, at the open ... ideally we need to gap OVER these two very important resistance levels.  If we can do that ... and hold over these levels at the close tomorrow, then I will turn more bullish ... but at this point I am a bit skeptical and being cautious.

I have two 'processes' that help me to form an opinion of the market on a daily basis.  The best way to describe this process is to compare it to a doctor looking at a patient.  The first analysis a doctor will do is to physically look their patient over, ask questions, listen to your heart rate, etc.  He will form an opinion based on what he observes of these 'obvious' or sometimes subtle signs.  Their second 'process' is to look at their patient internally; order blood work, X-Rays, MRI's, etc.  These steps are used to look at the patient's 'internals' to find out if there are any hidden 'alerts' or conditions that might not be obvious to the naked eye.

For me, discovering the market's health, I first just observing the price/volume action throughout the day.  This is a subjective analysis after just watching the movement of the tape and observing the price/volume relationship throughout the day.  Usually through this I can get a gauge of the strength of a move, but this is purely subjective and therefore can't be quantified ... it is more of a feeling that I get each day after observing the days' action.

My second daily analysis 'process' is much more technical and attempts to look at the underlying 'internal' movement of the market to try and get a feel for strength or weakness that isn't obvious.  This process is very computer intensive and looks at 1500 different stocks and their price movement relative to each other, their history, their proximity to various support / resistance levels, etc.

I noted above my 'feeling' about the market at this point, but my afternoon analysis of the internals showed much more strength than I am physically seeing.  It justifies the strong move we have had over the past three days and suggests we have more upside to go. 

I obviously use both of my approaches to form an opinion as to how I will trade over the following days and as a result, I will give the market the benefit of the doubt and give it more time to continue its' upward movement.  I expect and hope we see a gap up tomorrow at the open and the strength should continue for another day or two at minimum.  Given that tomorrow is Friday, I would assume we will see some selling late in the day since many traders will be too nervous at this stage to hold their positions over the weekend.

Enough blah, blah, blah for now ... hope you have a wonderful evening!

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