Below is an interesting theory/thought on how to approach investing, and stock market moves/trends. I would not say I strictly invest according to this strategy, but I believe it is interesting what people are capable of getting comfortable to. It seems to me that mentally we can handle incredible changes, as long as we are able to take breathers along the way. For example, every recession is marked with times of increases in equity markets, just as every boom market is marked by brief periods of market decline. I believe this is not necessarily because the markets change that much. I believe it has more to do with our ability to accept change, and our occasional resistance to too much at once. These periods of "too much at once" is when the market acts inversely to the current overall trend.
On that note I just sold my GE stock and GEX ETF in the belief that the overall trend of a bear market has not finished. The past couple of months have just been the breather we all need to accept the new reality. I believe we will now continue our economic downturn. At which point I will buy back these equity positions along with Wells Fargo and an Asian ETF (I still currently hold DIG ETF and SLV ETF).
Today's Urban Survival makes for an interesting read.
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Coping: Guessing "How Far is Down?"
Roll out the china board...here's a really simple way to look at trading. If there's one thing that seems to hold when it comes to markets, it's the fractal nature of things. Using fractals and understanding a bit about Elliott Wave Theory (EWT) You can make some educated guesses about what's ahead for the market.
Take the action on Monday, for example. I know that some very bright people I know - like Robin Landry - are expecting the market to drop for a while and then turn up. But how far is down in the interim? A very common Elliott pattern is for Wave 1 (up or down) to occur with five 'steps' inside of it. So a Big 1 down might be comprised of five smaller steps and it's not uncommon for these to be somewhat predictable. Often (but not always, of course) the first wave down is equal to the concluding 5th down, while the 3rd step down is often 1.618 times the first move.
Schematically, it looks something like this:
Given that the futures were showing a bounce this morning, we may be about to complete '1'. so if 1 = 155 (to round things off) then 2 might equal a 50% bounce (77.5 points) and then we might drop 1.618 times 155 or a further 250.8 points, then a bounce of maybe 125, and then another 155 down. With me on this?
Bounces are never exactly 50%. They can be all over the place. Sometimes 31.5% is enough or 38.2%, other times, various Fibonacci numbers hit, 75% comes up often, too. But for a quick, simple guess, I figure 50% and once in a very green while, it works out right.
Not that it will ever happen this predictably, it's just that by the end of this week, we might see something like a rise to 8,496 plus or minus a pack of gum to complete 2, then a drop to 8,245 putting in the big '3' down, a bounce to around 8,370.5, and then down to 8,215.5. That would finish the move that seems to have gotten underway yesterday.
Would the rally then continue? Why, heck no! Because this little five-stepper might only a fractal of something bigger. In other words, the five little steps could just be move #1 if you zoom out a bit, like so (trashing Elliott numbering conventions I am using A through E to show the larger degree wave):
Now, if it is (and this is an extreme long shot, but worth pondering) if yesterday was 1 within a larger A and if it works out that A completes with a loss of maybe 360 points or thereabouts, then the large A could be 8,215.5, the B could bounce to 8,395 and change, and then we could drop 582 point, which would put us around say 7,813 to finish the larger C, then up 7,993 to finish D and last but not least, a drop to 7,633 to finish the larger E.
So, if you wanted a SWAG at where the market is going, I'd guess in the next day or two, we will go up 75 and then head south again...wild generalizations and NOT TRADING ADVICE OR INVESTMENT ADVICE - it's just what I am personally expecting.
Thing about markets is that if you don't at least have some idea what the game could be, you never know when it's time to exit a trade.
However, once you get any kind of 'vision' about what's ahead, it's easy enough to trade commodity options and pick up a little pocket change. For example, seeing that this could be the start of a market decline that might go 3-5 weeks, I decided to exit some wheat options for September. I had entered the trade about 3-weeks ago at 14½¢ and closed the positions yesterday at 19¢ Even after the commissions for my commodity broker, it's still a decent return if you annualize it. Ever work out what 20% a month compounds out to?
Of course, things never work out as dreamed. Made money on the wheaties, but lost some by exiting half my silver call options too early. Still, hope springs eternal and the discipline of trading is something that's a never-ending battle.
The thing I like about commodity options is that not as many people play them as the commodities market seems to have something of a stigma because people can get in way over their heads. As long as I stick to options, however, the risk is well-defined. Can't lose more than the option price. It's when people start playing around with real contracts that danger appears. On the other hand, good money in that for those who are expect.
Not me, thanks. I just do a little future tripping and generalize that "If the stock market is going down, seems logical that maybe the commodities market will, too. The decline yesterday may - or may not - be the start of a trip down to the 7,600 area. And, if it is...and should we see an 80-point bounce today, followed by a drop to the 7,600 area over the next couple of weeks, then about halfway through the decline, I will start loading up on the long side of commodity options.
Pretty simple strategy: Higher Dow leading to the expectation of rising commodity prices, and downside risk moderated by what I see as building inflation pressures since the Treasury auction results were less than pleasing last week.
Besides, a trader/friend in Luxembourg sent me this historical note:
"The 1930-1931 bear-market rally in the Dow lasted for 70 calendar days. If we count forward 70 calendar days from the March bottom of this year, it would take us to the end of this week..."
Yup, down seems like the next move.
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