Good News, Bad News

A few days ago, I discussed weak pullbacks and how they are actually healthy for sustainable rallies.  The good news is that we’re getting weak pullbacks.  If you notice from the picture, the volume has been decreasing as the market has stalled the last few days.  In fact, today was the lowest I could see since late November.  So, that’s the good news.  The bad news is you can see from the picture below (the S&P 500 with the 50-day moving average) that we are consistently making lower intraday highs right at the 50-day moving average. 


If we can get through this key technical area with bigger volume, you could see the market test the early November highs which could be another 15% on the major indices. 

This is why I continue to want to have a strategy that uses shorts on the entire market, various longs, and plenty of income.  We’ve been through a lot this quarter but believe it or not, we’re at the same level on the S&P 500 we were at on October 10th.  But, it’s been a wild ride.  So, you can choose to hold through that volatility, trade the volatility, sit it out and get income for those two months, or do all of the above.  I’m choosing to do all of the above. 

Please do not take anything for granted.  We could go to new lows just as easily as testing the early November highs.  This is still a dangerous market that is healing the longer we move sideways.  You have to take profits on extreme highs and cover shorts on extreme lows. 

As I’ve said in the past, don’t be afraid to buy some great companies at cheap prices, just keep them mostly hedged.


3 Responses to “Good News, Bad News”

  1. 1 Hedge Fund of One December 11, 2008 at 3:27 pm

    As you have observed, Karl, the highs are walking down the 50-day moving average. This often seems to happen when price prepares to move beyond the average. Until the traders who use the 50-day avg as their cue to sell are done, I guess that it will continue to do that. Possibly today washed them out. Obviously, price will eventually have to break through for our rally to continue. On the QQQQ/NDX, today, the price filled the gap that was made on Monday, 12/08/2008 as the Nasdaq-100 has seemed to outperform the Dow and the S&P500 for the last few days.

  2. 3 Matt December 11, 2008 at 8:24 pm

    One note that I follow with volume – volume is much less important on initial selling than it is buying. I find volume actually tends to work inversely; that is, selling volume starts out soft and gets heaviest near the end of a bout of selling. Likewise, buying volume usually starts out strong (and needs to in order to confirm an up move) and tapers off as it exhausts.

    Of course, anything can happen, but I usually view the market as always feeling the effects of gravity. As inertia builds downwards, it gains speed and strength as stops are taken out, shorts add to positions, and “investors” get weak hands. Price action (i.e. emergence of some kind of support with or without volume) is always the key to downward moves, and volume through resistance early on is important on upward moves.

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