Monday, March 06, 2006

What I Saw Last Week

Had I been a stock trader I would now be finding fewer and fewer things to buy long. In fact, in this low vol environment, owning index puts doesn't sound like such a terrible idea. My only problem: I didn't see enough of an extreme reading on the upside to start scooping them up.

However, I did see this: past Tuesday and Friday were down days for the broad indices. Notably, both days had an above average volume when compared to the other three days of the week (where the market ended higher). Plus, last Friday the market rallied within fractions of a multi-year high (SPX) and then reversed at around 2 PM to give all the gains back and close in the red.

So, whlie I am not reading an outright short signal I think the play is the following (let's take QQQQ as the vehicle):

Watch the 42 level and look for a close above it. If you can't wait for the close then get in on a retracement once it is punched through intra-day. Then make sure we close above it. My rationale here is that if the market indeed breaks through, it will reject two big-volume down days and will also reject Friday's reversal.

Now, if the weakness continues, then become a cub and start selling the rallies (via buying puts, for example) and grow to become a bear as the market guides lower. 42 becomes your stop loss point. Now in this case don't take "42" too literally. My point is that if you've seen enough reason to get short, you don't want the market to get even close to 42 because it will then mean that it's just not weak enough to continue selling.

Why buy puts and not short the Q's outright? You want to pick up the spike in VIX.


P.S. BTW, if you still don't think that 42 is important, consider that 42 is the meaning of life, according to Douglas Adams.


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