Diary of a Financier

From the Trading Desk: Trade Reconciliation (Week of October 3)

In Trading Desk on Sat 8 Oct 2011 at 13:05

Chinese markets were closed this week on a national holiday. Although I hadn’t been aware of that on Monday, I think European & American equities were able to catch a breather, void of selling pressure from overnight Asian markets.

The “noisy” channel we’ve been trading in still seems characteristic of a schizophrenic market in search of a catalyst. I was lucky to trade the first three oscillations (including the dive down from atop SPX 1300) quite accurately, but I’ve chosen to sit this last leg out. Technically, SPX overshot the 1100 support on a closing basis, snapping back upon European relief rumors on cue. Not only did the bounce allow the Head & Shoulders pattern to hold last support, but it cemented the development of a classic Bull Flag pattern:

ES daily- Bull Flag

That also means present-day S&P 500 (SPX) is tracking its 2008 analogue quite tightly still…

ES daily (2008 v present)

…and 2008 would dictate a rally up to the 200DMA ~1250 perhaps:

ES daily (2008 v present)- dictates a rally up to 200DMA.

Like I said earlier in the week, I fear such a rally for two reasons:

  1. As evidenced in [October 5th’s] moonshot rally, this optimistic scenario–albeit remote–would leave the Street awash in Bears’ blood.
  2. America can (and likely will) remedy her misfortune with carefully combine monetary & fiscal intervention on the other side of Europe’s reckoning. Therefore, a prolonged process in Europe would be the worst outcome for all parties.

There’s a third, selfish reason too: with the exception of +13bps in realized performance contributed by CSCO to my AUM, I chose to sit on the sidelines for this rally. I’m still concerned that the safety trades of Treasuries, USD & Volatility (TLT/UUP/VXX) are all overbought for the coming week. Yet, I can’t bring myself to buy stocks that’re buoyed by the hope of sheeple.

The stakes have grown too high for me. Despite my confidence in the short-term technicals, they’re at odds with persistent bearishness of longer fractals. They’re at odds with the analogues. They’re at odds with common sense & risk management. I cannot bring myself to ramp-up my equity exposure to capture 8% upside reward vs. 12% downside risk–not when I intend to make money in the downdraft, then pickup merchandise at historic discounts. I’m in the black and I prefer to protect capital until my conviction is higher. I discussed this in July:

Even through the ups & downs of the past years, I’ve never faced a losing streak that’s turned my book into a multi-car pileup. I have often come to standstills in mental gridlock. I have occasionally pulled-over to let traffic pass me by. Sometimes I just can’t find a position supported by significant odds; sometimes I just can’t find confirmation patterns in any chart. These are often times in which the markets move so quickly and chaotically that my mental processes overload–the Cat’s Cradle in my head gets tangled. Further, these are often times in which the Market shows its sensitivity to initial conditions.

My Mom recently asked me, “How hard is it? You just buy when stocks are at the bottom and sell them at the top, right?” Believe it or not, Mom, I think I’ll be doing just that in a matter of weeks. Actually, it’s me who needs to believe it. My challenge is to step back until I’ve deciphered the big picture. The market will print fractals like little tiles of a mosaic, and at some point, someone standing just far enough away will recognize the start of a pattern, an image in the making, in this case an epochal rally.

Anyway, not much trade activity this week, beyond that Cisco (CSCO) profit. Here’s the rec:

  • $DF will head fm 9.45-7.13, where I’d buy in coming mnths. $DN_F fm 17.9-18.50 in coming weeks could open door. I own DF 7s of 16 bonds btw. Oct. 7 at 9:55 AM
  • $CSCO sold at 16.20, up 4.30pc. I’ll revisit stock soon due to value and LT bullish fractal, but I don’t trust footing of this mkt rally. Oct. 5 at 10:52 AM
  • I’m not convinced a Euro bailout will happen and US policy on momentary hold. So, it’s not worth owning PMs w/o any ST catalyst. $GC_F $SI_F Oct. 3 at 5:23 PM

–Romeo

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