Diary of a Financier

The Trigger

In Capital Markets on Wed 12 Oct 2011 at 12:40

In light of my recent comments, a few readers have inquired as to when I’d expect the market to turn lower & what signal I’m looking for.

To reiterate my outlook:

Not only did the [SPX] bounce allow the Head & Shoulders pattern to hold last support, but it cemented the development of a classic Bull Flag pattern

That also means present-day S&P 500 is tracking its 2008 analogue quite tightly still… and 2008 would dictate a rally up to the 200DMA ~1250

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.

My guide is the 2008 analogue still, and hence the downside trigger I’m awaiting is illustrated in the 2008 chart: simultaneously overbought daily & weekly fractals with resistance met around the 200DMA (~1250)

SP daily & weekly (2008)- simultaneous overbought indicators, the downside trigger.

If I have to deliver a wormhole, the coming days-weeks will see SPX knock resistance at 1215-1220, oscillate back down to 1140, then snap back on an assault of 1250.

As recent market action has lent my thesis a vote of confidence, my conviction is mounting. At this juncture, I will participate in the upside by buying the dips with ~30% of my AUM, which is a gross amount I can manage nimbly enough to turn on a dime.

~~~~

I’ll reiterate a bit of my trading philosophy here, for my own good. On the technical side of things, a daily fractal’s determinism pertains to the short-term (days to weeks), whereafter the fractal’s natural period (a.k.a. cycle length) comes to pass as its memory of initial conditions erodes. The same happens in more deterministic monthly fractals, whose long memories allow deterministic trends to last months to quarters.

Wrought from my research, studies & experience, this all suggests that the causal determinism I read in today’s charts will hold markets captive until those indicated memories expire. Therefore, the monthly SPX chart expects some European resolution by December, although I’m never that concerned about timelines because I make money off of the Y-axis, not the X. While monthly charts are the most deterministic (as they report less noise), shorter fractals are actually useful for their increasing sensitivity to initial conditions. Daily charts report reversals quicker, a trajectory which eventually appears in monthly charts if it persists. That’s why I trade support/resistance/entry/exit points off daily & intraday charts.

Controlling for fundamentals, the ultimate trade is opened with all fractals rising off support & oversold levels at once. (See CSCO recently.) When I’m faced with contradictory daily & monthly fractals like those of SPX today, I appeal to the intermediate weekly chart for a verdict, answering whether or not a short-term oscillation will reverse the long-term trend.

~~~~

I’m still doggedly focused on the developing big picture–a second opportunity to buy equities at generational discounts on the other side of the European fallout. That is priority #1. In the meantime, I’m quite feeling the rhythm of this market and looking to capitalize modestly upon a short-term pullback.

–Romeo

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  1. […] stance remains: My guide is the 2008 analogue still, and hence the downside trigger I’m awaiting is […]

  2. […] end, I determined most composite components look overbought short-term, bullish intermediate (the weakest determinism, in my experience), and bearish long-term. I’m left awaiting a pullback and better entry […]

  3. […] such collapse–the trigger being a weekly chart entering overbought territory, as I’ve mentioned: ES weekly & […]

  4. […] did say an overbought weekly fractal was the trigger to sell: SP Analogue (weekly)- 2008 or […]

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