Recovery Rally Into Christmas?

by OLIVIER on OCTOBER 12, 2011

Now this is one heck of a confusing market. Longs got trapped then shorts got trapped. Now nobody wants to commit to either side and the market is climbing a wall of worry and is simply moving up. Pretty much sums up what is happening right now. Still, that doesn’t make it easier to trade this market. I see so many conflicting signals that my head is spinning… Then again, that’s exactly what’s supposed to happen during sideways trading ranges. Volatility is insane and whenever you think you have figured it out the market does the exact opposite of what you expected.

A possible scenario I see unfolding here would be for the markets to move up until Christmas. A small pullback would be constructive action, then price climbing back up. Maybe I should say creeping back up as it will do so climbing the proverbial wall of worry. The wall of worry would best be described as everybody thinking in terms of ‘bounce within a bear market’.

Here’s a quick overview of various conflicting signals characterizing this market:

Bullish:

• False break out to the downside trapping shorts. This is bullish.
• Climbing the wall of worry type of situation.
• AAPL still holding up.
• Market somehow shrugging off bad news environment. So far no panic and no brutal sell-off.
• Cubes (QQQ) holding up extremely well. Not exactly indicative of a bear market.

Bearish:

• Thin leadership.
• No new leaders.
• Lots of distribution patterns. CRM, PPO, BIDU come to mind.
• Insane PE ratios. CRM, AMZN etc. come to mind.
• Long-term S&P 500 head and shoulders pattern implying much lower prices down the road.

There you have it. This is a nightmare for position traders looking to go long growth stocks with decent momentum. There are not many choices. As a position trader you could either be less aggressive i.e. reduce exposure and trade smaller position sizes than usual. You could also shorten your time frame and switch to swing trading mode. The last option would be to stay on the sidelines and patiently wait for broader bases and better set-ups.

Conclusion:

I will most likely remain on the sidelines. If I decide to trade I will reduce position size, shorten my time-frame and approach the trades with a swing trader mentality. The risk of putting on trades here is obvious. Not sticking to what best suits my position trader personality would be like losing focus. I cannot let this happen. So if I stay on the sidelines there is a reason why I do so.