Securities Research Services

Wednesday, April 11, 2007

Risk:Reward Not Favorable Here

We are at an interesting juncture today. Indices and stocks alike sold off on higher than usual volume yesterday, indicating that we may be due for a retest of the March lows. Technically this is what the daily charts are telling us.

At the same time, we can’t find an analyst out there that doesn’t see and think the same thing. Everyone is looking for a pullback here; everyone. And the put:call ratio on several important index contracts has continued one of the longest bearish streaks we have witnessed in years.

Even so, we were ready to hedge today and buy the SDS, an exchange traded fund (ETF) that moves up when the S&P 500 moves down. It makes sense. If you look at the SPY, it is at resistance and yesterday it was rejected on higher than average volume. Meanwhile, the SDS saw a volume spike as it trades near support. It’s kind of a no-brainer trade, so why don’t we take it?

Well, we may be over thinking things a bit much here and if so, we will have to live with missing out on some profits. But it really sticks in our craw that everyone is expecting the same thing to happen; a price tumble. If there is anything we hate, its agreement with the crowd at turning points. We don’t mind being in agreement with everyone when a strong trend is in place. In those situations the market is bigger than contrarian sentiment readings and the sentiment of the crowd drives the price. When the trend is not strong though, the market does a great job at fooling the largest number of people.

The trend is not strong here, so we are admittedly nervous about jumping on the shorting bandwagon. And once again, we may be wrong and the crowd may be right and we may miss a profit opportunity. We would rather miss out on profits though than make a bet we are uncomfortable with and end up losing money. We are funny that way.

What really helped us decide to head for the sidelines today though was our analysis of the SDS chart on the intraday view. You see, we have a rule about stocks we trade. They need to look good on all levels. We want to see a good chart on the weekly view, the daily view, and then the intraday view had better confirm, or we won’t take the trade.

Well, that’s what happened. We pulled up the intraday view on the SDS, and frankly, we just wouldn’t buy it here. Volume was barely above normal and indicators, instead of being oversold and turning up, are actually overbought and turning down. This is a bad bet in our books.

It doesn’t mean, mind you, that the market is going to power up through resistance in the next few days. The market will probably turn down here. We just think that it’s probably going to have a hard time gaining any traction to the downside and that those who put on short positions are going to be frustrated as prices don’t make much progress.

The SDS has an open gap between $57 and just over $58. We wouldn’t be at all surprised to see the S&P turn down and the SDS turn up to fill that gap. That’s what? A 2% gain on the SDS, or a 1% move on the SPY. That’s not a good risk:reward ratio by anybody’s calculation.

4 comments:

wez said...

today i'm going to try my luck again and short the market if it fly higher than the last close. regard.

wez said...

now take the profit and go long again for 12443(target:12485). regard.

wez said...

dear srs, today if you look at the interday chart of major indizes, you can find a double bottom that is turned around for approximately 45 degree. and it is something that appears quite offen. what is it, a new chart technical pattern, or something wellknown? regard.

wez said...

target 12485 reached and now go short again for 12490(target 12440). regard.