Securities Research Services

Monday, July 28, 2008

Cash Is King

This tough market has gotten even tougher over the past week. Prices bounced out of oversold conditions starting on the 15th of the month. The bounce quickly turned oversold conditions into overbought conditions and now we are once again trading very close to the lower Bollinger Band on all major indices.

So, what does it all mean?

The theory behind the risk assessor is that in a down trending market short side risk is relatively low when prices are trading near the 50-week average and downtrend line. This low risk situation occurred mid May. Likewise, short side risk increases as the price closes in on the lower Bollinger Band. As you can see below, the current SPY price is only $2.00 away from the lower B-Band.

So then, is it reasonable to assume that because short risk is high here that long side risk has decreased? It is very dangerous to make that assumption in a down trending market. Prices are oversold on a weekly basis as measured by the Risk Assessor. Oversold conditions can remain that way in down trending markets though.

With the end of the month window dressing closing in fast and with short side risk levels very high due to the position of price in relation to the weekly B-Band we would recommend avoiding new short positions at current levels. Unfortunately, there are not a lot of promising set ups on the long side developing here either.

Perhaps tomorrow will provide us with a turnaround Tuesday event and will set up some quick long side trades as we move in to the end of the month period. Until the market proves itself here though it’s best to sit on cash another day because this is one very dangerous market.

1 comment:

Wayne said...

Yes, I agree, In a downtrend market, cash is king until the market proved otherwise.