S&P 500 Index Analysis

EliteThink,

Thank you for your encouraging words.

A trader has to hold firm his conviction in order to profit from his trade. The most challenging aspect of trading, however, is to reverse one's conviction at the first hint that he is wrong rather than keep finding reasons to justify his wrong trade. As a matter of trading principle, a trader enters a position for a reason, and when that reason proves either invalid or simply wrong, he has to admit that he is wrong and take a loss. (Admitting one's wrong is different from setting the price of being wrong; one can control the former but not the latter.) Thanks.

Dr. Chen
 
EliteThink,

Here are the underlying reasons for staying short: China's November inflation rate to be released is at least 4.7%; China will raise its interest rate over the weekend; Moody & Poor will both lower Irish banks' debt ratings after Fitch's downgrade this week.

Here is a factor that supports staying short, although it is NOT the reason why I stay short: The American Association of Individual Investors weekly survey shows the percentage increase in bullish investors surveyed, and the gap between the bullish and bearish investors widens, a historically proven contrarian indicator of market inflection point.

Dr. Chen
 
Quote from DrChen:

As a result, the market will retreat while the dollar continues to strengthen against the Euro.
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SPX is up 5 pts, some retreat. Since the result didn't happen, whatever you said before reaching your conclusion is pretty much irrelevant, even if you were correct about those things.

Here is my analysis:

Christmas rally >>> your short conviction

It might seems that I am specially hard on you, but it is just tough love. I am really pulling for you, wishing you to succeed but you are dellusional as the result shows and the best treatment for that is honestly and the hard cold facts.

Once you understand the underlying problem of your approach, you will start making profits....Just think about it, basicly all your profits were made on the LONG side.
 
Quote from DrChen:

EliteThink,

Here are the underlying reasons for staying short: China's November inflation rate to be released is at least 4.7%; China will raise its interest rate over the weekend; Moody & Poor will both lower Irish banks' debt ratings after Fitch's downgrade this week.

Here is a factor that supports staying short, although it is NOT the reason why I stay short: The American Association of Individual Investors weekly survey shows the percentage increase in bullish investors surveyed, and the gap between the bullish and bearish investors widens, a historically proven contrarian indicator of market inflection point.

Dr. Chen
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The Japanese had a very upbeat report on their economy two nights ago. There were a few other strong news stories and none of them were mentioned in your analysis. The inflection point idea is WAY too early given we only just broke a top a few days ago. I'm going to predict you get your reveral point sometime mid-January ( a pause not a correction ); in fact, this is a fairly regular occurance if my memory is correct.

Again, I'm going to make my original point. You need to present/analyse ALL important news items not just the ones that support your current position.
 
Nine_Ender,

It would make sense that I present my side of the reasoning for entering one side of a trade, and you are welcome to respond with your reasoning why such a trade is wrong and should be offset. That would fit the reason for my starting this thread. Thanks.

Dr. Chen
 
Dec. 10, 2010

Analysis:

Today's market action made yesterday's Analysis look more like the writer was talking about his own book than he was making an objective analysis. Looking ahead to Monday, now that China's November inflation rate was 5.1%, China will raise its benchmark interest rates for deposit and lending by as much as 50 basis points this weekend. Since the market has not discounted such an event, it will retreat, and once it drops below 1,228, the sell-off will intensify until 1,220.

Strategy:

Hold short at 1,217
 
Quote from DrChen:

Nine_Ender,

It would make sense that I present my side of the reasoning for entering one side of a trade, and you are welcome to respond with your reasoning why such a trade is wrong and should be offset. That would fit the reason for my starting this thread. Thanks.

Dr. Chen
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Correct.
 
Quote from DrChen:

Nine_Ender,

It would make sense that I present my side of the reasoning for entering one side of a trade, and you are welcome to respond with your reasoning why such a trade is wrong and should be offset. That would fit the reason for my starting this thread. Thanks.

Dr. Chen
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I posted this earlier this week :

Quote from Nine_Ender:

Couldn't disagree more. There is a lot of significant bullish news on the wires tonight. The strength the market showed today in the face of some early selling pressure is also very bullish.

My prediction is we complete the start of the breakout move from Monday morning and set new highs. Shorts may be squeezed out as we begin the Xmas rally in earnest ( Monday the head fake was mostly premarket and had little effect on short holders ).

Recommend cover your short unless Jobless Claims trigger a negative move premarket. My call is off if this occurs.

Sure, anything is possible, but in your analysis of the last two days you are ignoring significant news items that can move the market. Drops in metal stocks actually camaflauged the overall strength in the market. But when you think of it carefully, Gold usually drops when market participants have lowered their fear about the world economy.

I'm ready for any eventuality but I think the bull market reasserts itself the rest of this week. Good luck.
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There was actually a one day delay between my prediction of a breakout upward and the actual breakout. You maintained your short both days. I will add that despite the bearish sentiment I tend to hear around my own trading floor ( and on ET ), I believe we are in an Xmas rally to a significantly higher high in December. The more bearish talk I see from traders the more I believe we are moving up and its catching a lot of people who should know better by surprise. When they turn the corner and start chasing the move the easy money will be gone and we will eventually hit the traditional retracement in mid-January.

Holding a short in a strong bull move based on just a couple of news items seems like folly to me. If you don't believe the move, go neutral ( cover your short ), then wait for confirmation you are correct. Historically, when markets and/or stocks crush previous resistance, they go much higher with old resistance becoming support. Will this be the rare exception ? I wouldn't want to risk it myself.

US news has been extremely strong lately. My opinion, the chance of a Chinese interest rate hike was priced in on the retracements we had trying to go up initially. But in the end, the reason the hike might occur is to temper strong growth in the Chinese economy ( mainly to appease US politicians ). Long term this is good for markets, and I note Copper prices still going up which to me is a pretty reliable leading indicator of market direction with respect to sentiment on China.

If China doesn't raise interest rates, you'll see a huge rally on Monday or Tuesday. This might even apply if its a watered down 0.25% rise.
 
Nine_Ender,

Thank you for accepting my invitation for a critique.

You stated, "if China doesn't raise interest rates, you'll see a huge rally on Monday or Tuesday." I disagree. I believe that even if China does not raise interest rates, the 5.1% inflation rate in November will induce a market EXPECTATION of an interest rate hike, which will pull the market back when the futures market opens in Asia trading hours; whereas you believe that "a Chinese interest rate hike was priced in on the retracements we had." I make no prediction on the duration of the retreat -- one hour, one day, or one week. Thanks.

Dr. Chen
 
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