S&P 500 Index Analysis

Sept. 20, 2010

Analysis:

Friday's Analysis predicted that "the PIGS saga will continue out of Europe," and it did, as the spread of the Irish bond over the Bund surged to a record today. But Europe's financial woes were no concern to the market, at least today, as the market rose to a four-month high. No one can damp the market's bullish sentiment except the Fed. Tomorrow the Fed will lower its economic forecast for the remaining two quarters of this year and reiterate that the economic slowdown becomes more widespread than it had seen after the Aug. meeting. Upon the release of the Fed's statement, the market will sell off and close below 1,131. In the unlikely event that the market continues to rise to close above 1,150, that would spell the end of any lingering doubt about the resumption of a bullish trend targeting 1,200-1,220 by the year end.

Strategy:

Hold short at 1,122
 
Quote from DrChen:

Sept. 20, 2010

Analysis:

In the unlikely event that the market continues to rise to close above 1,150, that would spell the end of any lingering doubt about the resumption of a bullish trend targeting 1,200-1,220 by the year end.

Strategy:

Hold short at 1,122
More...

Dr. Chen, are you going to hold your short through this bear, though bullish till the end to the year, market rally?

How much pain can you tolerate?
 
Quote from Optionpro007:

Dr. Chen, are you going to hold your short through this bear, though bullish till the end to the year, market rally?

How much pain can you tolerate?
More...

Optionpro007,

Thank you for your question.

From the structure of your sentence I discern that you view the current market as a bear market, hence the "bear market rally." I disagree. I view the market as a sideway market. Once I clarify my view, the answer to your question becomes clear. If the market breaks the trading range and has a follow-through -- in my view to close above 1,150, then the market is no longer a sideway market, hence "the resumption of a bullish trend." "The trend is your friend," and one should not trade against the trend by being bearish in a bullish market. So the final answer is that I can only tolerate the loss to 1,150. If you ask me why not take a loss earlier, my answer is that I was not convinced earlier. For example, I took a loss when the market closed above 1,108 because only then was I convinced that the market would continue to run up, and it did run up the next day by about 12 points. It is indeed hard to balance between holding one's conviction and admitting being wrong -- the master of it would own the world in one month.

This much being said, I have to admit that I was surprised by the market's ability to hold above 1,120 throughout the day on Friday and felt that I should offset my short position upon the market's open on Sunday evening, but I found reasons to hold the short position. Every time when I feel I should do a certain thing but talk myself into not doing it by sheer reasoning, I almost always regret it, sooner or later.

Dr. Chen
 
Quote from DrChen:

Optionpro007,

Thank you for your question.

From the structure of your sentence I discern that you view the current market as a bear market, hence the "bear market rally." I disagree. I view the market as a sideway market. Once I clarify my view, the answer to your question becomes clear. If the market breaks the trading range and has a follow-through -- in my view to close above 1,150, then the market is no longer a sideway market, hence "the resumption of a bullish trend." "The trend is your friend," and one should not trade against the trend by being bearish in a bullish market. So the final answer is that I can only tolerate the loss to 1,150. If you ask me why not take a loss earlier, my answer is that I was not convinced earlier. For example, I took a loss when the market closed above 1,108 because only then was I convinced that the market would continue to run up, and it did run up the next day by about 12 points. It is indeed hard to balance between holding one's conviction and admitting being wrong -- the master of it would own the world in one month.

This much being said, I have to admit that I was surprised by the market's ability to hold above 1,120 throughout the day on Friday and felt that I should offset my short position upon the market's open on Sunday evening, but I found reasons to hold the short position. Every time when I feel I should do a certain thing but talk myself into not doing it by sheer reasoning, I almost always regret it, sooner or later.

Dr. Chen
More...

Dr. Chen,

Thank you for your candid reply. I wish you much luck and success. Reason indeed can be quite expensive in this business.

For the record I am quite bullish going into next summer....as I consider this a bear market like no other.
 
Sept. 21, 2010

Analysis:

Today's Fed Announcement contains no surprise, and the market shot up briefly before settling lower. The Fed Announcement offers no sanguine picture of the economy but hints that the economy has veered towards the wrong track -- an inflation rate that is so low that the Fed may need to step in to pop it up, i.e., QE2. But since no Fed action is imminent, the Fed's assessment of the economy bears only bearish implication for the market. Looking ahead to tomorrow, the Initial Jobless Claims will stay above 450,000, and the housing data will bounce off historic lows. As the market continues to digest the Fed Announcement along with these data, it will sell off by the end of the day. In the next few days, the market will need either to close above 1,150 to confirm the resumption of a bullish trend or to close below 1,100 to scare off the retail investors who have jumped on the bandwagon in Sept. (Each time when bullish retail investors exceeded bearish retail investors by such a magnitude since 2006, the market has invariably declined.)

Strategy:

Hold short at 1,122
 
Sept. 22, 2010

Analysis:

Yesterday's Analysis predicted that "as the market continues to digest the Fed Announcement along with these data, it will sell off by the end of the day." Today the market did close lower, although one could argue that such a prediction always has a 50% chance of being correct. Nothing can be said about today's market action except that, truly, it is digesting the Fed's Announcement. Looking ahead to tomorrow, the Initial Jobless Claims will stay above 450,000, and the housing data will bounce off historic lows, although the extent of the rebound is uncertain.

Strategy:

Hold short at 1,122
 
Sept. 23, 2010

Analysis:

Yesterday's Analysis predicted that "the Initial Jobless Claims will stay above 450,000," and they came in as 465,000. The market opened lowered and bounced off the Leading Economic Index and Existing Home Sales. The former is an abstract number that is intangible, while the latter are the second lowest in history and look better only because the previous sales were the lowest in history. The market could not stay above 1,131 and fell within the trading range since mid-May. Unless the market can immediately reverse itself tomorrow to close above 1,131, the Bears will be enboldened and become very aggressive in attempts to push the market below 1,088 (hopefully not tomorrow). Looking ahead to tomorrow, AMD's lowering its corporate guidance may herald another round of disappointing corporate guidance before the earnings season, and a Durable Goods Order in line with consensus would only confirm the false breakout of the market early this week.

Strategy:

Hold short at 1,122
 
Algo_Design_Kid,

Thank you for your question.

One never rejoices at seeing his profit turning into a loss, and I am not an exception.

Dr. Chen :)
 
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