Tuesday, August 2, 2011

Doing Nothing is Sometimes the Best Thing to Be Doing

Thank goodness our honorable and wise representatives in Washington, D.C. finally passed legislation to raise the debt ceiling (just in time, I might add) - I would have really hated to see what the end of the world would have looked like.   It seems to me that the previous few weeks, every person I heard talk on TV was speaking about how awful things would be if the legislation wasn't agreed upon - that the markets would just fall apart.   Again, thank goodness they got something done, right???

Back on July 27th, the market tanked over 2.5% and all three of my timing signals went negative.   We had 36 4% breakouts that day compared to 620 4% breakdowns.   It didn't take a rocket scientist to figure out that the market was in trouble.

To be perfectly honest, however, I expected a few shenanigans and for the market to get whipped around for a few days until this debt crap got resolved.   I wasn't finding any short setups that interested me and I still saw a few longs that were hanging in there.  I really did not expect the market to fall off of a cliff.   I was wrong.
Russell 2000
 S&P 500
Charts from TC2000, Courtesy of Worden Brothers, Inc.

The charts above say it all.   If you have been buying these dips since July 27th, then you are likely not in a good mood right now.   It's possible we get a little relief bounce soon, but with economic numbers relating to jobs coming out both tomorrow and Friday, we may just keep falling straight down.   Both the S&P and Russell are breaking through necklines on massive head and shoulder topping patterns.   To be fair, we've seen head and shoulder setups several times since the bottom in 2009, but this one is much bigger and the action is much worse than we saw during those setups.

How bad is the action right now?   Today was even worse by my measurements than July 27.   Today we had 52 4% breakouts (most in gold and silver or earnings related) versus 681 4% breakdowns.   That's a buy/sell ratio of -629.   July 27th's reading was -584.   We've had two of the worst three buy/sell days (along with February 22) of the past year in the past five sessions (technically, it's less than a year - we had a -1048 day on August 11, 2010, but I am just rounding off a bit).   That is certainly not what you want to see.

We are definitely oversold and could get a bounce soon, but now is NOT the time to be a hero.   Now is the time to sit back and basically do nothing.   Shorting an oversold market is typically not easy, but with negative headlines potentially around every corner, catching falling knives hoping for a bounce is even harder.   I thought that earnings plays might be OK to play this week, but so many of those are being sold into before the release that the charts in most cases have tons of overhead resistance to overcome on any gap they may get.
McClellan Oscillator
Charts from TC2000, Courtesy of Worden Brothers, Inc.

Hedge funds, mutual funds, and big institutional investors have 99% of the advantages over "little" traders in this business, but one advantage we "little" traders do have is that we can easily get to cash, sit back, and do nothing if the market tells us to do so.   Hopefully you are either in that position or getting there fast.   The rest of this week is going to be tough to do anything with, so relax and let the market figure out what it wants to do.   There are virtually no charts anymore worth even considering on the long side, but shorting is not much of an option either.   If we bounce, it will possibly set up some nice short setups, so there will be a time to trade soon - I just don't think that time is right now.   IMO, now is the time to do nothing.   


Anonymous said...

I totally agreed Mac. I tried to get cute yesterday and bought some IWM expecting a post debt vote rally. Wrong! Steve Clem

Anonymous said...

do nothing! i think u should have gotten a small buy list ready. i bought QLD at $83 and change this am. dont worry, you will get a chance tomorrow or friday. my guess is you probably still stay in cash

Mac said...

Actually I took my kids to the Children's Museum today so I guess I did "something". Today was a good day however - still lots of news out there and I still think the next week or so will be volatile. Sticking to earnings plays only on the long side for now. No shorts yet either.

Anonymous said...

beautiful move!
happy trading every1, and our dear mac too.

now entering OS zone, lets not square the shorts too fast but to observe if we can make a big profit tomorrow (friday). i still suggest to take at least half profit of shorts before weekend.