I changed my mind again, Sunday 10/9/11

On Tuesday I had open orders to sell 1 lot of FAS at 11.65, 15.65 and 19.65. I began weighing the possibility of a continued downtrend in the FAS, which would suggest selling somewhere below the declining 20 MA is warranted (11.65) vs the possibility of Europe putting together a $3-5 trillion dollar fund to address their sovereign debt issues, which in my view would send the financials rocketing higher for perhaps weeks, months or even longer. I am also aware that the Best Six Months of the Year switching strategy popularized by the Stock Traders Almanac, is due to generate a long entry signal any day now. 

Putting all of this together, along with targeting large swing trades gains over multiple months instead of smaller swing trades gains over multiple days, I decided to pull the order to sell 1 FAS lot at 11.65. On Friday morning, the FAS hit a high of 11.67 around the open and then sold off pretty much the entire day until the close. My order would have been hit, and I would have pocketed a 10% gain on that lot which would have been nice, but I am still fine with having pulled it. Based on the current chart and my view of what might happen over the coming days, weeks and months, I would rather be targeting 50%, 90% and higher gains over this time frame. If the downtrend continues, then I still have 3 more lots to buy, and I am confident that I can manage the average cost in an advantageous manner.

FAZ appears to be carving out an ascending triangle since August. Ignoring the news and just trading off the technicals, suggests to me that the correct side of the Financials trade is to still focus on the short side. But for the reasons noted above, I am currently focused on the long side.

The European Financials that I have been tracking continue to carve out a basing pattern (UBS, BCS), or a pattern of higher highs and higher lows (DB).

The US Dollar Index continues to break out higher from its base, while the SP500 continues it choppy move down.

Gold looks like it is trying to hold onto its daily uptrend, but Silver looks like it is continuing its downtrend, with a series of lower lows and lower highs.

Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Economists are useless unless their names are Lakshman or Anirvan.

I generally find that most economists are useless and do not add anything of value to the conversation. Paying attention to lagging indicators only tells me where I have been (ie, revisions to Q Economic activity), kind of like looking into a rear view mirror. Paying attention to coincident indicators (ie, Monthly Retail Sales) only tells me where I currently am, and any fool can do that.

But looking into the future, and seeing where the economy is probably going, really adds something to the discussion. Lakshman Acuthan and Anirvan Banerji of the Economic Cycle Research Institute use leading indicators (ie. SP500, Weekly Unemployment Claims, Mortgage Application activity, Commodity Prices, etc) to identify turning points in the economic cycle. Yesterday, Lakshman stated that a US recession can not be avoided.

Jason Goepfert at Sentimentrader crunched some numbers on the how much the market falls during recessions, and found a median decline around 25% in the SP500, with the largest decline around 55%.   The SP500 is already down about 15% from its summer high, so some of the stock market fallout has already occurred.

I love the work that Lakshman and Anirvan do at ECRI, and that Jason does at Sentimentrader. I have been following them for about 10 years. Their research, and how I have been able to apply it to my trading, has been a big part of my trading success.

Speaking of trading, my order to purchase a second lot of FAS just above Thursday's high was not hit. I have edited the order such that a break above Friday's high (11.95ish) or a drop down to 10.35 will get me long a second lot of FAS.

The Volatitility Index (VIX), looks like it is setting up for a retest of it's summer high around 48. If there is not a significant positive news event out of Europe over the next few days-weeks, I would expect the market to be trading lower over that period, with an increase in the magnitude of the swings. It might be good to make a quick run to CVS and pick up some Dramamine. Having said that, I am looking to buy that weakness in piecemeal fashion, rather than sell it. According to the Stock Traders Almanac, the best 6 months of the year tends to begin with the September/October low. Monday is the first trading day of October.

Disclosure: Long FAS.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***

Articles of Interest, Friday 9/9/11

Stock Traders Almanac: Sector Seasonality is on Track

Todd Harrison: The Market is speaking, are you listening?  and this was written two weeks ago!

ECRI: WLI ticks up, but growth rate weakens

Stock Traders Almanac: Hemline Index still Bearish

Stock Traders Almanac Review of Current Conditions

Deja Vu All Over Again