Friday, October 23, 2009

A Trend is A Trend (Until it Isn't)

A reader emailed "What did you mean by 'Keep those stops tight?"' [in this morning' post "Approaching the Height of the Earnings Reporting Season" -ed]

Good question. A quick look at the DJIA hourly chart for the last ten days reveals a couple interesting points to consider (from BigCharts):

First off, the triple top around 10,100. Three time this week the index got to this level and stalled out. Secondly, the daily low to high range has expanded considerably. This kind of sloppy action is often the sign of half-hearted buying by participants.

Although we are still looking for S&P 1125 this month (which means next week), this is dangerous territory. To quote myself [favorite source? -ed]:
Markets: Where Do We Go From Here? (INTC; JPM) The Beat Goes On
Regular readers know we are looking for S&P 1125 sometime this month. If you watch this stuff (and I understand normal people who don't) the level of nervousness about the market's direction and this earnings season is as high as I can remember. Participants know they are playing a dangerous game; we all think we will be the one to grab a chair when the music stops.

This is creating a frisson for the players that has to be at least as exciting as Chris Matthews reaction to a Barack Obama speech...
There is downside risk. Any drop could be the start of a 15 to 30% decline.
I am comfortable with a 2% loss in futures or options, 4% in leveraged ETF's and 7-8% in individual stocks. Your comfort level will vary but at this point the goal has to be preservation of capital.
The kind of action we've been experiencing will stop you out a lot which can drive you crazy.
[not a long drive -ed]

If you aren't comfortable scale back your exposure to the "I can sleep at night" level.
As I said, good question.