Sunday, March 22, 2009

News Rules!

Make no mistake, this market is driven by news.... On a short term basis. On a longer term basis, this market is driven very much by technicals. News is driving the market on an hourly basis but the market always comes back to be driven by the tecnicals on a daily and weekly basis. Always.

Last week was no different. The VIX was a great example. On Tuesday, the VIX clearly showed the market should reverse and go down. TA also showed the market needed to fill a gap down. But news, in the form of the fed announcement of printing money, got in the way. For the short term. News drove the market on Wednesday. But Thurday and Friday, technicals took over and the market behaved as it should have technically, despite the news.

This week will be no different. News will drive short term movements, but technicals should hold the long term view. The great thing about news driven markets is it gives some really great trading opportunities for those who are patient and pick good entry points. But many day traders tend to be gamblers and can't stay out of the market so they tend to swing from one side to the other trying to time the market perfectly. The results, at best, in the long run would be 50/50 for a trader keeping most of their investment money in the market all the time make day trades. But usually traders can tend to catch a trend and get caught entering late and exiting at lower prices to avoid to large of a loss.

A better strategy would be to play the market technically when their are strong technical indicators. When the technical indicators are not strong, perhaps take profits or set tight stops, then wait for some news and play the back end of the "buy on the rumor, sell on the news" scenario, if you can react quick enough.

This week, it appears Tiny Timmie has a plan and wants to tell everyone. It's actually a good concept, but the execution of the plan has some major hurdles. The public/private toxic asset plan will work if the following 4 things happen.

1. Private hedge funds and investment firms have interest in participating and working together with the government, despite what has happened to AIG and other banks.

2. Banks have to be willing to offload their assets at discount prices. They will probably do that for their worthless assets (good luck finding buyers), but anything of value, they probably are not going to be interested in selling at discount prices.

3. Taxpayers do not voice negative opinion, in volume, about the plan. Taxpayers will take on the biggest burden of the plan and have the most to lose. Are they willing to accept this in hopes it turns the economy around?

4. Congress passes the bill which outlines this plan. This may be the biggest hurdle. Republicans will lobby against it, mostly for political reasons. But democrates have a lot to consider. They have been screaming there will be no new taxes but this plan would present a situation where, either the tax payer will get taxed directly or indirectly, or inflation will effect them so deeply they will feel the pain due to the plan. Democrates have to consider the impact of the plan to the taxpayer and decide if they can vote for a plan which is bullish for wall street but bearish for main street.

The VIX itself is in an upward trend just below the 20dma. Theoretically, the VIX would pass the 20dma here as it almost always done on a trend. Also, TA tells us the gap to 750 needs to be filled. But neither are strong indicators. Don't worry that the VIX dropped 2 pts in the last hour of trading on Friday. That was all due to OPEX. The VIX is calculated based on options trading and many traders exit their options positions late friday to avoid them being exercised. So the VIX will naturally fall late on OPEX.

This week appears to be setup for some excellent trading. I don't see the market making a big move in either direction, at least early in the week. I think we will see some great trading opportunities especially as the talking heads give their opinions on the financial networks. We will probably see some pretty good swings on Monday and Tuesday. If there is a gap up on Monday, you have to believe there will be an equal and opposite reaction later in the day. I will be playing this as though we have to fill the gap to 750 so on any move up, I will be trading via short ETFs or puts. It would not be a good idea to bet too much on financials since the swings on financials can be quick and significant. Financials present a lot of risk/reward right now. If you are willing to accept the risk, go for it, but don't expect to be on the right side of the trade each time.

Do your own research and make sure you do not over extend yourself in this uncertain market. Watch key support levels at 804 and 750. Moves above or below should indicate additional moves in that direction.


  1. What is your opinion about straddles and butterflies?

  2. Well, I can't imagine a butterfly being a grade trade right now. Too much uncertainty and we are not in a trading range. in fact, a move above 805 or below 750 probably means larger moves in those directions. So to me, a butterfly is not a good place to be.

    So obviously, I would favor a straddle right now. I think there has to be good money in a straddle if good timing can be managed.

  3. Pls explain whats a straddle and butterfly?

  4. Bsen,

    This post speaks to me a lot.

    I usually have my money on both sides of the trade (SKF and UYG) most of the time.

    Recently, I tried to trade with the technicals (daily indicators) to better my odds.

    I've been trading SKF more (since the slow stochastics is quitet oversold).

    On Friday, SKF was near +1.618 of the hourly opening range.

    Now, it is near the -1.618 opening range.

    I wish I played both sides (on the same day) and am tempted to do so again.

    Hopefully, the oversold technical indicator of SKF will do as it indicates.

    I've been following your blog.

    Thanks for the time you put into it. :)

  5. Joe, you can look up what a straddle and butterfly is. Basically, a straddle is played if you think there is going to be a large swing in one direction or the other. A buttefly means you are betting it stays within a range.