Trader’s Narrative

Things are finally falling into place and I’m feeling less dazed and confused.

Mark Hulbert reports that newsletter sentiment has fallen so much that short term market timing newsletter editors are now recommending a 12.3% short position to their clients. This is heartening for the bulls because for a few days newsletter bullish sentiment actually went up as the market declined. So it’s good to see real bearishness out there as a contrarian.

Trader Mike reported yesterday on his esoteric “search engine” indicator. Apparently, quite a number of people are finding his blog by typing in the search strings related to short selling. I find this hilarious. And it does dovetail nicely with the spike we’ve seen in odd lot short sales.

As well, the troubling COT report that I previously mentioned has now improved. The retail traders (dumb money) liquidated their big net long position and the commercials (smart money) covered a big chunk of their net short position.

And finally, here’s an interesting data point from Jason Goepfert: “Less than 10% of total assets in the Rydex mutual fund family is concentrated in technology funds, a level that has equated well with previous lows in big tech stocks. Overall, Rydex traders are positioned about as defensively as any time over the past few years.”

Yesterday Ugly posted a trade in AMR that he had missed by a hair’s breadth. By his own admission, he had been penny wise but pound foolish. I don’t think it’s wise to beat yourself up over something like that because in the end all that matters is whether you played out your gameplan as you were supposed to.

A more positive response would be to quickly find a correlated stock which is following or sypmathizing with the stock you missed, and enter a trade on it instead. This is not that difficult because most stocks in the same sector follow each other, more or less. Especially on an intraday basis (this is how pair traders make coin).

For example, take a look at UAL’s price action for yesterday:

UAL did not gap down as AMR did, but it was nevertheless crushed in an avalanche of aggressive selling in the morning. The 11:30 am candle was an inside candle and a hammer. Also notice that it was sitting right at the intraday support (and round number) $30. Once it broke that, the price action continued to expand to the downside.

You might be asking, why UAL? Was this a cherry picked example? Well, since we were looking for a short, obviously it would be to our advantage to pick a weak stock within the airlines sector. Looking at UAL on the daily, it is clear that it has low relative strength compared to the sector and to AMR. Whereas AMR was above the recent April swing low, UAL was below it’s April swing low.