Tuesday, July 22, 2008

Dow breaks upper trend line

The Dow Jones Industrial Average has now joined the S&P 500 in breaking its upper trend line, so it looks like the bear market rally is official.
I've sold the remainder of my SDS holdings, which puts me 100% in cash.

13 comments:

Anonymous said...

I know you just got into cash but any thoughts on taking advantage of the bear rally? I saw your hesitation with SSO. There seems to be some regularity to the bear and bear rally cycles. Any thoughts?
John from CO

Jody said...

The market has a funny way of changing its behavior just when you think you've figured it out, so I wouldn't assume that future cycles will look just like past ones.

That being said, if you want to ride this wave with SSO, then I recommend using stop-loss orders to prevent large losses in the event of a crash. And remember, if you buy SSO and the market goes up, then you will need to update your stop-loss orders to reflect the higher prices.

Dan said...

Jody,
What range do you expect to see for this bear market rally? Are you still expecting to see 8500 on the Dow after that?

There seems to be a consenses that sometime at the end of this year the market will hit bottom - your thoughts?

Jody said...

The only prediction I'm willing to make about this rally is that it probably won't go as high as the previous one. (S&P 1426)

All other things being equal, I'm inclined bet against the consensus. So if an end-of-year bottom really is the majority prediction right now (is it?), then that tells me the bottom will either arrive sooner, or that it will wait until next year.

hindawg30 said...

Hi Jody, Nice update. Just curious about your chart setting. Looking at the daily and the 60 min. I don't have this as a break out. FYI the same indicators I looked at 1220 and suggested a bottom/ oversold are now overbought. I've had the opinion that this bear would be a slow sell off but wonder if removing alot of the shorts could create a mini panic anytime. With shorts we have built in buyers the whole way down. Without that support I'm wondering how quick the next down trend will go. Any thoughts? My target is still 1292.

P.S.I think you would really like Elliot Wave Theory. It attempts to define the "consensus" psychology.

linc campbell said...

Hi Jody -

Where do you get your Dow and S&P graphs for resistance/support?

Jody said...

hindawg:

The S&P declined over 200 points in 2 months, and now you're saying it's already overbought just 1 week after a short-term bottom? This is one example of why I don't use any of the overbought/oversold indicators.

The short interest ratio is still near record levels, by the way.

linc:

I use different sources for charts depending on what I want to emphasize. My favorites are Yahoo finance, Google finance, MSN money central, and stockcharts.com.

linc campbell said...

The graph you used in this post for instance... where did it come from? I simply like the layout.

Thanks Jody. Great blog BTW. I randomly found it about a month ago and read every new post. This past weekend I went back and read all the history. Nice evolution of your thought processes.

Jody said...

Thanks, Linc. Welcome to the blog.

The chart in this post came from MSN money central. I add the trend lines myself.

John from CO said...

Jody and/or anyone else interested in commenting;
Do you employ a stop-loss "methodology" when setting your stop-losses? For example, SSO generally appears to move 5% or less in a direction opposite to the bear or bull trend, ie: I buy during a bull run at $60 and set my stop loss at $60 X 95%= ~$57. As SSO moves up I continue to reset my stop loss at the closing price times 95%. If SSO drops less than the stop-loss point, do you maintain the stop loss point at the original purchase price or readjust? Also, do you generally set your stop-loss at the close or opening or at some other point in time (daily)? What about setting the stop-loss as one is dollar-cost averaging a position? Am I over-thinking this? It seems complex with all the variables. My goal is to get into a position that makes rational sense based on data but minimize the chance for a significant loss. I appeciate any thoughts.
John from CO

Jody said...

I've never used a stop-loss myself. If I did, I'd follow the advice I've seen others use, which is to set orders at more than one price level below the current price. For instance, you could set three levels, with an order to sell 1/3 of your position at each price. That way if SSO dipped below one level but then rebounded, you would still have 67% riding it back up.

I think you have the right idea to look at the typical wiggle size and then put the first stop-loss a little below that level. As the price of SSO goes up, you can then put in a new 1/3 stop-loss order at a new higher price, and that way 2 of your previous points will still be usefully in play. That should help to simplify the process of following the rally.

Hindawg said...

Hi Jody, I understand there are many ways to get the job done and you're timing methods are great. I trust the indicators.

I did notice at 1291 short intrest on SPY was down about 100M from the lows to under 300M shares. But yes still over half the float is short.

John (not in CO)

Jody said...

Ahh, OK. I'm looking at the short interest ratio for the entire New York Stock Exchange, rather than the short interest on SPY. I want to make sure that I'm including people who short individual stocks, because they may be betting differently than ETF traders.