Great Trades

Great stock trades based on fundamentals and technical analysis.

Friday, February 06, 2009


Stop hit on shorts, Adjusting model

With the breakout through 850 SPX resistance, the new Tim Geitner bank rescue plan, and the positive reaction to the negative employment report, our trading model stopped out of short positions, entered some long intraday, but is now in cash. The short-term weakness the model was looking for came yesterday morning, but was bought up hard when support held. There should be more significant weakness soon, but after the aforementioned bullish factors have run their course.

We will be adjusting the trading model, which has been too early in calling for reversals. As we said when we introduced the model last month, it's a work in progress that we continue to fine tune.

One indicator in particular that goes into the model, the CBOE put/call ratio, has shown extremely low readings, which has preceded sizable selloffs near the beginning of each of the last 3 months (each time the model went short too early, but still profited handsomely from the ensuing selloffs). This indicator has actually proven to be a bullish indicator for the very short term, followed by sharp selling. With the model's contrarian interpretion of the extremely low put/call ratios as negative for the market, it went short too early, during the bullish period.

Today, the CBOE put/call ratio again had an extremely low reading at .71, the lowest reading over the past year, following several very low readings in recent trading sessions. These low readings point to a sharp pullback coming, but we're adjusting the trading model to wait for a breakout of the ratio's moving average downtrend before going fully short.

Similarly, on some other indicators, the model will wait for confirmation before doing a full reversal. These changes should improve the timeliness of the trading model. We will continue to fine tune the trading model as needed.

Open Positions: None

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