Great Trades

Great stock trades based on fundamentals and technical analysis.

Wednesday, March 11, 2009


Why our model sold longs and reversed to short

Here are a couple of indicators showing why our trading model sold longs and reversed to short this morning.

This chart shows the CBOE Put/Call ratio's 10-day moving average:

You can see from this chart that the 10-day EMA of the Put/Call ratio is at a level normally seen at market tops, not bottoms. We've never seen a market bottom with such low Put/Call ratios.

Here's the NYSE McClellan Oscillator (NYMO):

Although the rally only just started, NYMO is already in overbought territory per 5-day RSI and stochastics. One down day could trigger new sell signals, which would likely lead to new market lows fairly quickly.

While the price action yesterday and today has been constructive, indicating potential for more upside, these indicators and others (e.g., record high closing TICK reading yesterday) point to likely renewed selling coming up. Considering we're in a bear market, with the primary trend being down, we'd rather err on the cautious side when many are proclaiming that the bottom is in. Instead of staying heavily long, as we were during yesterday's huge rally, we currently plan on adding to shorts on any further upside or on confirmation of sell signals.

Open Positions: 20% short S&P 500, 10% short financials, speculative traders short financials an additional 20%, short an additional 10% S&P 500, short gold to hedge.

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