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Is This A Turning Point? - Learn to Trade Options | #1 Options Trading Education

Is This A Turning Point?

Published on May 26, 2010

Is This A Turning Point?

May 26, 2010

What a recovery! The Dow came back from nearly a 300 point fall to end the day with only 22.8 point loss, S&P from over 30 points drop to end in positive territory, NASDAQ from the depths of a 73 point loss to close almost flat. As dramatic (except the mysterious “fat Finger” incidence) an event as one can get. Dow in fact dropped below the May 6 “flash crash” and also below the level I mentioned but didn’t close below that.

A horrible 2 weeks for the markets and most investors now have to recoup the losses suffered during this sharp sell-off. For OPNewsletter we didn’t do much trading (except for speculative ones) as we have been “watching the show” from the sidelines. In fact, our last two Income trades for OPN were on May 12th, followed by May 14th. As of last Friday close, OPNewsletter June Income portfolio is up +14.33% on a capital investment of 31.62%. Which essentially means, OPN is up 4.5% on the overall $10K portfolio, significantly outperforming broader markets. (If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only).

Albeit, If we have escaped past crashes (the 2008/09 meltdown, Feb’10 and The latest one) so far, doesn’t mean we can always avoid the next one. No one can do that. So always, pls always be on guard for your capital. Over a period of past 15 years, I have learned that in this business, preservation is more important than “potential” opportunity. Complacency has no place. 

So the key question now is, has the market turned upwards? There is no doubt that markets are oversold on a short term basis and hence technical rebound is expected. But did this correction pulled back prices far enough to recharge the bulls? I shall again highlight what I mentioned earlier against dire prediction from Richard Russell of Dow Theory-

Besides a 10,300 level that one should be careful about, I think hard rain is not coming until the averages drops below following levels- Industrial at 9,835, Transports at 3,740. Though I am not an expert on Dow Theory, I would stay clear if Dow drops below $10,300 and will reposition to re-enter around 9,835 but with risk management plans in place, in case Markets drops further. If However, Dow manages to remain above 10,700, I think we might have run this pullback course; at least for now.

In that perspective, I think today’s close is an important data point. Here are 3 scenarios-

  • If Markets close almost flat, I think the uncertainty will continue
  • If Market close strong up, then probably we have seen at least a short term bottom.
  • If the market fails to rally today despite the heavily oversold readings on short term indicators, the probabilities would likely favor a further market sell-off before a sustainable low is established.

Though in trading, nothing is certain, pls pay extra attention today’s action and I think it might be prudent to delay bottom fishing at least by today.

Profitable Trading, OP

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