Wednesday, October 7, 2015

Buying Thrust

This is a powerful bounce off a panic selloff.  Like summer 2010, fall 2011, and fall 2014, you get the strongest point gains at the beginning stage of the buying thrust.  Officially we hit bottom for this down leg last Tuesday, so we are only 1 week into the rally.  Usually the biggest gains happen during the first 2 weeks of the rally, and then it gets choppier as the rally matures and more people jump on board.  On average, these type of rallies last around 4-6 weeks.  And they retrace at least 2/3 of the losses from the initial drop, which would be SPX 2100, so if you consider 1870 to the be floor, then we should go up at least till 2020, but more likely till at least 2040.

Of course, we could have a fake out buying thrust like we did on December 2014, but that is unlikely here.  This bottom had a lot more panic involved, and the sentiment got so bad and fearful that this one has high odds that it is the real deal buying thrust.  Based on this scenario, you cannot be short.  You have to be long here and use any 1 day dips to add long exposure.  This rally probably has till the beginning of November, with the target area around 2040-2060.  If we do get to that area, the risk/reward for staying long would not be worthwhile and I would consider a small short at that time.

We have a long ways to go, time wise, but not point wise.  It is a bit depressing for latecomers to know that 120 of the likely potential 170 points gain from 1870 to 2040 has already happened.  Really only about 50 points of upside left from 1990.  But I still like the risk/reward here being long just because all the ingredients for a good bottom were established last week, and the market is acting very strong even though we are overbought.

The past week's jump just emphasizes the extreme importance of catching these bottoms and being long when the initial thrust begins.  That is where most of the reward is in being long.  As you hold for longer into the rally, the rewards get smaller and the risk slowly rises.  That being said, it is still only a week into the thrust.  Still plenty of time left in this one.  Expecting more strength in the coming days.


shzhning said...

Quote "The past week's jump just emphasizes the extreme importance of catching these bottoms ..."

I would say picking bottom is a dangerous game in trading

Market Owl said...

Not for stock indexes. For individual stocks, yes, picking bottoms is a very dangerous game.

What is the most dangerous game in trading is following the herd and chasing.

shzhning said...


it sounds like you're mostly a mean reversion trader by identifying bottoms/tops and fade the trend in indexes

what about bonds? are you following the same trading style?

Market Owl said...

Yes, I am mostly a mean reversion trader, for bonds and stocks, but I will go with the flow and follow the trend if I think the trend is strong, such as stocks late last week, earlier this week.