Sleeping Soundly

Reposted from last night:

Yesterday, I ran into a friend (and member here) who was trying to develop a strategy for the rest of the week; we got to talking about various approaches.

I know I wrote this numerous times last week, but it bears repeating: if you’re not a gambler, stay out of this market. In the short-term, it’s just too dependent on what Bernanke says (or doesn’t) on Friday.

I blog every day about what I see and what I think. As always, I have an opinion as to what will happen. But, right now, my confidence in my opinion being right is a lot closer to 50% than the 70% I shoot for. Why?

Most of what happens in the next couple of days will be driven by what Bernanke says on Friday. And, while I have opinions, I have no special insight into what he’s going to do. So, unless something really weird happens in the next two days, I will have at most a very modest bet in place when Bernanke starts talking.

Ever since 1426, trading SPX has been very high risk. First, 1426 didn’t really match up with any patterns; 1422 or 1433, sure — but not 1426. I saw a few Elliott Wave guys get it right, but that’s about it. So, it wasn’t clear it was the top (still isn’t.)

Second, every one of the past 16 sessions has traded within 10 points of the fan line from 1576 in October 2007. Thirteen have actually touched it, and 5 have straddled it. Fan lines are extremely important, and the fact that the market can’t make up its mind is very telling.

Third, the cost of being wrong could be substantial. I’m working on a forecast that covers a range of outcomes, but SPX could move +50 or -50 in a matter of a day or two — depending the what the news is and how well it’s delivered.

Looking back over the years, the worst trades I ever made came from being invested at a time when I wasn’t very sure about the direction, but had enough of a hunch to stay invested. Sometimes these even work out, which is dangerous (it only encourages more hunch playing.)

I’ve learned the hard way that it’s perfectly all right to be on the sidelines. Sometimes, it’s the only sensible approach. Although illogical from a mathematical standpoint, in my opinion losing actual money sucks more than does an opportunity loss.

So, unless there’s a great straddle (currently 5.10 ATM on SPY) or volatility trade that makes sense, this is one of those times. I’m still long from 1409, with an objective of 1420-1422 and a stop at the fan line around 1405. I’ll continue to take stabs at the intra-day stuff for those who like to day trade. But, if nothing substantive happens in the next few days, I’ll be market neutral (and sleeping soundly) Thursday night.

I’ll post more after the open.

UPDATE: 9:50 AM

We’re getting that rebound we were expecting off the lower channel bound on the 30-min chart. So far, the TL (red, dashed) from 1426 is holding, but I expect it to give way in the next hour or two. If it does, potential targets are the .786 at 1420 and the .886 at 1422. But, I wouldn’t be surprised if the channel midline (the yellow dashed line) keeps a lid on any break outs.

If the channel should break down for some reason, the immediate downside should be limited to the fan line down around 1405. The channel bottom and the red TL intersect around 1410 at 1230 EDT, so look for a breakout or breakdown before then.