Wednesday, April 22, 2009

Why I got out

I just sold my two long units at 850.75 after buying them at an average of 842.25 earlier today. Why did I get out?

My range estimate for today was 835-860. The market so far has traded as high at 856.75 - not far from my estimate for the top of today's range. When I saw that high print I believed that today's demand shock would prevent any reaction of more than 6 points and I figured that the high of the day would more likely be 865 or so instead of 860. So the depth of the subsequent reaction which carried the e-minis down to 845.50 surprised me. When the market surprises me I start to wonder whether my current assessment needs modification.

In this case I was also bothered by the fact that the drop from 856.75 (and not far from the top of the range estimate) was an uncorrected one. Such uncorrected counter trend moves are often only the first shoe to drop, the second shoe being a second decline to a slightly lower low. In this case I also saw support at the midpoint of the correction from yesterday's high at 848.75 to this morning's low at 836 (purple dotted line) as well as at the point that would make the drop from 856.75 as big as the drop that ended at 836 (purple rectangle). Both support levels were below the 845.50 low of the reaction. It thus seemed reasonable to expect a second down leg to develop before the market took out the 856.75 high.

Give these considerations I decided that it was appropriate to accept a "half a loaf" of profit and sell my position at a lower high after a six point rally. I plan to put my long position back on near 844 or when the market gives me a good reason to think the rally is about to resume.

5 comments:

c said...

Nicely done -- and nice explanation. I also was surprised at the negative mkt action... Thanks.

JS said...

Nicely done! Taking profits aren't such a bad thing.

rc said...

Yeah Carl...........it was touch and go there for another leg down. I liked your call. FWIW.....Weds afternoons (based on satistical back testing) have sharp weakness that often comes in between 1:00 and 3:00.

Thanks again for your fine work.

Ron

Denali92 said...

Carl,

It absolutely looked like the move down was just the first of at least 2 waves down, so you did absolutely the right thing.

You have made some great calls and I think this one was well justified.

The one day correction has really caught a lot of people (though not you!) by surprise - I was expecting at least 2 down days, but I guess we are faced with a market that is much like early December - 1 big down day and then 2 big up days, 1 big down day and then one massive up day that launched us higher.

I will be quite intrigued to see if you think there is a reaction that is coming tomorrow or whether we are still headed higher. I must admit I will be playing for the reaction trade, as my indicators tell me we need at least a one day correction here.

Thanks for a great, honest blog!

Win said...

Carl,
Quite simply, you the man!