Thursday, February 12, 2009

Why I covered

This morning I shorted two e-mini units figuring that resistance at 819.50 would hold. My working hypothesis was that the market was weak, and I knew that if so rallies would tend to get shorter until the low was reached.

But instead we got a rally that was as long as yesterday's biggest rally. While this does not mean the trend has changed, it is an indication that the selling pressure and buying pressure are coming into balance. Moreover, at today's 825 high the day's range was as big as yesterday's. This made me think that we might not make new lows for the day.

So after the market fell away from my plan B resistance at 825 I was watching carefully to see if much selling pressure would develop. Instead I saw dullness in the 820-21 area which would have been minor support if the market had decided to go higher than 825 right away. So I covered one unit there. I covered my second unit at 816.50 because, although more selling pressure was evident, the market had returned to the day's midpoint - a fair price given the day's fluctuations thus far. I was playing defense instead of shooting for a substantial profit because it seemed to me that the buyers and sellers were of equal strength and the odds were good that the day's range was already in place.

4 comments:

Win said...

Carl,
If I may, I'd like to point out where I differ. I shorted some more at around 818 (I used the Qs) because I expect more weakness and they appear to be the last holdouts today. I am looking at what I see as the longer-term trend based upon volume and breath MAs over the past few months and I am expecting a retest of the November lows. When I saw that 826 resistance would not be broken to the upside at high volume, I decided to quickly short some more. If 826 had been broken convincingly, I would have hedged all of my longer term Puts by selling Febs. As it is, I am waiting for a break like this morning, to sell more Februarys.

Anonymous said...

Thank you for providing this detailed explanation, Carl! Val

Anonymous said...

Carl, Thanks for the explanation!

Yes, indeed, the resistance at 825 made it turnaround. But the support at 821 could have caused another up swing, especially because 825 had not been retested.

Personally, I have been often caught against a new trend because retest never happens. It is very difficult to distinguish between a potential continuation or a potential reversal. And there seem to be no consistent rules that we could follow.

Please let us know if know of a way to tell whether a pullback will be part of a continuation of an existing trend or a reversal of the existing trend??

Thanks again very much, Carl, for all your insights!

Denali92 said...

I found it torturous there (820 - 821) as well. I was really fearing that we were on a Thursday Key Reveral Trend day up like LAST Thursday.

Your logic was sound, and I certainly sweated my shorts, as the thing that I trade did not move at all as the e-minis came off.

I would expect that 818 - 819 must cap all rallies and we make new lows at the close or today may have still been that reversal day.

Thanks again for being so open on your thinking