Sunday, January 11, 2009

A few more reasons we're going down

There are many different tools traders can use to try to predict the next move in the market and obviously none in isolation works consistently. When a combination of indicators points in one direction, it gives you a better sense of outcome likelihoods and increases the reward to risk ratio. In the end, trading is educated guessing with risk management.

The three charts below (in addition to an oversold $VIX, price patterns, oversold momentum indicators, volume patterns, and knowing that we are in a bear market correction) helped give me the confidence to initiate short trades last week:

We're oversold, banks ($BKX) and JP Morgan (JPM) have broken down, the $VIX is oversold and due for a bounce up, and there aren't too many short sellers on board yet. Perfect time to go short! Remember, though, that this is a scalp trade for 1-4 weeks duration. Come the end of January or so, I'll be looking to bet the farm going long gold stocks, the only stock sector currently in a bull market.

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