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July 24, 2012 / redman59

Keep Perspective On What Has Worked, Not News or Emotions

What a day today as the market opened it was definitely a trend down day.  If you were overly long then you felt some pain to your portfolio.  The summer has marked a buy the dip and sell the rip environment.  I think the key to staying sane here is not to overweight yourself to any one side.  Me personally I am in a buy-the-blood mindset.  Does that mean going 50-75-100% long? No!  I am talking about dipping in with no more than 25% of my portfolio to the long side as we can still see selling.  But here are some things I am looking at as a reason for me to have some long exposure.

Below is an SPX chart with the McClellan Oscillator which I have talked about before in this post.  In the chart you can see that when we have a -200 reading (highlighted areas) there is a good chance that we bounce.  Also when there is a divergence between price and the oscillator after it hits -200, we move higher and a longer rally has occurred.  But also make note that when we do hit -200, it does not mean an immediate bounce.  Instead it tells me that I should start scaling out of shorts I may have had and scale into longs.

(click on chart to enlarge)

Could we have another scenario like August of 2011?  Of course we could, that’s why I emphasize scaling in and going no more than 25% or my preferred 20% long exposure at this juncture.  Also another indicator I am looking at is on a more narrow time frame.  I always look at the RUT and /TF (emini Russell) charts.  I like to plot the RUT with Weekly Person Pivots and the /TF with Daily Person Pivots.  I have found that when we go around 15-20 points below the Weekly Person Pivot, this often marks an extreme move and a basing or bounce is imminent.  I have highlighted these points in a prior post.  As you can see in the chart below we are currently -10pts below the Weekly Person Pivot and hitting the bottom of the Daily Person Pivot.

So what does all of this information tell me?  With AAPL earnings out today and where the futures are currently trading, I believe we may see a gap down tomorrow.  This is a perfect scenario to me as I believe this could push the McClellan Oscillator to oversold territory (-200 or further) and couple that with possible extreme moves in the RUT and /TF parameters in regards to the Person Pivots; I have no problem having some long exposure on, especially to stocks that have displayed Relative Strength this week.

In my opinion it is not a time to add to shorts as this market during the summer has been  a buy the dip and sell the rip type market.  The only advice I can give is to ignore news, doomsday scenarios, etc. but go in with a game plan.  Am I uber-Bullish?  Not by any means but from a risk perspective I would be looking to reduce short exposure and add to long exposure…or go cash with a wait-and-see mindset as that saves you capital, physical and mental.

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