Musical chairs…

Posted on Mar 10, 2011 by in Letters

Anybody who thinks that today’s air pocket is the result of the trade deficit or Spanish indigestion or Greek salads hasn’t been paying attention.  Last night some big traders decided that the music was going to end this morning, and that creates a self fulfilling prophecy.  When the elephants dance the ants suffer.  We are still of the opinion that this is just your normal elephant dance and that we will soon see an opportunity to add on to our positions.  In the meantime  paper equity in accounts will suffer some attrition.

Traders will naturally be irritated.  Being ambushed is always annoying, and not having a chair when the music stops is doubly so.  We have said that, in general adroit traders should not be caught in these traps.  First of all, they always occur after there has been some warning.  Usually our comments pertain to broader movements — thus a major trend change is signaled in an issue, and not long after everyone is surprised and distressed that a 5% gap occurs.  No surprise to the technician.  Here there was just a break of the short term trend line.  So let us review the hedging procedure.  The power bar the 22nd was the signal that a new round of musical chairs had started.  And the signal to hedge if you were “swing” trading.  The hedge is lifted on one of two events.  A new high is made or the bump-dump-bump pattern is completed with an up power bar.

We made an ineffectual effort to hedge as we noted, and made a reasonable entry but didn’t observe our rule about the new high so the hedge was not much good.

We may now be into more serious water with today’s action.  An important  trendline is broken with today’s power bar.  Readers who keep these transient developments in perspective will be watching with interest and observing Basing Point stops, while their Cassius-like brethern rush about looking for a chair.

It doesn’t matter how big the elephants are who set off this round.  Even they can’t fight the long wave of the market.

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