Market misfires. Refuses to tip…

0517spxwedge

http://stockcharts.com/h-sc/ui?s=%24SPX&p=D&yr=0&mn=7&dy=0&id=p97591315138&a=408600621

Offered a chance to resolve the suspense Friday the market played coy, so the issue remains unresolved.  The market principle should be remembered:  The market will do whatever it can to cause the most pain to the most people.

We have been thinking (thinking thinking thinking) that given the present uncertainty a prudent thing to do might be to start putting on a hedge.  If it breaks out up you lose a little on the hedge.  If it breaks down your equity is at least partially protected.  There is some technical basis for this strategy:  The formation drawn above is a wedge and rising wedges tend to break down.  And, at the moment, if you looked at the pattern as in a channel the next most probable move is down to the bottom trendline.  Detailed hedging instructions are beyond the purview of this letter — but generallly speaking you can buy puts, sell calls against your position, buy a reverse ETF (SPXU, for example, a leveraged bear ETF on the SPX  — or even lighten up your long positions.)  If you don’t have a broker knowledgable about these things, get one.  If you want a reference email us (bassetti@edwards-magee.com).  Tdameritrade crosses our palm with enough free trades to buy an ice cream cone for references, and their handling of our accounts has been completely competent and professional.

We took a decent profit on our short bond trade (about 25%) and looking at the gaps in gold and silver (totally unexplainable) dipped a toe into each issue.

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This Post Has One Comment

  1. thoughtslinger

    Wondering if you might care to comment on the divergence between $TRANS and $INDU?

    $TRANS seems to be breaking down – it has broken the Nov 12 trend line and is approaching the Mar 09 line. Storm clouds on the horizon? Which would reinforce reefing of sails?

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