On November 9, I mentioned that I was pretty much done trading for the year. I think many market participants also went home that day.
My decision on November 9 is looking pretty good right now. Most traders are not going to do very well trading a tight range bound market. Especially when all their biases are anchored towards trading a trending market (we’ve been in a trending market for over 2 years).
To make money since November 9, you needed to switch your trading style from picking market direction (trading SPY, IWM, DIA) to picking particular stocks and sectors.
The good news for bloggers is that a range bound market provides more material to write about and it also makes it easier to differentiate yourself from the masses. Other than the junk longs, it has been somewhat silly to pick stocks since the March bottom. Simply buying an index like IYT would have yielded over a 100% gain.
So why is there range bound trading? Well, it should come as no surprise that USD has been trading sideways since November 9. The fuel behind the market has taken a break. So what do we know?
Downward USD = Uptrend
Flat USD = Range Bound Trading
Upward USD = ?
USD is up in the pre-market again and there is a good chance today that USD might break the 50-day SMA. ES is currently down about 10. As I have mentioned previously, the economic news may be too rosy for the market. If things start picking up too fast, interest rate hikes and a stronger USD are coming.
This means the easy money for our exporters and banks has likely already peaked.
Finally, I mentioned previously that my plan was to short DIA if USD moved over its 50-day SMA. I would then increase my position size if and when the trade went in my direction. I’m starting to think it may not be the right approach for this market. I think I may be applying 2009 thinking to 2010 market.
I wrote yesterday that I think USD will consolidate for a while and that we’re not going to get a sharp reversal that many bears expect. Many expect this sharp reversal because it is another way of saying they are expecting a trending market. Why? Because people have grown accustomed to a trending market rather than a range bound market.
For the reasons I mentioned yesterday, I expect to see more of March-August 2008 trading environment in USD (range bound) than an uptrending or downtrending USD.
So if the last month is any kind of analog, it likely means we’ll see a range bound market as well. At least until the USD/Equity relationship breaks. In the immediate term, if USD does breakout, we’ll likely see market weakness like we have today. So there may be a chance to participate in a brief correction. However, I don’t think it is likely that it will be any kind of extended correction that will permit loading up on index shorts and riding the market down. I also question the risk-reward of trading short during a historically bullish time of year. Let’s not forget that USD could easily take one last plunge back to support before it consolidates causing a “Santa Claus” rally. So more questions than answers. That is why I turned the lights off on November 9th.
