Tuesday, March 9, 2010

On the Approach to S&P 1150

My plan now is to unload the SPY calls, and some TNA ETF I picked up (who can resist TNA really?) a few hours ago if/when we hit 1150 on the S&P 500.  The level is very obvious to humans and computers alike.  This is January 2010 highs .... those levels have NOT stopped either the Russell 2000 or NASDAQ the past week, so I don't know if it will cause a pause in the rally.  Historically it would - but this type of rally is making its own history.

I have essentially been stair stepping each leg of the rally... over 1109 (the breakout level from a week ago Monday) I bought, then sold over the next 2 days. Over 1125 I bought, and sold.  Over 1130, then 1135, and today over 1140 on the S&P 500 I buy and then have been selling these index positions as we move to the next mini resistance.   It's been remarkable than there have been no head fakes - each time I enter an index position, I make a mental note to stop out if we fall below the round number just below where I enter - and I have not been tested once.  For example today I bought over 1141 and said I'd exit if we fall below 1140... not even a whiff of it happening (yet).  As scintillating as the rally has been, the complete lack of head fakes along the way is perhaps the more amazing thing; it's the "no sweat" rally.  This must end relatively soon (I think). 

This methodology I've employed is a very cautious way to do things and in retrospect simply buying the breakout over S&P 500 1109 a week ago Monday and sitting on my hands would have been the 'right' thing to do, but we do not have a crystal ball.  I've been able to catch a decent portion of the move from 1109 to 1145, with a lot less risk with the index plays - darting in and out.  But in return for that safety component have given up some upside. That said, I wish I had been afforded an opportunity to buy more individual equties when I was attempting to entering last week, but many stocks I was interested in shot up first thing Monday morning and I simply did not chase them.

So using the methodology above, I will repeat the same theme with 1150 (if and when) - sell into the resistance, then buy on a break over it.  Although the higher we go, the more risk comes into play of a sharp reversal... so the game gets more dangerous.  It's like a high wire balancing act... and the farther we go away from any meaningful support, the faster the wind is blowing around us.  Staying on the wire will become more difficult.  Due to that if we reach 1150 and I let go of long exposure, I plan to wait for something such as 1153 (rather than 1151 or 1152) to get back those positions.  And then we'll use 1150 as the floor for that trade; effectively the same trade we've been using the past week and a half.

I am keeping S&P 1078 in the back of my head and recalculating each day how much of a correction it will be in percentage terms to 'fill the gap'.  It grows by the day....I believe someday in April or May we shall make our visit.

As for the 3 individual shorts put on last week... still treating us fine.  Indeed up to about 30 minutes ago I was actually net positive on the 3 despite the never ending rally.  I'd like to find out how they perform if the market actually went in their favor!  I still am courting short TNA (or TZA) but only from across the room... haven't offered her a drink yet.  This darn DJ will not stop the music.... his endurance is legendary. 

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