The market was extremely oversold. Even with not so good news from the Fed today with apparent disappointment, the market still overcame the initial huge sell off after 2:15 pm and bounced back to surprise everyone by ending the day with an over 429 points jump for Dow and 53 points jump for S&P. Certainly no surprise for me. I actually got a few contracts for the SSO options in place to anticipate the bouncing back. So are we out of the woods by now? Is it likely the bottom for this correction? I'm not so sure yet. When a market crashes, it always tries to bounce back and it has the habit to lure retail investors into believing that it has done with the crash and it is going to rally for long. As soon as the herd is convinced about the rally and starts to chase the seemingly upward trend, it crashes again and usually more severely to test the new low. This is what has often happened in the past during crashes. If the history is any guide, here is the script of what I'm going to do.
As I told you, S&P 1250 was the support line before the crash. Since it was broken through, it now serves as the new resistance line for it. If the rally is real, it must first break through this resistance line. Most often however, it will come back to test this line in its attempting rally but will then plunge again to a new low. If you have good paper profits for your existing stocks, it will actually be a good time to take your profits when S&P comes back to near 1250 before its renewed downtrend. That's exactly what I'm going to do. I will wait at the sideline for now and see the market try to rally in the next few weeks. When it jumps to the level close to 1250 for S&P, I will start to unload many of my positions with good paper profits. That will enhance my cash position to be prepared for the real bottom to come. This should come in the next 1-2 months. Stay tuned.
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