$SPX traded in the 1270 area during the first week of 2011. It closed at 1257 on December 30th, 2011 so still not negative for the year but that may not be much consolation for the buy-n-hold crowd who bought at any time since the beginning of 2011. $TRAN, which so many people tend to overlook, is off by 108pts or about 2% on the year.
This is a dangerous market. It’s been dangerous for quite some time and this isn’t about to change. There has been an increase in volatility over the past couple of years due in part to the HFT’s. Those computers don’t care which way the market goes they just want it to move so they can make gains on the movements, up or down.
As I have mentioned before, during the 2011 decline there were 17 instances where the markets went deep into oversold territory. By comparison, during the 2007-2009 decline there were only 15 such instances and these all occurred during a seven month period from September 2008 through March of 2009. And during the 2010 decline when the markets dropped about 18% there were only 8 instances.
Since the start of this current decline, which began after the $SPX closing high of 1419.04 on April 2nd, we’ve really only had one instance, on April 10th. This past week we’ve had two instances where most, but not all, breadth indicators went deep into oversold territory and more than 90% of the volume went into declining issues. On Friday, 9 out of the 11 indicators that I follow, with the exception of $NYMO with Bollinger Bands and $NYSI, dropped into extreme oversold territory. I think, especially in this dangerous market, that it’s very important to have everything confirm as there really shouldn’t be gray areas when it comes to putting money at risk in the stock market. $NYMO closed 62 ticks above its lower Bollinger Band and $NYSI dropped by 41 points when a drop of 70pts or more signals an extremely oversold condition.
$NYSI: Something to keep in mind about $NYSI is that it went to -650 during the 2011 decline and is now sitting at -507. It is quite possible that $NYSI might drop down to the -1000 to -1100 range like it did during the 2008-2009 decline. Just something to watch over the next weeks and maybe months ahead.
Which leads me to Friday. Based upon the fact that breadth indicators were showing extreme oversold throughout most of Friday’s session and the fact that the RSI on the 60min chart of $SPX, and many other indexes, dropped below 30, I decided to take on a small position in SSO for what I expect to be a market bounce starting sometime Monday. This is an extremely risky trade and I could lose $$ on it since being long in this market is counter trend. The more I think about this trade, the dumber I feel. However I am only holding a few shares of SSO so I won’t get hurt too badly even if I do have to sell at a loss.
My plan as of now is to hold through Monday and into Tuesday. If the market goes my way, I could hold for a bit longer, but the market isn’t likely to go my way for very long.
I’m not trying to pick a bottom here. I’ll try that in August or maybe September. All I’m trying to do is test my system with some skin in the game which will force me to remain focused on the trade.
Once I complete this trade, I may put this site into hibernation mode for some time. Rather than watch a dull market through the summer doldrums, I’m probably going to spend a lot of time in the mountains just to the south of the small town where I live.
Only the truly paranoid survive.
GL in the week ahead.