Thursday, May 19, 2011

Prepare Accordingly

We think that the USD bottom is here to stay for a while and this is a game-changer for the market.  The commodities, and silver specifically, had been market leaders — they will not be able to regain this role with a strong USD.    We’ve gone from a trending market to a range-bound market.    This isn’t necessarily a bad thing (for traders anyway) but it is necessary to change one’s strategy accordingly.

This means we’ll be less focused on trend strategies ( break-outs/break-downs) and more biased towards reversion to mean strategies (shorting resistance and buying support).    Of course there still will be break-outs here and there (we already have a few tech spots we love) but it will be more of a stock-pickers market going forward.  We also believe it will be a less forgiving market going forward.

Our general strategy in range-bound markets is to buy support the day after a trend-day down, and to short the pop into resistance the day after a trend-day up.     As always with any bias/strategy, we’ll do it until it doesn’t work, and then re-assess.    As an extra bonus this is occurring with the coming of summer which means when we see no edge, we will shut off the computers and take off to enjoy the sun.

As we tweeted yesterday:
Yesterday was trend day to resistance which means today you short the pop and cover into the dip.    Look not for home-runs, but base runs.
SPY over 134.7 resistance overshot into 135, and then right back down to 134 support.

Follow us on StockTwits and Twitter