Timing Market Turns Update 2 – 03/21/2006

Market Timing - posted at 1750 EST

Swing trade - still 100% short, as of the open on Monday, March 20th.

Investor core - still in 100% cash

We just wrote:

Expecting a upward bounce after a decline to SPX 1298 would be normal. The double gap just above SPX 1306 is visible on the 5 minute chats. That level might become resistance.

I might believe the markets heard that comment and decided to show me who is the boss when it involves what the market is going to do. :)

Don't forget about that gap. It might become a target level intraday tomorrow morning.

As I promised, I would try to deduce what the rationale for shorting on March 13th.
I was definitely fooled by the formation. From an Elliott perspective, there are at least 5 reasonable "counts" from March 8th through March 13th. They might involve a 5th failure that failed so horribly that it looked like a corrective upward leg. Any structural conclusion leads me to the result that the market ended its downward correction, either late on March 10th or at the intraday low on March 13th. I favor a fair bit, the ending on March 10th as seen through my rear view mirror.

What did I learn? I knew the market was still in an overall bullish phase, and still is. I relearned to not underestimate how the market can shape a reversal in its own unique way. Recall the October bottom in 2005, it also showed the same creative tendency when a reversal is due. We had stated that the turn was coming either on October 21st or October 24th. When we executed the trades, we had a much better structural view since the downward preceding move was much greater and longer in time. We felt very comfortable stepping onto that bus going upward.

This last turn locus on the 13th of March, had my mind thinking logically and asking, "Can the SPX turn upward from a point halfway back up this downward move of only a few days?" Then answering myself with, "No. Not a high percentagoccurrencece." Frequently, indexes short change the structure's desired completeness when underlying sentiment of the smart money stops buying/selling near market turns.

Instances such as those are normal and moderately easy to spot. Some may have found this turn to have been a walk in the park. I didn't, but I didn't walk to far till I 'hit a tree in the park' and exited. Lesson learned, or relearned.

That's why we use stops in our disciplined trading plan. And that's why we completely reversed our Swing trade position to the correct direction. We got on the wrong bus. It has happened before and will most certainly happen again.

Trading is supposed to become a small loss business with large profits coming from correct trades. The strong upward move which continued after we reversed our position confirmed the correctness of reversing and capturing a small amount of the total movement up.

I hope this explains how to do more than be wrong. Hopefully, it helps to show you what MUST be done when you are wrong. The first decision is to exit. Reversing your position is a totally new trade and decision tree matrix, isn't it.

Good trading and God bless.

W. B. Busin