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The Psychology of Handling Large Drawdowns
6 days ago
Monday, October 26, 2009
Today the price action (mainly on the bid per NYSE tick) on the S&P500 & Nasdaq indicated a clear inverse correlation between the dollar and equities. Obviously the connection has always been part of the equation, what has not been as obvious is how many traders are watching this trade. As i posted earlier today on twitter, UUP showed large volume spikes today following the rumor of S&P downgrading the banking sector. If you look a bit further out you can see UUP has been in a downtrend finally finding some historical support down here around 22ish. As Roubini mentioned a dollar collapse is a lot less likely than a dollar rally. If this is the case profits from the rally we begin to be taken aggressively out of fear of, this will create great sell side pressure on equities and commodities alike.
This timing is almost perfect, the rally has been way over extended, near 60%, we are exhibiting price action (tight ranges, easier to fall than to rise) in the index's which indicates a toppy environment. I am basing this off of most good news is being sold in relation to earnings, as NOT good enough. The only example i have which goes against this hypothesis is Amazon, though I think this was more of a market momentum trade than fundamental. Amazon will at some point have to trade down a bit as profits are taken on a nearly 45$ run in less than a week.
Anyway, back to the my point.. UUP has had nearly zero volume on the buy side in months, today it woke up the market sold off on rumors. Rumors are moving the market, the financial sector still has systemic risk associated, I.E. Bove downgrading WFC sent the market into a tizzy, today the S&P downgrade rumor sent everyone heading for the bid.
These rumors have not even been substantiated, what happens when something real hits the market? I think as the dollar firms up we are gonna see the market become sell side again. I could be wrong but if you use these signals to help formulate your trading plan you will be rewarded.
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