Up Up and Away?

If you look at the sharp upward shift in long side positions by the commercials, and my Magic Potion indicator solidly in the green, things look very bullish. At this point the seasonal seems to have been met by the sharp decline at the end of July.

I am in a flat position due to the horrible mistake I made of exiting due to someone else's model that I respect. As a result, I now need to look for a way back in, or wait for the short signal. The problem is, we are nowhere near a short signal now. Also notice the very bearish positions by both the Small Specs and Large Specs, this is very bullish. At this point I will wait for the typical seasonal low point in October, and just buy strength if we have not had any meaningful decline into that time period.

It is important when you make a big mistake like I just did, to not get emotional and chase a market. If I miss out on an opprotunity, so be it, but chasing what could very easily be a runaway move here upcoming, is not something I am going to do. If you are long, definitely stay long, it could not be much more bullish than it is right here.

Do Not Fight The Fed

Quite frankly I could not have been more wrong when I exited my stocks on Monday. This is where discretionary decisions can come back to haunt you. When trading with systems, which I do, there are still times when some judgements have to be made. This year I have been off by just 10 days in one spot, and here probably about a week, and the result has been a horribly managed trade.

With the bond market breaking down sharply, and the commercials starting to go to the short side, my model will probably give the sell signal next week. However, it would not be surprising to see new highs by then. I do have to confess that in my research I looked at a new timing model developed by someone else, that indicated an exit early this week. This did influence my thinking because he is one of my mentors. I will not make a mistake like this again, it is clear that my system is far superior to his.

When we make new highs, we will once again have one of those broadening patterns I have posted previously. If this occurs while a heavy commercial short position is on, it will be an excellent shorting opportunity. I apologize for steering people wrong on this recent movement, it is one of the biggest blunders I have ever made.

WHAT TO DO?

I have been debating this for the last month or so, after we had the severe decline in stock prices. My plan as I had posted earlier, was to sell on a rally off that low point. It is always easy to say that, but defining the exact point is never an easy task. The COT report is released after the close today, so I do not know what that will show. I had planned to wait for the commercials to get heavily short before exiting, however on this screen, there are a few reasons why I am front running that plan.

First, I have a proprietary indicator which I just call the Long and Short indicator ( L&S). As you can see, it does a pretty good job of calling short term highs and lows, and it is in the sell zone here. Also, the commercials started moving off their heavy long positions two weeks ago. The other thing that I have displayed here which concerns me is the Small Specs increasing Long position. It is back up to a level similar to where it was in July. This is an indicator that I want to fade.

The last, and most important reason why I have exited today is that the value stocks I had purchased, which led the market rise significantly, have lagged it considerably, on the bounce off the lows. I view this as a sign of underlying weakness of the overall market. Last, the heavy seasonal down bias is here. It is possible that the big decline we have already seen is all that there will be, and the seasonal would still be accurate if that were to be the case. However, the seasonal calls for fall buys, so that is where I am focused.

I still have a profitable trade, so it is time to take the profits and wait for a better entry point.