Saturday, August 18, 2007

Second Chance?

First off let me point out the 4 day corollary signal that was given by the Dow on Friday. For any who are new to the site here is a post with explanations on the 4 day rules. Also take a look at the long tail in both charts. Normally a strong sign of a bottom. On top of that we had a 90% up day the very next day. Many intermediate declines end on a 90% up day.

Now let's move on to the next chart of the S&P. For all the people who missed the original long signal back in Mar. well you just got a do over. As of Friday the S&P is right back at the level where the Mar. signal was given. Now let me make a few things clear. First off your odds on any COT signal producing a winning trade over the last 21 years are about 3 to 1. If you were to just take long trades they would be better than 3 to 1. Next and I've repeatedly called attention to this the commercials are not just long they are at massively historic long positions. The little guy is at almost historic short positions. Insiders are buying like there's no tomorrow and there's only one reason for insiders to buy. Now lets throw out a few more statistics. Breadth extremes like we've seen over the last week or two have only occurred four times in the last 40 years or so. Every one of them was followed by extremely powerful rallies.

I've said this many times before that if you can get the odds in your favor then just like a casino you will make money in the long run. Having said all that and shown you that the odds are very heavily weighted to the long side and the technicals are also suggesting a bottom how many of you after all the volatility last week have the balls to pull the trigger? Let me point something else out. Your stop would be a break below the recent lows. The four times in history where we saw these kind of conditions the panic lows where not violated. So to make it simple your maximum loss if you put your intire account (which I better not catch anyone doing after all my rants about position sizing) is 5.5%. Your potential gain if we just go back and match the highs is 6.8%. Of course if the market rallies powerfully as has been the case after such extreme oversold levels then your potential gain could be much more than 6.8%.

So the odds are in your favor and the risk reward is in your favor. It doesn't get any better than this in the markets. So I'll ask again how many when presented with all these factors in your favor have the courage to buy here? My guess is few and here's why. Too many investors are more concerned with being right than making money. I've just explained to you that if you consistently trade with the odds in your favor you will make money in the markets. Not you might make money in the markets. You will make money (well as long as your position size is sane). That doesn't mean that you won't lose from time to time. You will. This could be one of those times even with everything in your favor. My guess is the extreme volatility we've just experienced and the fear of losing will prevent all but the most experienced and disciplined investors from buying here.