This past week was marked by two key points in the trading period. The first was the market reaction to the FOMC statement on Wednesday, and the following was the market reaction following the Bank of Japan announcement on late Thursday night that resulted in a massive gap up in the market on Friday that ran thereafter.
Both of these events had significant opposite market reactions. With the FOMC creating a 44 point sell-off on SPX and the BOJ announcement resulting in a 46 point rally. All within a 48 hour period of each other. Not to mention five days of up/down/up/down trading in a wide range in the days prior to Friday’s rally. We were actually positioned correctly during the course of the week, but Wednesday’s move broke the charts on our four positions that day, and made holding them overnight a higher risk endeavor.
There is give and take to any trading strategy. Wide stop-losses and risk tolerance allows for you to endure more market volatility, but major draw-downs as well. Tighter stop-losses takes you out of positions before a major move can take place against your position and endures less market volatility per individual position and avoids major draw downs. With the two opposite moves in the Market on Wednesday and Friday, the latter risk strategy that I employ required that I take precautions when the charts worked against us on Wednesday only to keep us away from not having those positions on Friday. And considering the numerous afternoon fades that we have seen of late with market rallies, it made the notion of aggressively chasing Friday’s market action of high risk.
Heading into February, we could still see the market attempt to move higher, and if that is the case, I’ll trade accordingly. Resistance for a dead cat bounce could go as high as 2000. After that, there is much reason to believe that the market will attempt to make a move back down to January’s lows at the 1812 level.
So we enter the week 100% cash which provides maximum flexibility and will allow us to respond to whichever direction the market chooses to take us this week and the weeks ahead.
