As a person who takes a lot of pride in managing the risk that is inherent in trading and keeping it to a minimum, last week, is one of those weeks, that can be quite easy to get under the skin (thought I refuse to let it). Coming into last week, the market had hit levels that were so overbought, that getting heavily long at that point was extremely unfavorable. And the week alluded to that with a weak start, but that was thrown completely to the wind when the FOMC Statement came out and showed that without warning, Janet Yellen had suddenly become dovish again and ran against her policy of the last couple of years of wanting to return the rates to some form of normalization.
That kind of news completely caught everybody off guard and sent the HFT’s and Algos into a buying frenzy ripping through key moving averages like the 200-day MA.
At this point, yes, the market could continue to keep moving higher, but we have to still be cognizant of the risks in this market, and a market that drops more than 10% and then rallies back 10% in a single quarter is not a healthy market.
We can trade to the long side, but in doing so the risk/reward is not highly favorable. That doesn’t mean we avoid long setups all together, but we have to pick and choose our setups that give us the best chance for success.
Does the market favor another 2-3% week to the upside? Probably not. Could we see it to the downside? Absolutely. It’s called a pullback and every market has them. We just haven’t seen it in the current rally yet. But it will happen. It always happens, and this time isn’t different (it never is).
