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Bringing Common Sense to Trading Part II

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In last week's Chart of the Week (COTW), I explained why there would not be a severe market correction any time soon. However, I did tell you short term the odds are that a minor correction is not that far off as we are coming into what is historically the most bearish time of the year. That being said, we need a common sense way of measuring the likelihood of a historical cycle repeating, rather than blinding following history. Let's look.


For a short-term correction to occur there has to be a reason for that to happen, other than just the time of year. Many seasonal periods have failed to produce the expected based on the past. Here is what else has to be in alignment with this time of year.


First, in an uptrend, the Void of price resistance has to be closed. Without an area of price supply to the left, prices aren't likely to pullback much. Second, the majorities have to be willing to take on a historical high level of risk with bets that the trend will continue after having doubting it. This is seen through an acceleration of prices moving higher and an increase in speculative leveraged bets. In other words, the trend is now obvious to the latecomers and they are entering close to the worst possible time. This started happening last week.




In the chart above, prices of the S&P 500 measure by the ETF symbol SPY began accelerating higher the week before last and are nearing resistance. This resistance is also the all-time highs from 2007, so this area will be an obvious point that all will focus on. So why are so many increasing their buying into an area where selling will show up? It always happens that way and I believe that it's just human nature to ignore the obvious risk when greed kicks in. There is also the fear on the part of money managers that they have missed the move and are jumping in.




The second component needed is speculative leveraged betting and there is no place better to measure that than with the activity of options traders. The chart above displays the number of put options traded verses call options in equities on each day and a 5-day moving average of those daily closes. The 5-day moving average and the daily close have reached a historical level where short-term corrections are not far off. Combined with the upward momentum into prices resistance it tells us that the odds of a short-term correction are high during this bearish yearly time.


Historical cycles in the market can be a good guide to timing change, but alone they are not enough. It's the combination of technical concepts and market internals with historical cycles that make them valuable information.


All the best,


Greg Capra

President & CEO

Pristine Capital Holdings, Inc.


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ThesaurusAntonymsRelated WordsSynonymsLegend: Switch to new thesaurus Adj. 1. useless - having no beneficial use or incapable of functioning usefully; "a kitchen full of useless gadgets"; "she is useless in an emergency" ineffective, ineffectual, uneffective - not producing an intended effect; "an ineffective teacher"; "ineffective legislation" unprofitable - producing little or no profit or gain; "deposits abandoned by mining companies as unprofitable" unserviceable - not ready for service; "unserviceable equipment may be replaced" useful, utile - being of use or service; "the girl felt motherly and useful"; "a useful job"; "a useful member of society" Based on WordNet 3.0, Farlex clipart collection. © 2003-2012 Princeton University, Farlex Inc. useless adjective 1. worthless, of no use, valueless, pants (slang), ineffective, impractical, fruitless, unproductive, ineffectual, unworkable, disadvantageous, unavailing, bootless, unsuitable He realised that their money was useless in this country. worthless useful, practical, valuable, effective, productive, fruitful, workable, advantageous 2. pointless, hopeless, futile, vain, idle, profitless She knew it was useless to protest. pointless worthwhile, profitable 3. 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(= ineffective) [object] → que no sirve para nada; [person] → inútil this can opener's useless → este abrelatas no sirve para nada compasses are useless in the jungle → las brújulas no sirven para or de nada en la selva she's useless → es una inútil he's useless as a forward → no vale para delantero → no sirve como delantero I was always useless at maths → siempre fui (un) negado or un inútil para las matemáticas 2. (= unusable) [object, vehicle] → inservible; [limb] → inutilizado, inútil he's a mine of useless information! (hum) → se sabe todo tipo de datos y chorraditas que no sirven de nada to render or make sth useless → inutilizar algo 3. (= pointless) → inútil it's useless to shout → de nada sirve gritar, es inútil gritar Collins Spanish Dictionary - Complete and Unabridged 8th Edition 2005 © William Collins Sons & Co. Ltd. 1971, 1988 © HarperCollins Publishers 1992, 1993, 1996, 1997, 2000, 2003, 2005 use2 (juːs) noun 1. the act of using or state of being used. The use of force to persuade workers to join a strike cannot be justified; This telephone number is for use in emergencies.uso, utilización 2. the/a purpose for which something may be used. This little knife has plenty of uses; I have no further use for these clothes.uso 3. (often in questions or with negatives) value or advantage. Is this coat (of) any use to you?; It's no use offering to help when it's too late.utilidad 4. the power of using. She lost the use of her right arm as a result of the accident.uso 5. permission, or the right, to use. They let us have the use of their car while they were away.uso ˈuseful adjective helpful or serving a purpose well. a useful tool/dictionary; She made herself useful by doing the washing for her mother.útil ˈusefulness noun utilidad ˈusefully adverb in a useful way. He spent the day usefully in repairing the car.útilmente ˈuseless adjective having no use or no effect. 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Tell a friend about us, add a link to this page, or visit the webmaster's page for free fun content. Link to this page:   Facebook Twitter     Finally, Farlex brings you all the rules of English grammar, all in one place, explained in simple terms. The Farlex Grammar Book is available now in paperback and eBook formats. Feedback Finally, all the rules of English Grammar in one place. Explore The Farlex Grammar Book now for FREE. Flashcards & Bookmarks ? Please log in or register to use Flashcards and Bookmarks. You can also log in with Facebook Twitter Google+ Yahoo TheFreeDictionary presents: Write what you mean clearly and correctly. Correct all you're your grammar errors instantly. Try it now. Mentioned in ? aidless anopheles anopheline barren bauchle bitslag bogotify boonless bootless bootlessness Cassate destroy discard dissipation Disutilize dud duff dufferdom effectless References in classic literature ? 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