Wednesday, October 16, 2013

Gap up or sell on the news?

The market had another strong day today and it is just a few points from an all time high and I am assuming the high will be taken out when the House approves the extension of the debt ceiling and the re-opening of the government. The Senate just passed the bill as of the time of this post so chances are good we will get this issue out of the way until January. So now the question is will we see a huge run tomorrow in some sort of bullish W3 (the micro count supports it) of a stand alone W3 or a sell on the news event. I am wishing for a sell on the news scenario where the market will test the TA so I can load up on longs but I think the case for a continued run is stronger. That Bullish Engulfing Pattern is usually the start of a powerful rally and it seems like this time won't be any different. I guess we'll find out in a few hours..

What happens tomorrow btw ties in very well with the recent economics Nobel Prize. For those that are not familiar with the theories, the concepts formulated by the recipients is related to directly to the stock market and all other asset classes. On one hand we have Robert Shiller whose theory on asset valuations assumes prices are distorted by emotional factors, leading to irrational exuberance and bubbles. At the other end of the spectrum we have Eugene Fama whose theory assumes market is always efficient, meaning assets are perfectly priced by the market because participants are able to price in all relevant available information. So during a bubble, say the US housing market prior to the crash. Shiller assumes prices where out of control because buyers were in manic mode vs Fama who assumes buyers priced in all relevant factors such as easy mortgages and a competitive buyers market. In a way it's ironic they gave the prize to people who contradict each other but at the same time they are both technically right. Using the S&P500 as a guide, if we believe in Shiller's theory 100% then one would be able to time the market and have substantially better results than the buy and hold method. But the fact is there are very few people in the world who actually have been able to beat the S&P500 over the long term and the one person who has managed to do that consistently (Warren Buffet) is a buy and hold proponent. Personally, I think over the log term markets will price assets appropriately while during shorter periods of time markets will have the tendency to be affected by emotional biases. In fact, this theory mirrors my own portfolio where I have invested most of my funds in markets I consider to be undervalued in hopes valuations will rectify over the long term while I trade short term market moves. But the real question is, do we really have an advantage using Technical analysis and Wave theory to beat the market. If you believe Shiller, that would be a yes. I like to real time test stuff, so I will come to a conclusion in a few years as I will be able to compare my own results. As of now, I lean yes but I am not 100% sure just yet.

Short Term Trend = Bullish
Medium Term Trend = Bullish
Long Term Trend = Bullish

* Trends are not trade signals. Trends are posted for situational awareness only and does not take into account wave counts, technical or fundamental conditions of the market. While mechanically trading the posted trends is feasible, keep in mind that these are lagging indicators and as such are prone to whipsaws and I personally do not use nor recommend them to initiate or close positions in the market without taking into consideration other factors.

No comments:

Post a Comment