S&P 500 Index (SP500)

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Trading Notes: Friday, January 29th
By Brett Steenbarger, Ph.D.

* January 29, 2016

* Easy to get burned out sitting in front of screens all day and trying to stay disciplined. Here is an important antidote to burnout.

* I've been offline for a couple of days, swamped with coaching work with traders. Whenever that happens, it's a sure sign that markets are tricky and people are having trouble making money. We had a real risk off start to the year, with oil, stocks, and emerging markets lower and firmness in the U.S. dollar. Late last week we saw a sharp rebound and these posts talked about having put in a momentum low for this market cycle. Evidence was also suggesting that this cycle was not like ones we had seen in 2014 and 2015, with far more persistence of weakness in stocks. This week we have generally continued the bounce, but in a highly choppy fashion, making it difficult to make money from either the bull or bear side. Hence the recent frustration of traders.

* A momentum low implies the possibility that further price lows could remain ahead, albeit with breadth divergences. That is what we saw in the trade following May, 2010; August, 2011; and certainly January, 2008. Thus far, this has been a low Sharpe ratio bounce; not the kind of resumption of uptrend that we saw following, say, the October, 2014 low. That uneven bounce increases the likelihood in my estimation of those retests of lows.

* Which brings us to today's trade. With the move to negative rates in Japan, we saw a sharp rally in stocks, followed by a sharp dip, followed by more rangy behavior in the ES futures. Oil has rallied significantly from its lows; VIX has remained above 20. I'm concerned that we're having trouble making fresh highs in ES in pre-market trade even with the Japan easing and oil strength. That has me looking to sell strength as long as we can remain below the post BOJ highs.

* Note that there is a difference between a retest of lows and the start of a fresh bear market leg. When we had extended bottoming processes in May, 2010; August, 2011; and even that January, 2008 period, there was a two-way trade and rallies interspersing the declines. My leaning will be to take profits opportunistically on short trades and not necessarily assume a resumption of a high Sharpe downtrend.

http://traderfeed.blogspot.com/2016/01/trading-notes-week-of-january-25-2016.html

• George.

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