Bear Market Driving

By: Erik Swarts | Wed, May 4, 2011
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"I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms." - Paul Tudor Jones.

I have always gravitated to tops and bottoms as well (could be a gender thing), because you get to drive the freshly laid technical infrastructure on the backside of the move. I find the exits and entrance ramps to the market highway much clearer revealed during these pivots.

Exit 106

Structurally speaking, bull markets typically lay the roadwork that you can drive at high speeds during bear raids. The downside decline is typically a much steeper face. Tremendous gains can be captured and compounded in very short timeframes. However, as a trader you absolutely need to have your homework completed and have available a few extra road maps and fractals in plain sight. The exits and entrances will come at a much faster pace as the move progresses.

Speaking of bear markets declines, silver met the standard criteria of a 20% decline (intraday) today; this after just four trading sessions. It's certainly not a Hunt's brother's 50% decline in four days (see Silver Thursday) - but it is following the exhaustion geometry rather acutely.

Silver versus US Dollar

My near-term target of ~36 for SLV appears to be taking the expedited route.

Silver - Hourly Chart

I cleared my position in ZSL today (20% gain) at the bottom of the move below 40 (SLV) and re-entered the trade right before the close, picking up a few additional percent. Now that silver has pivoted, I will manage the position and use the breached hourly SLV trend line from late January as my sliding stop. All my trades have been posted in real-time via my Twitter account (@MktAnthropology).

Recently, I have read some articles describing the dangers and misconceptions with the leveraged ETF trading vehicles. And while I wholeheartedly agree with some of their generalizations towards retail investors, I would strongly disagree towards their utility to professional traders. In my opinion, they are an excellent alternative to the options market where a trader's position can be adversely eroded by time decay. I am more comfortable layering in a larger position with a leveraged ETF in a set-up such as silver - than I am with conventional options. I know my risk principal will be less as long as I am not applying extraneous margin to the position. Like any trade, timing is everything - but the flexibility and liquidity with these instruments over the short to intermediate time frames outweighs their imperfections.

Just my two cents - we all have our own comfort zones. I am sure there are those that strongly disagree with this methodology.

Broadly speaking, the equity markets appear to be taking on the bull-trap scenario that I described last Thursday (see here). At this point that perspective hinges on the Dollar. You could say that the market is wrapped in tinder if the Euro decides to break from the stampede it has been on for the last several months. I cleared the deck of the Russell short I had via TWM (4% gain) since last Thursday. I will likely reposition that trade in the coming sessions if the dollar decides to firm or the market bounces.



Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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