A gift of a chart on the Dow by Ben Turney

By
3 mins. to read

Make no mistake; the following chart is an absolute gift as far as I am concerned. 

If you’ve been following my narrative on US stocks in the last few months, you’ll know I’m bearish because I believe the outlook for American QE has fundamentally changed. Naturally, I have been seeking opportunities to go short. To be honest this hasn’t exactly been a genius play. If anything it’s been a bit too easy, but I’m never one to look a gift horse in the mouth.

I was wrong-footed by the Fed’s refusal to commit to tapering in September, but, irrespective of this, the benchmark indices had clearly run out of steam. Above is the daily Dow since the start of April. Daily RSI readings were consistently a touch below the 70 mark (suggesting the market was nearing an overbought state from a technical perspective), while the price action moved in an extremely tight range for several weeks. It just looked like a break was coming.

My original short position survived the mildest of rallies in response to the expected continuation of QE and I quickly decided to start adding to it. By the end of last week I held a decent sized spread bet, as well as some extremely cheap August puts @ 15,300, which I managed to pick up last Friday. I’ll admit the put options were a bit of a gamble, as they were due to expire today, but with the Dow at 15,500 and for the price I paid, I felt even a slight move to the downside would enable me to hedge my position relatively easily.

As it turned out, fickle fortune has been smiling on me this week and the market moved almost exactly as I hoped. In fact better than that, the market has been moving in a manner, which has meant I haven’t really had to make any decisions. They’ve all been made for me.

Look at the chart above and you’ll see that the selling has clearly accelerated. Although the drop of the last few days hasn’t been as pronounced as that experienced in late June. With the daily RSI closed at 30.4 last night, suggesting the Dow is on the cusp of being oversold. Additionally the index’s price finished the session just below the 100MA line (grey on the chart above). In a healthy bull market the combination of these two indicators would normally be enough to consider opening a long position. However, given I am short and my options expired tomorrow, the only thing for me to do was to bank that profit. Taken! Thank you very much!

This left me with the spread bet, but even there I wasn’t faced with much of a decision. The chart is giving such great guidance I could sit back and start enjoying the weekend early.

Now showing a chunky blue figure, there is a temptation to close at least some of my remaining leveraged position. Were it not for the options’ profit, I probably would consider this, but I have guaranteed stops and I am sticking with my original view that a market top is in place.

What is great about the position tonight is that I can afford to be wrong and still expect to add to today’s profit. This is because the chart reveals such an obvious place to put my stops. By placing them just above the 50MA (the green line on the chart), I can hold the original position fairly secure in the knowledge that if the Dow recovers to break through this moving average, then the chances are the market could once again move on to make new all time highs.

In some ways, I even hope this happens!!! As a writer, one of the advantages of these repetitive moves in markets is I don’t have to think much about what I serve up to my editor. And after the week I’ve had this week, I’ve found I could develop a taste for making money without having to do much… 

Comments (0)

Comments are closed.

YOUR FREE INVESTMENT MAG

Get real investment insights from some of the best minds in the business - with our free Master Investor Magazine.