Thursday, May 12, 2005

Those Amazing Trendlines

Today was a good day for the bears and a fascinating one from a technical perspective. Let me back up a day to explain. Please note the chart above represents the S&P MidCap 400 ($MID) over a period of sixty trading days, shown on an intraday basis.

On Wednesday (see the May 11th post), the market did a sharp 'V' reversal; that is, it initially fell and then sharply rose the rest of the day. This 'fake out' was frustrating for a person with a lot of short positions and puts (such as yours truly).

After the close on Wednesday, I noticed on both the $INDU and the $MID that the low point of the day exactly touched the supporting trendline (see chart above, indicated by the first green arrow). In other words, the long line spanning a period of about 50 days which used to be resistance and had changed to support acting as the floor on which Wednesday's low bounced. Had I recognize that earlier, I would have had a perfect exit opportunity.

Incredibly, Thursday provided me a second chance (and second chances are very rare in this market!) As the chart indicates, the price once again dipped to the trendline, shown as the second green arrow, and at that moment I closed out all my big index shorts with handsome profits. My fear, of course, is that I may have repeated the same mistake made in mid April when the indexes reallystarted collapsing. I'll be watching the markets closely for another opportunity to re-enter these shorts at hopefully safer prices.

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