Ok, so we bounced quite nicely today without having to fill the gap. Tech and emerging markets were strong right off the bat which, among other reasons, made me believe we had a 50/50 shot of a gap and run type day. However, the fact that we gapped up big, never looked back and closed even higher after the market had been slammed in the days prior reminds me of what a bear market bounce looks like. I'm not saying this is a bear market bounce, but rather that these are the types of rallies that are very prone to failure....not necessarily the next day but shortly afterwards.
I asked myself if I could have intelligently participated in this rally knowing that a bounce was almost guaranteed today. I rarely chase gap days especially counter to the prevailing ST trend because it would force me to be weak long (because I would bail at any hint of the rally fizzling). The only time I would chase a gap is if I noticed good leadership, which there was, but also some signs of trader pessimism like a sticky VIX and/or high put/call ratio and that didn't occur. Because of these offsetting factors I assigned a 50/50 chance of the rally sticking....perhaps the odds were higher given the extreme oversold condition and end of the month window dressing...oh well, hindsight is 20/20. Perhaps I should have put on a trade with a smaller than normal position size given the cross currents I was observing. That certainly was feasible. Woulda, coulda, shoulda...it's all in the past. Learn from it and let it go. This game is a never ending learning curve. And if you ever miss an opportunity, get whipsawed or make some other kind of mistake don't fall into the trap of "doubling down" on the next trade or chasing poor risk/reward set ups just to make up for it. This is a very common mistake people make and I used to do this all the time. This is like a poker player "going on tilt". Relax, take a step back and come to realize that the market isn't going away. If you miss a boat another will come and if you miss that yet another one will come....they will come.
I've been playing a very tight game, sometimes too tight but it's been working well for me this year. There have been times where I've never made a trade for a month because I couldn't get a setup I was comfortable with. It was very frustrating but it kept me out of trouble and doing things I would have regreted. Anyhow, enough about me....
There's room for the markets to grind higher here to unwind more of the oversold condition but I suspect sometime in early to mid November we are going to head back down to at least fill today's gap and I will look for a set up to play the short side. Notice how the VIX once again collapsed and the put/call ratio dropped back to the low end of neutral readings...fear turned to greed quite easily. Usually we would see skepticism or guarded optimism on rallies like this during the past 9 months....further evidence which suggest today's rally will ultimately fail.
AAII sentiment came in today at 34% bulls 42% bears. At the July low bears out numbered bulls 2:1. We aren't there yet but we aren't that far away from that happening either.
Tomorrow morning I will discuss gold stocks and the bearish signs I'm seeing for them.
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