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October In The Rear View Mirror

11/02/11 09:07:08 AM
by Billy Williams

Europe strikes a deal and October is shrinking in our rear-view mirror, so what does it mean to you and how can you profit from it?

Security:   SPX
Position:   Buy

When October began, the outlook for the market as a whole was grim and getting worse. However, for the bears, there was a hint of optimism as the short-sellers were sharpening their blades and getting ready for a potential bloodletting as the market was setting up for the next leg down in the SPX (Figure 1). Adding to that outlook, October has traditionally been the "jinx" month for traders and investors at large since most of the major stock crashes in US history have occurred during that month.

Then, the unexpected happened: where it was expected that price would find weakness, price found support instead and rallied. More than rallied -- it reversed the current downtrend and is now trading above the 200-day simple moving average (SMA) and acting bullish again.

FIGURE 1: SPX. The SPX found support at the beginning of October and has staged a dramatic trend reversal back to the upside, punching through the 200-day SMA.
Graphic provided by:
The investment community at large had been predicting a crash in the market due to a variety of factors up to and including the European debt crisis. The outlook was dark and gloomy, but now, a month later, it looks like the Europeans might put together a deal to handle the debt crisis, if only to kick the problem down the road. That said, it's important to use this event as a lesson to remember that price makes news, not the news that makes price.

While the underlying dynamics of the massive problems overseas in Europe is still intact since the new deal does nothing about the long-term problems still in place and that it could still trigger a Lehman Brothers-like event, for now, the market is moving upward and shrugging those fears off.

The reason is that the market is a giant discount mechanism that strives to anticipate the next six to 12 months of economic action. Thus, traders being the trigger-happy bunch that they are, it can be safe to assume that they think that the next six to 12 months will be positive for the stock market.

This is why it's important to be an interpreter of price action, not a predictor of price action. Interpreters will trade in the present moment instead of trying to base a trade off predictions of what should happen in the future.

Currently, price tells us that it is going higher despite the massive problems hanging over the market like some dark cloud. Since October has staged a massive reversal back to the upside, the market favors the longs and now, it's time to sell off weakness and start buying strength as price is on the rise again.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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