Friday, September 16, 2011

Elephant in the room


I have looked at all the charts after a 4 day rally, and it looks like the rally is sustainable for further north until conditions change. There is a new optimism among bloggers and traders about this rally and going north from here. There is also a conference of European finance ministers today. Tim Geithner is attending the conference as well. Suddenly, everything seems fine. If there is one thing that we are ignoring, it is the elephant in the room. 

On September 8th, I posted that Eur/ USD broke down. The equity markets took the elevator down following Euro. Both the currency pair and the market rallied for the last 3 days and reversed the course. We are at a tipping point again at this time. From the chart, it is clear that Euro is trying to break in again. Euro traded in a box for 4 - 5 months before breaking down. That was a prolonged consolidation and it is not easy to break above again in a whim.

What next? Considering the difficulty for Euro to break into the box again, we must assume that the equity markets will drop the correlation with Euro and rally against the Euro. However, that would be like ignoring the elephant in the room. 

The best thing to do is to select and buy stocks with perfect balance sheet, no debt, and big caps. Buy the strong ones always, as they tend to go up 1st and most. Weak ones are left behind. Since our strategy is to keep working against the elephant, it is best to keep the stops tight at 3%.  I know it is hard to trade with tight stops, in this volatile market environment. But, it is better always to get stopped rather than losing the trade by big amount. That is called market discipline, which you must follow in a volatile environment or not.

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