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Breakfast with Brodsky


Risk/Reward may be coming my way...

Good morning. March began with a bang as the indices climbed nicely throughout the day. The bears will be quick to point out the lack of volume that accompanied yesterday's grind higher. Those of you who have read me for a while are familiar with my take on days like yesterday and volume. I don't think it matters much. In fact, for longs that are in high beta, trading names, it is more bullish to me to see light volume. Why you ask? Because in a market like this one, which is a trading market, I prefer not to see explosive volume. To me, that would signify that many shorts would have covered, thus making a continuation of a rally more difficult.

The other case that bears will throw our way is that we never had a correction. They will try to say the prices never dipped by a said percentage amount (although the NDX declined 7% over six weeks) and then list a bunch of irrelevant factors that, whenever this bull is over, they will point to in hindsight and run around and talk about how they called the top! This may be true but what good is calling the top a year (or whatever the time frame is) too soon?

I have said before that I agree with many points made by the bears, but I think they are way too early. I think that we will have time to work out of longs and although I will never catch the top, I do not aim to. I think a good trader, or investor, is able to understand his/her environment and is able to "see" trades and even though they may not agree with how things are trading, they are able to make money. Let us not forget that is the point of this business. To make money. Not to be right theoretically. Leave that to college professors. Traders, investors, portfolio managers, we all need to make money and I hope my perspective is helping you make better decisions.

I make this point this morning for the reason that too often I speak to people who say, "Hey, did you see that? Boy was I right about that!" But then when I ask if they made money, the response is much different. I do not make money all the time and very few people do. But do not get caught up in the "this COULD happen" crowd, which often hinders one's ability to trade and make money. If you are nervous about the market and are a bear, don't short blindly across the board. Recognize we are in an up trend. Make the appropriate trades with acceptable risk to your thesis on the current market. Respect levels and respect trades.

In my analysis of the indices yesterday, I said that the charts looked lower to me. Although I wrote that at 7:00 AM, I was quick to realize that I was wrong when the Intel (INTC: NASD) downgrade had little effect on tech and semi stocks and I acted appropriately. I have also been highlighting the channel levels in the S&P, Dow and NDX that I believe need to be respected until a breakout or breakdown is confirmed. They change every day since the trend lines are angled. For the S&P they are: top 1161, bottom 1132. Dow: top 10,776, bottom 10,500. NDX: top 1510 bottom 1450-ish (although the bottom trend line channel is lower there is massive support at the 1450 level that needs to be respected.)

Again, since we are in a trading market I am letting those levels guide my trading. I think that the overall levels will trump any sector levels so since we are nearing the upper band of the S&P the risk/reward may be skewed to the cash/short side, as it was skewed to the cash/long side last week. Good luck.

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No positions in stocks mentioned.

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