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Trading Lessons: Dealing With Resistance


Much tougher to go against the herd in reality than it is in theory.


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

It's been my position that the market would retest the prior highs in the 950s and exhaust itself at or around these levels. A false break of the S&P 950 area lasting no more than a few days would be consistent with this outlook.

After much-better-than-expected earnings early in the season, for the rest of the companies that have not reported, the market should already be expecting earnings that are significantly better than sell-side consensus.

For example, if a tech company in a certain subsector beat consensus sell-side revenue expectations by 10% and earnings by 30%, it will be assumed that most companies in that subsector should beat sell-side consensus revenue expectations by at least that much – and so forth for other sectors and subsectors.

Thus, true "surprises" will be exceedingly difficult to come by for the rest of the earnings season. Companies will "beat the numbers" -- but it won't be a surprise at this point.

Looking beyond earnings season, I don't think there are many viable catalysts to propel this market to significantly further upside. And to the contrary, as I outlined in my latest article, I see quite a few factors that will weigh down on the market in coming months.

I do not foresee any fundamental catalysts for a sharp correction in the short term. However, in the absence of positive upside catalysts and investor psychology such that investors are starting to focus on an uncertain horizon, it is my expectation from a technical point of view that the market will tend drift to or below the 900 level within the next 21 days. It could happen at any time.

So what am I doing?

I am gradually moving from a neutral to a marginally net short position in my portfolio. I will more fully flesh out my fairly complex portfolio in future posts. However, a few bearish holdings acquired gradually in the last few days include:

  • Short Banco Santander (STD)

  • Short Emerging Markets ETF (EEM)

  • Short Freeport McMoran (FCX)

  • Long Russia ETF (RSX) August Puts

  • Long China ETF (FXI) August Puts

My bullish holdings include most of my prior tech picks, including Apple (AAPL), Palm (PALM), Yingl Green (YGE), JA Solar (JASO), and Broadcom (BRCM). When the premiums are reasonable, I've purchased puts to protect some of my longs. Otherwise, I have considerably reduced unprotected longs.
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Position in all stocks mentioned
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