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Too much bad news is usually a sign that the end of bad news is near.
- Sterling Smith | |
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Today's Featured Article
As if there aren't enough issues in the markets to be digested right at the moment, last Monday we got treated to yet another kind of market phenomenon, as October crude oil managed to rally a whopping $25.00 off the lows.
The prior Friday, the September S&P 500 contract opening rotation settlement was an amazing 81 points higher from Thursday's close.
This is what can happen when the shorts get pushed out of the market, intense relentless forced buying.
In the case of the crude oil on Monday, it was the last trading day for that contract, so if you came into that day short crude oil, you had the choices of either delivering the crude or go into the marketplace and buy your contracts back. Looking at price action from Monday in the crude it is seems rather apparent that buying back contracts was a much bigger activity than making deliveries. It should be noted that no other months moved by that huge amount, and it seemed to be bigger fodder for some parts of the media, but was not a completely accurate portrayal of what was happening.
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he short squeeze is the short covering rally's big brother, but the two have very different dynamics. As a market moves lower short positions increase in profit, and some traders will (or at least should) naturally move down stop orders to help guard against adverse price moves. At some point the market become so oversold, it begins to run out of aggressive sellers, prices stabilize, and then begin to move higher, and shorts get stopped out, by buying back that which they have sold. These rallies can be rather sharp.
The short squeeze is a different beast. It happens when shorts are compelled to buy; by either a change in situation (the shorting of certain stocks being banned, a stock can no longer be borrowed) or a contract comes due for delivery. These rallies are intense as the buying is forced, and when natural sellers catch wind of a squeeze they tend to be less interested selling, and this produces wild prices swings.
There are two sides to this coin, yes you can make a lot of money if you are on the right side of this (however it also may mean you have been on the wrong side of the market for an extended time) or you can lose a lot of money if you are not very careful. The smarter choice in something like this, in my opinion is not to get caught in contracts that are approaching delivery unless you are looking to take or make delivery.
On bailouts and choppy markets: News driven markets can be trouble right now become very polarized so being vigilant is more important than ever. We are playing on an unusual playing field at the moment. Make sure you can give yourself enough time to be to right. It is important to get the basics right, here are 10 ideas or concepts that I think are important for trading.
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10. I will not enter a position without some type of solid exit strategy. This is just as important for winning trades as losing ones. Most people generally don't get in their cars and drive aimlessly, especially with gas prices where they are so have a plan when you trade.
9. I will not delude myself about my positions. I see this happen a lot, and it often leads to scary losses. It starts when a position that a trader is particularly fond of begins to turn into a loser or when a particular belief that a trader holds dear begins to go the other way. The trader becomes more like a lawyer...building ongoing case about why the market "must" go the other way. If you find yourself digging for information to support why you are in a losing position, you are probably in much more trouble than you realize.
8. I will not over margin my account. Remember margin requirements are your friend. They are there to help you stay out of trouble. If you are having margin calls it is a sure signal that you are doing something wrong.
7. I will not do things that I do not understand. Your broker should be there to explain things clearly in a manner that YOU can understand. If you can't get this done, get another broker. If you trade online and don't understand what you are going that is a very good sign that you should not be trading online.
6. I will take neither great pride in my wins nor great pain in my losses. The bottom line is that emotion kills traders. Being level-headed wins the war.
5. I will study my losers more than my winners. A lot of being a good trader is minimizing mistakes. Trying to blame someone or something else for a bad trade is pure futility. Figure out what went wrong and move on.
4. I will concentrate on the substance of trading, and not on the potential rewards of trading. To succeed you must love the game, not the rewards of the game.
3. I will devote time to this every day, consistently and regularly. Good, regular habits make for good trading. The power of habit is a useful tool, respect it and use it.
2. I will not become arrogant in my trading. When a trader begins to think that they know everything, it is most likely a good time to get flat the market, as trouble is most likely lurking in the shadows.
1. I will respect the market for the good it can do, and the pain it can cause.
REPRODUCTION OR REBROADCAST OF ANY PORTION OF THIS INFORMATION IS STRICTLY PROHIBITED WITHOUT THE WRITTEN PERMISSION OF FUTURESONE AND STERLING J SMITH. THE INFORMATION REFLECTED HEREIN IS DERIVED FROM SOURCES BELIEVED TO BE RELIABLE; HOWEVER, THIS INFORMATION IS NOT ASSURED AS TO ITS ACCURACY OR COMPLETENESS. OPINIONS EXPRESSED ARE SUBJECT TO CHANGE WITHOUT NOTICE. THIS MATERIAL AND ANY VIEW EXPRESSED HEREIN ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED IN ANY WAY AS AN INDUCEMENT TO BUY OR SELL COMMODITY FUTURES OR OPTIONS CONTRACTS. FUTURESONE AND ITS OFFICERS, DIRECTORS, EMPLOYEES AND AFFILIATES MAY TAKE POSITIONS FOR THEIR OWN ACCOUNTS IN
CONTRACTS REFERRED TO HEREIN. TRADING FUTURES INVOLVES RISK OF LOSS. DO NOT DUPLICATE.
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About the Author
Sterling Smith is FuturesOne's Vice President and CTA, as well as creator and publisher of the FuturesOne Power Index. Sterling is a veteran broker and market analyst. Beginning in the futures industry as a risk manager for a large FCM, he moved to a major clearing firm and learned from some legendary traders. He incorporates the benefits of these insights to help every client construct better trading plans and to enhance their understanding of the marketplace. |
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