Yesterday’s post early afternoon suggested that we are at a resistance level and that the market will pull back to test the lower trend line or even its 50-day average. Today I’m no more bullish. I offer into evidence the following:

1) Last Thursday, the INDU touched the upper trend line, followed by small congestion candles, after a nice run up. The market usually stalls at this point.

2) Yesterday was lousy, and yesterday’s open was almost the same as Monday’s close. If there was any strength there, it would have opened higher than Monday’s close.

3) The INDU opened low this morning, below yesterday’s close - and yesterday was a down day, too, remember. In fact, the market opened today below Monday’s close, also.

4) The market shot up briefly today to a higher level than yesterday, but intraday highs on a bad day like this only mark a high point in irony… what might have been.

5) In candlestick analysis (see the free chart school on Stockcharts.com for lessons on this), Monday’s white candle was important. In order to continue the trend, even briefly, the market needed to break above it and not below it. Although it doesn’t look much like much of a candidate for an engulfing candle, it’s all we had.

Okay, the little devil on my left shoulder whispers that the market could come back after just a couple of punk days. But the problem isn’t just yesterday and today, but the context. Look at the second week of August for an example of the market topping at the upper trend line and coming back - but that comeback lasted only two days.

Covered Calls

My thoughts for covered call writers in yesterday’s “futile” post still stands. If we are wrong to close positions now and the market rockets right on up, we’ll have taken a loss for nothing. If the market does pull back to support, we’ll feel kind of silly to ride it down.

We always want to trade WITH the market, because any other approach makes less sense. But because we are neither psychic nor in possession of tomorrow’s newspaper, the timing of trade entries and adjustments inevitably involves making educated guesses. You have to ask yourself: what are the odds favoring now?

We can’t always be right. We’ll misjudge weakness and have a stock collapse on us that we could have gotten out of. Or we underestimate strength and get out at a needless loss. These things WILL happen. But that just means our timing was off. Once we have a feel for direction after being wrong, we know when to ride the bronc again (with the market), and those can be some of the best profits.

As far as I’m concerned, the current market action is the rattler’s rattle.

This entry was posted on Wednesday, October 21st, 2009 at 4:58 pm and is filed under Covered Calls, Markets/Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.