Monday, October 6, 2008

You Can Taste The Fear

After being down 800 Dow points, the market reversed and shot higher regaining over 450 points in the last hour. The selling was as fierce as I've ever seen and it seemed like we started to capitulate an hour into the day. Except for one crucial factor. Volume. The volume was lacking what a capitulatory event requires. Even with decliners outpacing advancers by over a 12-1 ratio and the VIX hitting all-time record highs of 56 today, I think we need more volume for a long term bottom to be established. Today was a good start but I would have preferred to see a total washout selloff into the close, then a follow up gap down tomorrow with a midday reversal and close in the green. We will bottom, its coming, but just dont try to be a hero and plant the flag before the battle has been won. My rule is to let the other guys grab the first 20% of a move and the last 20% of a move. I'll be happy taking that middle 60% every single time.

If you take this same approach you will have a much better risk/reward when trading the markets. A wise trader once said that if you try to pick a bottom, you'll get stuck holding a handful of something, lol.

Getting back to the VIX, I mentioned it got up to a 56 handle, then closed at 52. If the reversal at the end of the day were to be real, I would have wanted to see that measure of fear to drop off a cliff during the market rally. It did not. We may be bottoming this week but I dont think it finished today.

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