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Volatility is back as bears bare teeth



FOR months, it's been oneway traffic on the markets. All you had to do was buy the dips and just watch the money come rolling in. Over the past 10 days, however, the bears have finally shown some teeth and volatility has returned with a vengeance.

The Dow lost over 400 points in just three days, its biggest decline since the vicious sell-off in February.

It rebounded on Monday, sold off on Tuesday and went bananas on Wednesday (a gain of 170 points, its biggest one-day gain since last July).

It's not boring, that's for sure.

The sell-off stopped me out of all my existing bets. No sooner had I finished penning last week's column than I said goodbye to my Dow position. I gave up more of my gains than I would have liked (over 250 points) but trading is all about finding a compromise between the need to protect your profits and giving your position sufficient room to run. Hindsight tells you where you 'should' have sold but I still think I got the balance right on this one.

I said goodbye to Apple when it slid below $118 on Wednesday. Apple has been tanking this week. The stock has had a hell of a run over the past six weeks; the valuation is looking very frothy and traders are taking their profits in anticipation of a 'sell the news' reaction to the upcoming iPhone launch (29 June).

Anyway, I didn't handle the trade nearly as well as I should have. The stock hit a high of $127.60 last week and I really should have reduced my position around the $125 level. I was hoping that the stock had further to run but was too loose in protecting my profits.

It's still been a nice trade, but I'm a bit irked to have given up such a chunk of my profits.

Tuesday saw me bid farewell to Amazon once it fell below $71. No regrets here . . .yes, it hit a high of nearly $75 the previous week, but you can't expect to get out at the exact top.

I'm not bragging (OK, maybe just a little) to say that this trade was handled expertly from day one. It's been my most profitable trade since this column began and I'm not going to beat myself up over allowing some crumbs to fall from the table.

New positions? Two losing day trades on the Dow: enough said about that.

I bought Elan as it dipped to $19. It bounced, but not by enough for me to take profits.

I've already brought my stop up, however . . . it's under the recent low at $18.90. If this trade turns out to be a loser, at least it will be a small loss. I'm a big believer in reducing one's risk as soon as it is practical.

Defence before offence, as they say in boxing circles.

I'm also long the S&P 500.

Buying here was an absolute no-brainer. After three days of heavy selling, the index came into its 50-day moving average. Shorts were sitting on some tasty profits (the index had fallen from 1540 to 1490 in just three days) and this was an obvious place for them to book some profits. Longs were also likely to load up here . . . it was the first time in months that the index even came near the 50-day average.

I sold half as soon as my profits equalled my initial risk and brought my stop up to break-even. The sellers came roaring back and it looked like I'd be stopped out only for the bulls to get motoring again on Wednesday. As a result, I'm sitting pretty once more.

As for the markets, what's the cause of the commotion and how should one play it?

Markets had been pricing in an interest rate cut. Strong economic data and inflationary pressures made it clear that's not going to happen soon and that, if anything, rates might increase. Expected rate increases around the globe have not helped sentiment.

The bond market has been in meltdown and traders fear the private equity buying spree is a bubble about to burst.

Blah, blah, blah. I read the headlines but they seldom enlighten me. As one analyst put it, the market is being "yanked around by a superabundance of self-contradictory news releases" and has "lost its feel for where the economy is heading. Yesterday was an extremely weak day.

Today was an extremely strong day. Was the market right yesterday? Or was it right today?"

Search me. If the market can't figure things out, how can a humble monkey be expected to? All I can do is look for a balance of longs and shorts, wait for good entries and manage the trade accordingly.

The intermediate-term uptrend remains intact so my bias is still to have slightly more longs than shorts. In fact, I'm seeing a lot more long set-ups at the moment than I was a few weeks ago.

Cisco's recent dip to its 200day average is an example. I wasn't alert enough and missed out on the bounce, but I expect to find similar setups in the forthcoming weeks.

I'd like to get back into Amazon if the stock dips to the $68 area. Apple probably won't go as low as $105 but if it did, I'd be a buyer. As for shorts, SanDisk is a candidate if it can make it up to $46.

In other words, I'm looking to buy strong stocks that dip to support areas and sell weak stocks that rise to resistance points. Take profits at appropriate junctures, raise your stops and don't bet the farm.

I'm still gunning for 50,000.

If I follow my own advice, I should make it sooner rather than later, irrespective of where the market goes.

Weekly gain/loss: . . . 600
Overall balance: 48,450




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