Thursday, 25 August 2011

My Experiences in 2007

They say that experience counts for everything. I couldn't agree more and I believe this is particularly apt in the world of trading. In this post I wanted to reflect on some of my experiences as a relatively young trader at a major investment bank as the market topped out in 2007 and 2008. In that small timeframe, I was privy to the unfolding of a number of historic events that would shock and change the financial marketplace. I witnessed the full cycle from bull to bear and the complete range of emotions from euphoria to outright fear. More importantly, I saw how the market developed and unfolded from a technical perspective. As each day passes currently, I feel I am reliving many of these moments and experiences.I wrote about some of this in a post back in June and this has played out with eerie precision thus: AND

I didn't have the experience back then in 07 to effectively trade that environment to my full potential and this has certainly shaped who I am and how I trade today. I hope these words can in some way can give you a vital bit of information to prepare you for the times ahead.

Markets always seemingly look their best at their highs for the unsuspecting.One by one, topping patterns slowly creep up on you. The S&P 500 made its high in 2007 not so much with a bang but on a whimper. The initial move out of the high grinded lower. It was only slowly that the mainstream heard of credit stress and the subprime debacle, the strains in the interbank lending market, hedge funds going underwater and mass redemptions hitting the market. It was only after all this occurred that the economic data began to soften. 2 months out of the high and we were in a full blown sell off. The central point to make is that this fear and panic reached a crescendo very quickly out of the high in 2007 just as it is now. By the time the market had become fully aware of the problems, the move lower was done. Just when it really felt like the world was ending, the S&500 bottomed on the 38.2 retrace in Jan 2008. This was 4 months out of the high. A long slow painful grind ensued for the next 3 to 4 months. I remember this grind higher very clearly- everytime I tried to short, the market just keep going higher. This is what intermediate rallies do. They frustrate and they do their best to remove the last remnants of the bears. The best times to be short are never in the panic stages but a few months after the panic low.

Fast forward to today and we are seeing the same kind of headlines and the same technical backdrop.The initial move out of the S&P500 high grinded lower. Just as we saw signs of credit stress in 07, we are now seeing severe debt stress for sovereigns and CDS are blowing out to all time highs. Mutual fund outflows have been hitting the market and hedge funds are getting decimated or closing up shop (most notably George Soros returning money). The economic data is also clearly softening now. And once again, fear and panic has reached a crescendo very quickly. Anyone and everyone is now talking about the end of Europe, the debt problems in the US, an imminent market crash, the death of the consumer etc etc. But markets just do not work like this. The best time to be short is never 2 to 3 months out of the initial high. In 07 we made an important intermediate low at the 38.2 retrace after a 4 month sell off. Currently, we bottomed at 1102 right on the 38.2 fib retrace after a 4 month sell off from the high. Coincidence?

Don't get me wrong- there are a lot of topping patterns across markets in the bigger picture. However, these have played out on a short term basis. Don't be that jittery trader who thinks the world is coming to an end. Making money on the short side is actually very difficult to do and you have to be very nimble and opportunistic- not when the crowd is all leaning the same way.

Australia has seen its panic low. Just as I saw genuine fear in 07 and capitulation, I have seen the fear and capitulation now. I talked about this on this blog as it was playing out. I believe this bounce is all part of an intermediate rally that will last at least 2 to 3 months at a minimum. Technically and fundamentally, everything has lined up for that low. I think this rally will be across Asia and the US. This will be choppy and volatile no doubt so there should be ample time to get involved. The double bottom patterns I showed on my last post have worked a treat as an initial entry point.

Now if my experiences and lessons drawn from 2007 are correct, this rally will lead to a momentumental shorting opportunity. But that time is not now.

S&P 500 2007 vs Now
The moves thus far into and out of the high have been uncanny. This simple chart has guided me through the high and recent low. If my take on the parallel is correct, we have seen a climatic low as shown by the red arrow. I believe we are on the cusp of an intermeadiate rally that will last for 1 to 2 months as shown by the green arrow.

This chart was brought to me and updated by my good friend and pro trader, Rich Sexton at: If you trade the FX markets, you must read his blog- daily.