When it comes to options trading, time is just as important as price. The relationship is so strong between those two factors that when the market tries to make its move based on the rhythm of a trend, any interruption can cause a shift or total reversal of that trend.
Technical analysis can help guide us through a trend, and nobody does it better than my RealMoney Pro colleague Carolyn Boroden, who specializes in Fibonacci and time cycles, not to mention Bob Byrne, a master at finding value at certain price points in time.
For most of 2013, we have seen aggressive buying during dips in the market – even the sharpest and deepest drops. When there is implied safety (vis-a-vis a supportive Fed providing liquidity), then the confidence builds. It has been perfectly okay to buy during a dip, because that is the pattern that has worked so often this year. Well, it is OK – until it isn’t.
Now we introduce another element that seems to be shaking everyone’s confidence, both the bulls and the bears – politics. Sentiment around politics has been poor for years, and it’s just getting worse. Trying to understand the motivation and goals of politicians these days is like trying to figure out why a man would stick his unprotected hand in a scorching oven (probably the same results).
The impotence in Washington has affected Wall Street. Market movements are all about sentiment. You either have confidence and courage or fear and protection. Traders typically run through a gamut of emotions as we try and save our capital while relying on the Fed and the system to create more wealth. It is often just rinse and repeat.
This market, however, drop feels different from the prior ones. We are closer to the end of the Fed stimulus than the beginning, and while we are entering a seasonal pattern (that is typically bullish), it seems that this market may be running out of time. The historical behavior of “normal” market gyrations and cycles have not been seen. Instead, we got a big correction. Why is that?
All the reasons I listed above seem to say a correction wasn’t necessary, but eventually the market Gods taketh away. I’m neither bearish nor bullish. I continue to see opportunities within the current market structure – on both sides of the tape.
So, while the noise coming from DC is annoying and unnecessary, it is something we have to deal with. But if the chance for the market to advance is squandered and investors give up, we’ll know who to point a finger at.