By and large where we see a lot of traders, and certainly investors, getting themselves into trouble is when they try to time the market. With futures traders that is obviously part of the game, and I certainly understand that. However, even the futures trader needs to understand when a particular market is susceptible to violent knee jerk reactions that can quickly get them upside down on a trade. As I have mentioned to a number of our clients over the past 10 days, this is certainly that kind of a market, and if you are unable to monitor your positions frequently throughout the day you might want to hang on the sidelines until the volatility subsides.
Coming into the open this morning we had the E-mini S&P 500 December contract opening at 1648.50, and subsequently trading sharply higher through the lunch hour to a high of 1680.25. This 32 point move can be attributed to the announcement over night that the Republicans were going to present a plan to temporarily raise the debt ceiling for a period of 6 weeks, essentially in an effort to buy more time for negotiations. The problem, however, is that as of 1:00pm EST this is far from fact and is more in line with a rumor at this point as nothing has officially been accepted. Is this our typical "buy the rumor sell the fact" scenario? Not unlikely. Which means we could easily find ourselves back down 32 points.
From those that I have been speaking with on other trading desks this morning, the rally in the broader market is primarily a result of short covering by some of the larger funds who were positioning themselves around the belief that the debt negotiations would carry on for another week plus, into and possibly beyond the final hour. With the announcement overnight, these same funds were quick to cover those shorts in hopes of not getting caught up in an official deal announcement of some sort. For those playing the same side of the market as the institutions, and finding themselves away from their trading screen this morning, this could have presented a major problem.
The moral of the story here is that you need to understand exactly the type of market you are trading in, and adjust your trading approach to properly mitigate risk within that market. A failure to make this adjustment, and to treat every market the same, is a recipe for disaster.
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