Welcome back to the Rookie Blog. Last week we were talking about hedging and this was very necessary as we have had a recent spike in volatilty and a drop in the markets over the last couple of weeks and this has had some challenging effects on some folks. We are going to discuss the two different camps that most people fall into and why the reaction to the movement of the market should be the same regardless of what camp you fall into.

The two camps that most people find themselves in goes a little something like this. The “what a great buying opportunity this is” group and the “sky is falling group.” There are some commonalities between the two groups but of course there are some great divides that need to be crossed and it is these divides we are going to discuss this week.

Looking at the action of the overall market in the last couple of weeks has tested the faith of many a trader. I have heard many comments like “is this a repeat of February?” or “is this nothing more than a buy the dip, garden variety bull retracement?” These two questions express a lot of emotions of both dread and euphoria. The question for most is who is right? What if I told you all those people are right, both camps are right? Does this make sense? I am willing to bet some of you are shaking your heads and saying this can’t be right? Let me see if I can explain how both groups could be right, possibly?

The first thing I want to point out is the action now versus the recent action. Below is a chart of the S&P futures. After the recovery in April following the corona beatdown we have had at least 4 pullbacks that would have been considered bullish retracements and buying opportunites by most. This latest pullback looks a bit different though, if you notice from the chart all the other pullbacks did not breach the rising 50 moving average and yet this one has. You will also notice that the 9 and the 20 EMA’s never crossed the 50 MA and yet the 9MA has already crossed and the 20 MA seems poised to. So, this would seem that this setup is favoring the “the sky is falling” group but hold on even if this pullback is deeper than the last few does this mean the buying the dip group is weong? I would say no because ultimately what it means to that second group is that at some point they are going to get an even better deal to buy what they want. So, you can see that both groups can be right at the same time. The key is perspective and that makes all the difference in the world.

You see perspective can have some running for the hills and perspective can also have some salivating like pavlov’s dogs at the opportunities abound. I am not going to say which perspective is right or wrong because the reality is that perspective is what it is and it shapes how we behave and this can either be a detriment or a boost and only you get to choose how that plays out.

So whichever side you find yourself on just make sure that your perspective doesn’t hurt your focus or cause you to react in a negative way that affects your portfolio. Hopefully, instead you can take your perspective and turn it into positive movements that bring you peace and calm so that you can make the best out of whatever situation arises whether it be a repeat of February and present some golden buying opportunities or be it just a deep pullback that can equally be exploited for some nice gains.

Trade well,

Coach “Old Money” Holmes

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