We’ll be trading short term price patterns, both with and against the major trends. The current environment is not only extremely volatile but our ability to participate on the short side has been hindered by the shallow thinking regulators that have banned short selling. Many an issue irk me with this decision and I really don’t wish to get into a diatribe about it, but some considerations:

1. History shows that such a decision was misguided. The following chart shows how in back in 1932 the US markets continued to precipitously decline after short selling was banned. (Thanks to Wayne over at http://sigmaoptions.blogspot.com/ for this one)

   

2. Mum and Dad traders represent such a minuscule part of the market that their actions are almost incalculable with day to day volatility and price direction. The largest traders in the market place are normally the arbitrage traders whose net effect is also also not overly destabilizing as they spend their day trading the index basket verse the futures. Now what about those frisky hedge funds that the media like to beat up? Well that theory was good until we saw the ASX drop some 500-points, or 9.5%, in just the last a week without any so-called short sellers pushing their barrows.
3. The selling is being generated by a loss of confidence in the economy because nobody wants to be left holding the next dog stock. The new SMSF tax incentives that induced so many investors into the market prior to June 2007 created an extension to the already extended speculative bubble and we’re now seeing all those investors run. Fund redemption’s across the planet are accelerating which in turn makes fund managers sell stocks to cash out their redemptions. This is what causing the downside pressure in the markets and its not going to stop until confidence has been restored.

Back to my introduction…so that’s why we’re now well hindered on the short side and why its going to be reasonably quiet until (a) the market turns, or (b) short selling is re-introduced to at least us small fry.

Our CFD account will start with a nominal $50,000 and take short term trades out to 2 or 3 weeks in length. We’ll be using specific low risk setups, which in this current volatility will tend to be trend reversal in nature, and adhere to specific target objectives.

We’ll update positions and P&L as time goes on.

Unfortunately the only trade that takes my fancy for today is a short in CGF, which obviously we can’t participate in. With the Dow down another 350-points we’ll be standing aside but we’ll watch the CGF trade over the coming days and post the price action anyway.

Safe trading.

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