Be Careful Not To Chase Your Own Tail

Random Thoughts

When a market is basing at high levels, you have to be careful not to chase your own tail. When it trades to near the top of the range it will feel like the “all clear” and when it drops to the bottom of the range it will look a little ominous.

Based on Wednesday’s mostly positive action, I had to admit that it’s getting better (see Thursday’s column). Unfortunately, on Thursday, we didn’t see any follow through. And, as I also preach, follow through is key.

Let’s look at Thursday’s action.

The Ps finished well off their worst levels to end down only slightly on the day. It seems like we are back to the index masking what really happened internally.

The Quack sold off hard out of a First Thrust formation, losing nearly 1%. It’s not the end of the world but it is important to watch to see that this pattern does not materialize further.

The Rusty also sold off hard. It lost just over 1%. As mentioned in Thursday’s chart show, it has a bit of a “Gatekeeper” look to it,

Some of the strongest high flyers such as Internet and Biotech sold off hard out of Bowties/First Thrusts. They appear to be attempting to resume their recent slide.

Some of the areas such as Manufacturing and Consumer Durables that were trying to peep out above their multiple peaks came back in. As usual, follow through—i.e. new highs—will be key here.

Banks sold off a bit. So far, their recent breakout above their prior peaks remains intact. It’s important for them to hold these levels or higher.

Retail, Consumer Non-Durables, and quite a few other still remain below their prior peaks.

There wasn’t much good to be found on Thursday other than in the defensive issues. They remained strong on both a relative and absolute basis. Energies and Utilities made new highs. Foods were unchanged but remain just a gnat’s eyelash away from new highs.

So what do we do? It seems like we’re back to the mixed market that we’ve been seeing lately. Again, this is why I preach to not make any big picture predictions. A day like Wednesday will feel like all is good in the world and a day like Thursday will feel like (in my best Fargo voice), “Oh gees, here we go again Norm.” It does seem like we might be back to the sector rotation that we’ve seen just recently. Since it is generally harder to predict the overall market, especially based on recent mixed activity, I think the best action is to continue to take things on a setup by setup basis. And, make sure you really really like the setup. Right now, I’m seeing a few interesting shorts and not too many longs. I wouldn’t get crazy bearish but I think it is okay to fire off a short or two. Just make sure you wait for entries. That, in and of itself, can often keep you out of new trouble—in this case, if the market decides to go straight back up. On existing positions, you know the routine, honor your stops just in case.

Futures are strong pre-market.

Best of luck with your trading today!

Dave