There are two ways to dissect Friday’s action. You can look at what the market did or you can look at how the market did it. Let’s look at the what first. The Ps (S&P 500) gained over ½%. This isn’t anything to sneeze at and it certainly is plenty enough to keep it all all-time highs. And, as a general rule, you don’t want to argue with new highs. It’s the how that’s a little concerning. The index gapped nicely higher like it was off to the races, gaining over 1% but then slowly began losing ground. This action suggests that all of pent up demand coming into the day was exhausted on the open-a “now what?” if you will.
The Quack (Nasdaq) put in a similar performance except that it was only able to hold on to around ¼% of its gains. Nevertheless, this action was enough to keep it at 14-year highs.
The Rusty (IWM) was even worse. It allowed nearly a 1 1/2% gain to virtually evaporate, closing only .12% higher for the day.
I hate to read too much into an intra-day reversal but it can’t be completely ignored. The market tried to breakout/accelerate higher but it stalled. The logical reasoning side of me is seeing a market that might be stalling. The trend following moron side of me is seeing a market at new highs.
Friday’s action does leave us with some structure to work with. Thursday’s low is now an important inflection point in both the Ps and Quack. If that gets taken out, it would not be a good thing. Until and unless it does, let’s not get too excited. And, as long as the market is at new highs, let’s not rush out and call a top because it ran out of steam intra-day.
Sometimes, present company included, we all get a little too caught up in the indices. True, you don’t want to ignore them or fight the tape but whatever will be, will be-che sara. Following the plan is the way to go. Take partial profits if the market continues higher just in case it doesn’t continue higher after that. If it doesn’t follow through then stops will take you out. And, if it does, trailing stops will keep you in.
I’m not a huge fan of seasonal biases but this week is usually a good one for the markets. So let’s hope—and I hate to use the word hope in this business—that this holds true again this week. And, if it doesn’t, that’s what stops are for.
So what do we do? I think I’ve already said it. Let’s not get too caught up in an intra-day reversal but let’s not completely ignore it. Let’s not worry too much unless Thursday’s low gets taken out. If the holiday bias floats us higher then so be it. Without thinking too much, stops will keeps us in if we need to be in and they will take us out if we need to be out. One last point, initiating new positions around holidays can be a little iffy. Markets can be thin and choppy. Therefore, make sure you really really like a setup before taking it. The good news is that since the methodology requires a pullback, I’m not seeing a lot of meaningful setups at this juncture. For the most part, manage what you already have.
FYI, due to scheduling conflicts, there will be no column/newsletter on Tuesday 11/25/14. For my paid clients, my trading service will continue as normal with the exception that Tuesday’s service will likely be posted Tuesday morning (vs. Monday night).
Best of luck with your trading today!
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