Many were surprised yesterday when I said that this market would have to make new highs or at least, get well back into its prior trading range before I’d begin to get excited about the long side again. If it does begin to turn around in earnest, I’m not worried too much about what happens between here and there. You can’t be all things in all markets. You let things unfold and pick your spots carefully. Sitting mostly in cash and waiting for the best opportunities is a great place to be. I’m not going to put capital in harm’s way to try to a) catch every zig or zag or b) try to look smart. I’ll let the others pick bottoms, play reversals, and do other (in my best Darrel Hammond imitating Arnold Schwarzenegger voice) “THANGS OF DAT NAH-TURE.” (classic Dave Landry).
Based on the participation in yesterday’s chart show, it seems that some tend to think professionals know exactly where a market is headed. Trust me, no one does: not you, not me, or the guy who screams on TV. No one knows exactly. If I did you’d never see my fat ass again. That’s why I’m in here grinding it out (I do only work half a day: 24/2=12 hours). The “secret” is to find one thing and do it well. And, when conditions aren’t conducive for that one thing, you put your hands on your buttocks and sit on them.
My friend Quint Tatro over a Tickerville wrote an excellent piece yesterday and not just because he gave me a shout out:
“…the longer term trend we’ve enjoyed since 2009 is being challenged. It is far too early to know if this will be like 2010 where after a few weeks of pain we have a reversal and move higher to break free of the carnage, but for now capital preservation is the key. If you don’t like shorting or just aren’t very good at it, than now is a time to do nothing. Raise cash and sit and wait however beware of the market siren call and following people who’ve never traded in a downtrend….If you don’t have rules for buying stock and following trends, now’s the time to adopt some. Pick up a copy of @AlphaTrends book or start following Dave Landry. Both are seasoned traders who’ve seen ups, downs and everything in between. They follow rules not emotions….”
Quint’s right. Things are looking a little dicey. And, again, now’s the time to either sit in some cash or consider a short or two.
So, Let’s Roll The Dice
As mentioned recently, on a monthly chart, the S&P 500 has pulled back to its prior pullback—in this case, that pullback was a Trend Knockout (TKO). As discussed in the Stock Selection Course and yesterday’s webinar, in markets you want to see them “stair step” higher.
Net net change is the simplest of all technical analysis. Whenever you find yourself plotting that 15th oscillator or trying to figure out if it’s a 5th of a 3rd or 3rd of a 5th, ask yourself is the price higher, lower, or about the same as it was a week ago, several weeks ago, a month ago, and a year ago. Using this complex analysis. The answer is lower. It doesn’t mean that it will continue lower, it just is.
Rules, Not Emotions
As Quint said, you follow rules, not emotions. For me that means signs, signal, setup, and trigger. Signs are classical technical analysis patterns such as bases and rounded tops. Signals would be some sort of catalyst that the market is beginning to change direction such as a sharp thrust down or a moving average crossing. The emerging trend pattern completes by pulling back to form setups such as the First Thrust or Bowtie. You then wait for the trigger. This means that the market must turn back into the intended direction. This way, at least at that moment, the market is confirming your analysis.
Considering the above, in the Ps, there is overhead supply, the market has broken down from its range and its subsequent pullback sets up a First Thrust and a Bowtie on the weekly chart. The last two times we had weekly Bowties down from all-time highs, the market lost well over 40%. Maybe this time is different.
And, of course, we have a Death Cross. As I have been preaching, don’t get too caught up in the hype of this but do pay attention to see if a trend does develop. Like the Bowties or any other signs/signals/setups, it does suggest that the tides may be turning. So, at the least, you don’t want to fight it.
I think now more than ever is the time to pay careful attention what’s happening. Take an hour or so out of your busy schedule to watch Thursday’s chart show. I fleshed all of the above out and then some. It’s free and must be good because people often say “Dave’s good for nothing!”
So What Do We Do?
Do what you always do. Follow the plan. If you have been honoring your stops on the long side, I can’t imagine that you have any left. And, if you do, that must be “one charming pig.” (again, see the chart show)The chop back and forth has made the short side difficult. The good thing is, using liberal entries might keep you out until/unless this is the “real deal.” I much rather just ride longs in a bull market but you have to have to make friends with the trend you’re in. The trend is your friend, of course, until it ends. And, now the old one might be coming to an end and a new one begins. As I’ve written many times before, you have to be really careful not to label yourself a “bull” or “bear.” If you do, you tend to paint yourself into a corner. As I preach, what is is. Just follow along and say hello to your new friend.
Best of luck with your trading today!
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