The Often Overlooked 3rd Option – Dave Landry on Trading

The Often Overlooked 3rd Option

By Dave Landry | Random Thoughts

chaulk-optionsRandom Thoughts

The Ps (S&P 500) gained over ¾%. Unfortunately, this wasn’t a “do over” from Thursday’s slide. In fact, in only erases around half of the losses.

The Quack (Nasdaq) had a solid day, gaining just over 1%. Unfortunately, it too only made back around half of Thursday’s slide.

Ditto for the Rusty (IWM).

As I preach, take things one day at a time. If the market strings together some good days then it would appear to be headed higher. If it strings together some bad days then it would appear to be headed lower. And, if it alternates between good and bad days, it might just be choppy. It is that simple. So, when you are plotting that 15th oscillator or can’t decide if it’s a fifth of a third or a third of a fifth in your wave count, just look to see if the market is generally working its way higher, lower, or the third often overlooked direction-sideways.

Using my aforementioned patent pending drawing of arrows to determine trend, the Rusty seems to be headed lower for nearly a month. This action has it approaching the bottom of its wide-and-loose longer-term trading range—which is around 1-year in the making. Plot your weekly chart here.

Speaking of weekly charts, the solid longer-term uptrend remains intact on the Ps basis the weekly. Shorter-term though, it is important for current levels to hold. Further, they haven’t made much forward progress in nearly 3-months.

The Quack is looking a little bit better longer-term but it too has certainly lost momentum as of late. This is evidenced obviously in price—which you should always look at first—and by the fact that the Bowtie moving averages (10 simple, 20 exponential, & 30 exponential) are turning down and are on the cusp of crossing over.

Although the bounce was pretty much across the board, not much changes in the sectors.

It is important for those that are below prior peaks—i.e. potential double tops—to take out those peaks soon. Otherwise, the double tops would likely be confirmed by Bowties down. And, Bowties down from multi-year and especially all-time double tops is not a good thing. The Semis are a good example here but there are many others that fit this pattern.

BTW, the bigger picture classic patterns (e.g. double tops) give you a market framework. The setups (e.g. Bowties) give you an entry within the context (i.e. timing). This would probably be good fodder the next webinar.

Some of the areas that have been in a free fall such as the REITS and Energies bounced but I think it’s just that, a bounce.

I was really hoping that Friday would be the mother-of-all “do overs.” That would have put the hook in on the eager shorts (i.e. have them force to reconsider their position) and it would have nervous longs thinking about getting back in. Well, that didn’t happen. Further, the futures are weak pre-market so it look like, unless thing improve from the open, we’re going to have add in another negative day.

So what do we do? As I preach, in times like these you have to be careful not to chase your own tail. ALL you have to do on existing positions is honor your stops. If the market continues to slide then it will take you out of any of your longs that can’t defy gravity. On potential new longs, you have to be very selective. On the short side, there’s no need to load the boat just yet but you certainly want to pay attention. Additional weakness would be concerning. Regardless of what you do, make sure you wait for entries. That, in and of itself, can often keep you out of new trouble while the market finds its way. And finally, never forget that not doing anything is also an option—a third, often overlooked option. True, you’re not going to make much by doing nothing but sometimes in this game, return of capital is more important than return on capital.

Best of luck with your trading today!



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