Trying To Out Smart This Market? Stop! Draw Your Arrows!

Random Thoughts

The Ps (S&P 500) sold off fairly hard. They found their low near the previous lows, circa 1975 and began to rally. They still ended the day down well over ½% nonetheless. So far, they remain range bound at best.

The Quack (Nasdaq) also reversed after dipping lower but also still ended lower by nearly ½%.

The Rusty (IWM) put in a similar performance, ending the day down .40%.

As I preach, technical analysis in its purest form is simply looking at today’s price and then looking at previous prices to determine the “net net” change. In doing this in the Ps & Quack, you’ll see that we haven’t made any forward progress since late October ’14. The same holds true for the Rusty. In fact, if you back the chart way out, you’ll see that it hasn’t made any forward progress on a net net basis in over a year.

To those who don’t know me, I became somewhat famous for drawing arrows on charts, way back in the 90s. This earned me the not-so-nice-at-the-time title “Trend Following Moron.” The name stuck. I’m not ashamed to admit that in spite of any well though reasoning, if a market is going up, it’s going up. If it’s going down, it’s going down. And, if it’s going sideways, it’s going sideways. Embracing my title has been liberating. I no longer have to justify why. I just continue to draw my arrows.

Unfortunately, the arrow has turned sideways as of late. As mentioned recently, when a market is range bound at high levels, a big up day will look like it’s off to the races and a big down day will look like the end of the world. And, sometimes, a major intraday reversal like we saw on Tuesday will look like both. This is why it is important to avoid getting too caught up in every zig and zag. Otherwise, you’ll end up chasing your own tail.

One of the hardest things for a novice trader to do is wait. Yet, that’s exactly what you should be doing during less than ideal conditions. Let everyone else fight it out. Livermore has a great quote explaining how those players (who are in during less-than-ideal conditions) are laying the groundwork for your next venture. I just grabbed my well worn and torn copy of Reminiscences Of A Stock Operator, to look for the quote and the first thing I found was this:

“…I let the craving for excitement get the better of my judgment…….The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among professionals, who feel that they must take home some money every day, as though they were working for regular wages.”

This fits nicely into my recent mantra of letting things shake out. I’ll find the other quote on Friday.

Let’s look at the rest of the market.

Most sectors have lost steam like the indices themselves. Many big cap areas such as Insurance, Durables, Non-durables, Conglomerates, Financials, and Defense are beginning to look a little toppy.
Banks have been headed lower and are now breaking down from high level range. It’s important for them to stabilize soon. Otherwise, it could get ugly fast.

Metals & Mining, led by Steel & Iron and Copper, probed towards new lows. Gold and Silver were also weak but so far, a bottom appears to remain in place here. Just make sure you wait for setups and entries since this has been more of a process than an event.

The only other good news in the sectors is that Drugs and Biotech within the Drugs ended higher and are nearing new highs.

So what do we do? Keep an eye on Gold and Silver for potential trades. Other than that, there’s not much to do. As usual, let the ebb and flow control your portfolio, especially during less-than-ideal conditions. Protective stops will take your out of existing positions that are no longer working and being selective and waiting for entries will help keep you out of new ones should there be no follow through.

Best of luck with your trading today!

Dave

Questions? I answer all emails. dave at davelandry dot com

P.S. Chart show today. Click here to participate. Be there because without you, there is no show. I’m going to cover trading inefficient vs. efficient markets and any other topics that you’d like. And, obviously, I will be covering current conditions. I’m also going to analyze your stock picks. So, if you have a favorite, bring it to the show.