As I write the NAZ is up 84 handles and above yesterday’s high. If you covered into the little towel trade we saw yesterday, like me, you’re probably tempted to re-enter the short side here licking your chops over today’s gap. Stay away!
Maybe you’ve been in cash waiting for an opportunity to get long. Knowing full well this could retrace quite a bit before becoming over bought you’re tempted to press some longs and squeeze the shorts. Avoid it!
The market is bouncing and may very well continue higher over the next few sessions. Quite possibly, maybe the complete reversal is Apple is an indication of things to come and we abruptly head lower to start October. The point is, there is no fat pitch here and therefore nothing to do. Here’s how I see it playing out where a fat pitch may set up.
Let’s say we keep squeezing higher. The NAZ broke a decent trend line this week and a kiss of that line wouldn’t be out of the question. When it comes to the key weekly moving averages an oversold bounce could take us back to the 4800 level. It would be at this point I would start averaging back into the short side looking for, at minimum, a retest of these recent lows. More than likely it would be an incredible setup for even lower prices and I would try desperately to hold onto the trade for some time.
Let’s say we don’t squeeze higher but abruptly reverse and start seeing new lows. The short trade would have been missed but that’s ok because a much bigger oversold bounce play would be emerging. My objective at this point would be to play this bounce using index ETFs, slowly edging into the long side while the market penetrates recent lows and we see individual stocks be thrown out with the bathwater. It would be at this point I would be looking to build size in a series of ETFs and anticipate a bounce. When it comes, poof, gains would be taken!
The point is simple, right here and now I see very little edge. The fat pitch on the short side has come and gone for now and the chop is not something you want to try and game. Sit on the sidelines and wait with cash at the ready. That is the best play right now.
This market is ill and more than likely headed lower. Regardless of your view point on the world, the economy or the ridiculous show Apple put on yesterday, 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.
Pundits will try and lure you back in by claiming ‘value’ and ‘oversold.’ While the general investor panics, and other pundits take center stage to talk the bear camp, you’re natural desire will be to go counter trend and buy the blood. “It’s too negative” you’ll think as you see prices erode and markets drop.
I’ve fallen into this trap many times. It looks and feels easy. You’re nimble enough to move in when others are puking stock however what you’re doing in reality is trying to catch a falling knife and participate in the next counter trend bounce. On occasion you may enjoy some gains but overall you’ll be beat down psychologically, emotionally and ultimately financially. When the real move finally comes and is sustained with real accumulation you’ll be so skeptical and beaten that you won’t participate.
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. Don’t be sucked into the increased volatility but rather wait patiently for the storm to pass. It will take time and rules will be your guide!
For those a bit more opportunistic check out the Tape Talks for some short ideas.
Relax a bit and don’t rush back into this, it’s not worth it.Read More
Over the years I have traded for a variety of different reasons. During the dot com bubble I traded because it was easy. I was in college and could buy a stock before a class and sell it before the bell pocketing several hundred dollars. Ya, it wasn’t huge but it was more than enough to pay the weekend’s bar bill.
After college I became a broker, cold calling people night and day pushing garbage stocks and insurance products. I hated it. I basically stopped trading and spent the first year of my career with a phone to my ear.
After I launched my own firm, the market had already topped and started its descent. I was ignorant about shorting and so I traded the vicious counter-trend rallies. It was hard and while I made some money, on balance I probably lost years of my life entering trades far too early, buying lower and spending a lot of time on my knees praying that a bounce would come. When it did, I lightened up and swore off dip buying. That is of course until the next time when I repeated the process.
Finally, around 2004 I stopped trying to trade and spent the next several years learning. I read every book imaginable. Marked up charts, journaled every trade and listened much much more than I talked. In 2005 I landed a partnership with an incredible trader who spent the next 2 years teaching me the game. From 2004 – 2007 I traded to learn and soaked in every move, every trend, every win and every loss.
In late 2007 when I again went out on my own I started to put all that I had learned to work. I had two homes, a new baby and a new advisory business. I primarily traded my own capital and at that time I traded to live. Each winning trade put food on our table, paid bills and kept me going while I worked evenings and weekends to bring in assets and grow the business. I never took trading as serious as I did during that time because each tick literally was the difference between success and failure. I traded well, grew the business and slowly moved from a short term, hypersensitive trader into a more methodical trend follower. Trading slowly to a backseat and longer term management became my primary focus.
Fast forward to today. Our management company now handles $60M in separate accounts. I’m sure this is small by many institutional standards but for someone who basically started over in 2007 with nothing, trading to pay bills, I’m beyond pleased with our progress thus far.
Until just recently I had all but stopped trading. I spent a majority of my time handling day to day business operations. Trading was replaced exclusively by longer term trend following. My personal capital mirrored that of my clients and in addition to my advisory firm, any spare time was spent within a manufacturing business I had invested in two years ago.
Then it hit me. For the first time in my life I was able to trade not out of necessity, not out of fear, not to learn and not because my life depended on it but rather out of pure enjoyment of the sport. I know it sounds strange but after stepping back from the manufacturing business and having more time to devote to the markets, it hit me like a ton of bricks. Why not take this opportunity to once again trade, but do so out of love of the game rather than anything else?
You want to know the funny thing? I’ve been trading better than ever. I don’t care what the stock is, what the direction is or most important, how long I hold the pig. My only objective is to extract money from the market day in and day out. Sure, it won’t always be sunshine and butterflies but this freedoms allows me to, at the drop of the hat, sell every single stock just because I want a day off or maybe don’t like what I see. It’s probably the most refreshing and exhilarating feeling I’ve had in my career.
It has taken me a long time to be in the position to trade in this manner and my hope for you is that you too will eventually find yourself in the place of freedom such that you can trade because you love it and for no other reason other than to use that love and passion to extract money from Mr. Market as you choose.
I’ve been trading a long time. I’ve gone through great successes and experienced horrific losses. At the end of the day I can confidently still proclaim, trading is by far the best game in the world!