We live in a society where action correlates with productivity, which is perceived to result in production. Common terms like ‘Get Busy’ or ‘Just Do It,’ roll off our lips as most people attempt to act their way to financial freedom. This isn’t rocket science as we are taught from our earliest days that if we do X we will achieve Y, however if we do 2X, we will achieve 2Y. The most popular literature has and always will be those that motivate us into action. Individuals make a living off teaching others how to reprogram their brains and motivate them to move forward with some activity that will ultimately produce a desired result.

One of the most interesting things about trading however is that so often an individual’s success correlates with the ability to stop taking action rather than to always be in motion. This is much different that almost every other activity that it is not a surprise this is one of the hardest techniques for a trader to master. I believe it is because of the nature of most individuals drawn to this profession. It takes an entrepreneurial spirit and a motivational drive to be a trader and most traders I know, pride themselves on their accomplishments, which more often than not are a result of pure hard work. Unfortunately, turning this ‘action trait’ off, when it comes to the markets is the detriment of most.

Jesse Livermore told a story his only published work, about a man who lived in the mountains of Northern California and was one of the most successful stock speculators Livermore had ever known. The trick to the Californian’s success came in only ‘playing’ the markets a few select times of year. The individual was isolated from most news and only received information periodically via an old newspaper, however when the markets reached extremes as measured by the media, this gentleman would venture down to San Francisco for a few days and proceed to place significant contrarian bets, that over the next few months paid off handsomely. The individual would return to the mountains, and repeat when appropriate.

While this lifestyle seems rather appealing to me, I am not in any way suggesting we take it to that extreme extent however I believe there is a need to recognize that in the trading game, action is often the albatross around a speculators’ neck keeping him from true success.

Nicholas Darvas, in his book “How I Made $2 Million,” said that the ‘real money was made in the waiting.’ While he was specifically speaking about buying and holding winning stocks, I think we can also apply this theme to many other areas as well.

The stock market has and always will be within one of three trends. It will be trending higher, lower or sideways. If you only feel comfortable trading stocks long, then two out of the three trends will have you sitting on the sidelines, assuming you adhere to the basic rule of playing the broader average trends. On the other hand if you feel comfortable shorting stocks then your activity can come within two out of three trends. While it sounds simple and basic, there is also that time when a trend may be changing and we simply don’t know where we are going. It is imperative during these stages, when a clear trend is not present or is under development that we wait patiently and do nothing.
It is what makes a market, and I will not make a futile attempt to persuade the masses, however for those select individuals that seek to significantly improve their trading, learning this skill is essential.

Currently all major averages are within longer-term up-trends however for the purposes of most traders, I would say we look at the medium term trend of the past few months. As a side note, it is easy to say a market is always trending higher by simply looking at a longer-term chart. The S&P has broken out of a 3 month sideways pattern, however fell back within this channel on Friday, while the NASDAQ has broken above its sideways trend and confirmed a new trend by putting in higher highs and higher lows.

At this very moment, our action to remain patient with our long positions correlates with where the markets are, however should this change and a sideways or down trend develops, it will be important for us to adjust accordingly and possibly go long the waiting game rather than take any action that can result in a loss of capital.

Markets are always in motion however that does not mean you need to be. On the contrary, more often than not the successful speculator will be waiting within their respective positions or will be waiting patiently for a new trend to develop before pursuing any activity. If you find yourself fighting this urge or worse, always in motion it may be time to take a step back and see if this strategy is working for you. It just may be that rather than getting out and ‘doing something’ you may need to sit idle and hold those horses.

Futures are flat as market participants wait further earnings reports this week. The action has been choppy however so far no real change is present. Should it set in, we will take action accordingly however for the time being we must refrain from drawing any conclusions and stick with the charts.

Wait well today!

~ Quint