The Secret To Trading

Random Thoughts

Markets, like life, have to be taken one day at a time. Way back on Friday the P’s (S&P 500) closed at all-time highs. This is certainly a positive development. Unfortunately, it’s not an all clear. Net net, the index hasn’t made much forward progress in the past 2 ½ months. Follow through will be key. Ideally, I’d like to see it break out higher and not look back for a while.

The Quack (Nasdaq) had a decent day. It gained just over ¾%. This action has it breaking out above its 1-month plus sideways range. It also puts it well above its 50-day moving average. For me to get excited here, I’d like to see new highs for the year. It is certainly a positive development nonetheless.

The Rusty (IWM) still remains the rub. Although it had a great day, so far, its downtrend remains intact. As I have been saying, the index seems to be in a 1 step forward, 2 steps back pattern—making mostly lower lows and lower highs (which, btw, is the definition of a downtrend). And now, we have another step forward.

Again, my concern remains that the market continues to rally just enough to keep everyone placated.

You know me, follow through is key. The market will have to have more than just a few up days before I’ll start getting excited.

I don’t see any reason to get aggressive on the buy side until the Ps get out of their range decisively, the Quack makes news highs, and the Rusty’s downtrend subsides.

As I have been preaching, when conditions are good, it’s easy. You put your money down, you pick more money up. Right now is not one of those times. Patience is a virtue.

Speaking of patience, most aren’t. As usual, whenever conditions get a little choppy, I see novice trend followers go off to chase rainbows. They change systems, timeframes, you name it. This often comes at the absolute worst time. Soon thereafter, the market will trend again. Many end up perpetually out of phase. In the end, the patient will win. You’re much better off trading one system and staying mostly out of the market during less-than-ideal conditions than trying to adapt to constantly changing market conditions.

Also, never forget that the only way to profit in a market is to catch a trend. You have to sell higher than you buy or cover lower than you short. I know, duh, but you’d be surprised how many try to outsmart the market, losing sight of this simple fact. My point is that in order to profit, you much capture a trend, so why not be a trend follower all the time? This does mean that you will have to sit on your hands at times.

So what do we do? As usual, follow through will be key-stop me if you’ve heard that before. With conditions choppy, continue to be very selective on new positions. If you think you have the mother-of-all-setups, then take it. If not, then pass. Once again, for the aggressive, keep an eye out on the highfliers that appear to be rolling over. Selected Energies are a good example here. Yet again, tread lightly and at the risk of beating a dead horse, pick the best, leave the rest, and practice proper money and position management.

Futures are strong pre-market.

Best of luck with your trading today!

Dave