Play The Hand That Is Dealt

Random Thoughts

Way back last Friday, the Ps (S&P 500) continued to side but did manage to close off of their worst levels. They still ended down nearly 1/3% nonetheless. 1875, the prior major breakout levels, looks like the next potential stop here.

The Quack (Nasdaq) put in a similar performance, ending down just over 1/3%. This action puts it below its March peak and it has it probing the bottom of its shorter-term trading range. It also has it closing below its 50-day moving average for those keeping score. As you know, there’s nothing magical about moving averages but they can help to keep you on the right side of the market. For instance, plot the 50 and notice that we have had “Daylight” (lows> moving average) since the low 4000s up until now. See my intro to trading video on the IPO Webinar page for more on this.

The Rusty (IWM) remains the ugliest. It too sold off but still ended down nearly ½%. It is now trading well below its 200-day moving average.

The internals remain ugly. Most sectors have either rolled over or are now in downtrends. And, the rest are too erratic—up-down-and-all-around—to trade. See recent columns for more on the internals—and then add a modest down day to that.

So what do we do? I think now is the time to start keeping an eye out for shorts. Since the market is oversold, you might want to wait for the first bounce. This should set up a plethora of First Thrusts and Bowties. I’d much rather just go long a bull market and sit back and relax. Unfortunately, as traders we have to play the hand that is dealt. The short side is a real pain in the buttocks. There’s additional logistics involved, you have to anticipate the moves more than the long side, and the retrace rallies suck—see the Week In Chart archives (I often discuss this). For some reason (after all, the name of the column is Random Thoughts), this reminds me of a commercial back in my (undergraduate) college days back in Cajun land. It was some Coonass (like me) talking about how tires “ain’t pretty, they don’t smell good, they don’t make you look good, but you gotta have ‘em.” Shorting does help you to see both sides of the market. And, if you are going to profit in downtrends, you “gotta have ‘em.”

Best of luck with your trading today!

Dave