Trend Following: A Game Of Clues

Random Thoughts

Each day brings a new clue. Lately, in spite of the indices being at/near new highs internally there have been some concerns. Yesterday was different. Many sectors hit new highs. Software, Conglomerates, Consumer Durables, Consumer Non-Durables, Insurance, Retail, and the Trannys are good examples here. Other areas that have pulled back a bit like Drugs and Biotech came back nicely and are now just shy of new highs.

I still don’t like the fact that the Ps (S&P 500) are still drifting or “wedging” higher but they are going higher nonetheless. This is enough to keep them at all-time highs.

The Quack (Nasdaq) had on okay day. It managed to close at 14-year highs—better-than-a-poke-in-the-eye I suppose.

As a trend guy I can’t argue with new highs. So, I won’t. There’s just the dilemma that the market is still overbought and it hasn’t cleared its prior peaks decisively. As usual, take things one day at a time.

When analyzing the overall market it is good to come up with a few scenarios. One of those scenarios is that if the market can continue to make new highs it will put more and more FOMO (fear of missing out) pressure on those who are on the sidelines. It will also squeeze out any remaining shorts and possibly attract some eager new ones—and subsequently squeeze them out too. This is one of the scenarios discussed in yesterday’s panel for TimingResearch.com. Thanks to David Kosmider for having me as the guest host. See my Youtube channel “Likes” to view it.

So what do we do? In an ideal world, we’d see some meaningful follow through to the upside followed by an orderly pullback. This action would create a plethora of setups and would be a “no brainer.” Unfortunately, at the moment it doesn’t look like it is going to be that easy. From the recent internal corrective action, we are left with few setups to choose from. At the moment, I like the Trend Knockout setups. These are trending stocks that have sold off hard in one day. This shakes out the weak hands and attracts eager shorts. If the stock then triggers, the predicament of these traders can help to propel the position higher. The great thing is that if the sell off is the real deal, you avoid a position by waiting for an entry. This is a beautiful thing. As mentioned in yesterday’s column, you’re wrong by not long-no capital is put into harm’s way. Considering this, look to add on the long side but make darn sure you wait for entries, especially given the fact that the market remains overbought.

Best of luck with your trading today!

Dave