Follow Your Read

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Not a single trader has any clue whether yesterday’s rip-snorting rally will result in the next bull leg or a lower high to confirm the next move of the bear. What traders everywhere will call upon is their recollection of past quantitative easing measures and the impact it had on stock prices. Most traders were slow to embrace the dramatic effect easy money would have on stock prices and vowed never again to be so naive. Now that it is upon us doubt rears its ugly head once again and questions like ‘maybe this will be the time it doesn’t work’ or ‘was this really liquidity’ start to waft through the air. Debates will begin, opinions will become heated and frustrations will rise. Traders everywhere will grasp a bias while price tells us the truth.

As I have grown as a trader, I have learned to avoid arguments based on opinion, respect all technical view points and humbly accept constructive criticism when I stray off the price path myself. At the present moment I am not immune to the questions posed above however am working hard to outline facts I have witnessed firsthand all based on price action and only then begin to develop my action plan. Let’s look at a few of these facts.

1.) The S&P 500 remains below its 50 period weekly moving average. This is one of my biggest trend indicators and something I have learned to respect over many years. As long as price remains below this key area I am hesitant to look at any longer term swing trades on the long side. Should this change, I too will change. Despite the news driven move yesterday, the market in relation to this area tells me to look short for my longer term trades.

2.) Individual charts are a mess – Even if I wanted to venture into the tape on the long side for a shorter term trade, I have few if any setups that fit my style. I am typically a volatility expansion trader which means I need to have some tight consolidation frm which I can properly place a stop that isn’t light-years away.

3.) I wanted a bounce – It’s easy for traders to say they are looking for a bounce to short, and when it comes change their mind. I have been victim of this on many occasions because when the trade actually sets up, it’s going against just about everything you feel is right and therefore it becomes increasingly difficult to take the trade. I had been short into the last thrust lower, covering near the lows prior to Thanksgiving. I got cute flipping long for a trade, which I do not regret throwing in despite the millions I left on the table (more on this below). When I analyzed charts I kept coming back to the fact that I wanted higher prices to initiate trend shorts. Seeing those higher prices transpire has me doing just that.

What would change my view on the shorter term would be charts that set up and work higher. This would then set the stage for a technical improvement of the weekly picture, would more than likely would have me switching from short to long. These are two scenarios that would both need to play out and until they do I must stick with the facts which tell me to act as I am now. It is hard to do with the understanding of what past QE’s have meant to the market but I must follow my read. I am not at all opposed to someone else who takes a different approach. My only goal on this blog is to encourage disciplined trading and be held accountable for my moves (despite have a daily NAV that does that already) whatever your read at this juncture, I hope it is based on price, possesses quantifiable risk and is objective and open minded. Right or wrong you’ll do well on this trade or the next.



** Let’s say for a moment that rather than recognize my cute trade and closing it out I had in fact stayed with it and for no technical reason other than a gut feel, stayed long and reaped the benefits of this bounce? Completely unjustified, I would receive praise and accolades from my clients, co-workers and readers. My confidence would have gotten a big boost and more than likely I would have begun to feel much smarter than the market. The problem is, it was all based on a gut feel with no real technical basis and therefore no real stop. Had I won on that trade, I would have been emboldened to do it again and quite possibly the next time wouldn’t have worked out so well. Whenever a trader is saved from an undiscipned hope trade in my opinion it is worse than had they thrown in the towel before the trade played out. If you begin down the path of undisciplined trading it may not be today, or tomorrow but sooner or later you lose such a vast amount that you will be knocked out of the game altogether. The number one rule in trading, right or wrong, is to live to fight another day.

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