Trade what you see. Don't fight the Fed. Never short a dull market. Look both ways before you cross the street. Don't eat yellow snow. Pull all zippers up slowly. Keep it simple. Sound advice given to me one time or another in my life so far.
I continue to receive email from readers heavily skewed to the bearish side. Many want to know about this toppy chart or that bearish indicator, etc. 2,200 Dow points higher and 600 NDX points above early April lows, many traders continue to look for the top in order to get short.
Well, we've all been watching for that quite awhile now. It has been one of the most unusual stretches where surprise rate cuts and short-squeeze explosions to follow made much of those gains all but non-tradable. Reminds me greatly of late 1998 & early 1999 before the markets really caught fire in July 1999. Plenty of bears shorted those parabolic moves until they went broke, still convinced it wouldn't last. They were indeed correct, just fatally early.
(Weekly/Daily Charts: NDX)
The NDX/QQQ is a long ways off April lows according to stochastic chart signals but we see more room to run. The weekly chart (left) shows a recent break above this bullish triangle to confirm while a descending triangle broke to the upside in the daily charts and begged us to buy calls. The 47.00 area was our prime entry but 48.50 in Position & Sector Share models will do.
(Weekly/Daily Charts: Dow)
The Dow was a screaming buy from late March up through the past 2,200 index points. Now that everyone and their floor broker believe we'll see 12,000 by lunchtime Friday, weekly stochastic values are buried in overbought. Not where I'd feel good about chasing the upside on a buy & hold basis from here.
Plenty of failed short signals on the daily chart repeatedly faked out many traders as one short-squeeze rally after another continued to prevail.
(Weekly/Daily Charts: SPX)
SPX breaks the venerable 1300 level and takes out several key measures of resistance with it. Now what? Should we get long with impunity from here? The chase reflex is alive & well within traders and could give the most veteran car-chasing dog lessons on the natural fear of loss. We see markets running away from us and eventually the majority joins that race.
Ever wonder why the masses buy high & sell low? Look at your weekly chart and see for yourself: last time the SPX was this overbought was in early September 2000. Volume orders poured in as traders saw the worst behind them and got themselves in front of the fall rally. Analysts pointed out that bright light at the end of Year 2000 fourth-quarter tunnel. That light did greet plenty of traders from there, but it wasn't heavenly angels arriving.
(Weekly/Daily Charts: SOX)
The Semi-conductors look like there's room to run higher past today's breakout. We're playing it that way in Position and Sector Share models but don't expect to hold for weeks & months on end. These are the more bullish chart signals to be seen right now and we'll ride them until they overextend themselves too far as well.
(Weekly/Daily Charts: XAU)
Speaking of over-extended, that describes the Gold & Silver index right now. Can it go higher? Certainly. Might it go lower? Someone bought 4,000 XAU June 60/55 bear-put debit spreads today for 1.00 net debit on a 5.00 point intrinsic spread. They believe this was merely a technical rally spurred by some buy programs in the underlying metal and a short-squeeze move to cover. Looks that way to me, and I'd buy those debits, sell June 70/65 bear-call credits or do both.
Use the credit received on the calls to buy debits for double the reward (and likewise risk) of what appears to be a high-odds move back to reality and support in four weeks or less.
Return To My Trading Roots
I began trading long before the internet was conceived, right before home PCs were catching on in retail stores. I wonder how my old 8088 processor would run Qcharts service today? Didn't Bill Gates himself once quote that he couldn't imagine anyone needing more than 640K in a box? He was obviously not trying to scalp the SPX at the time of that statement!
I had to start with a paper chart service that reached my mailbox each Monday afternoon produced on the previous Friday's close. Walked uphill in the snow to get there, too. Both ways. And I'm only 37 years old! Modern traders who wig out when their real-time chart service blinks out should have tried trading with us in the stone ages. Commissions? Try $100 - $150 dollars PER SIDE! Trust me: SOES bandits would not have thrived trying to scalp 1/4 point gains when it cost $200 - $300 per round trip.
So we traded longer trends back then. Weekly and daily charts & stochastic values to indicate market turns with hourly charts & stochastic values to time entries. Throw in some basic chart pattern formations to confirm entry and target objectives made up the bulk of our approach. Primitive? Very. Effective? Very.
Avalanche Of Information
But I digress. Somewhere along the way I may have let a few too many influences cloud my trading decisions. Up looked down and down looked up. Ever happen to you? Some may think the solution lies with one more "can't miss" indicator or a different "sure- fire" trading system. I happen to believe that less is more, and a return to what worked in simpler times is best for me. Strip away excess and begin from a clean base.
On a similar note, have you ever skimmed through any trading magazines? Count the number of "can't lose" trading systems for sale in there from $150 to $1,000s per month. Let me ask you a question my wealthy uncle always posed to me: if these systems actually work without effort, why are they for sale at all? Why aren't the proprietors too rich trading them to bother?
Because trading systems don't work. Traders do. Even the most mechanical, mathematical "sure thing" model costing $10,000 per month requires human intervention to manage trades. Heck, the biggest institutions buy programs are examined and adjusted each day, and they trade billions of dollars. Automation to riches simply does not exist.
But each of us can learn to be effective, profitable traders in our own right by overcoming the biggest challenge of all: our own weakness of emotion. Trade entries & exits are easy once learned, but mastering human discipline is the Herculean effort. Most traders squint their eyes at that thought and go seek out the next guru in line who can deliver immediate success. The minority seeks to reach this state of success themselves, and I think that describes most of us together here.
Back To The Future
So with that I base my outlook going forward. I will buy calls until weekly and daily chart stochastic values turn bearish and use shorter-term chart signals and patterns to enter & exit either way. Right now I like tech sectors better than Dow sectors, but all of them are closer to near-term tops than bottoms. Weekly charts clearly tell us so. Bulls who just turned complacent in a buy & hold mood may be a few weeks late to the party. Traders who carefully follow the trends should do just fine. We may miss more than we get but that's trading. Let's just try to get mostly winners and few losers along the way!
Best Trading Wishes,