I feel compelled to reiterate the fact that, at least in my opinion, the risks to sudden and sharp decline in the broad market is elevated at this time. I also wanted to make clear why it is then, that I continue to post and even personally trade both long and short side trades. At the end of August, I made this post titled Predictions vs. Warnings. If you haven’t done so already, I would encourage you to click on that link and take a minute to read that post as it pretty much summarizes my thoughts to where things are today. BTW- That post was made just before the market broke out to new multi-year highs while sentiment and other extremes were basically as stretched as the were now and most importantly, that post came just over two weeks before the SPX dropped 9% & the Nasdaq dropped 12% in less than 2 months.
Then why, if I see such potential risks do I continue to post and even personally take both long trade ideas as well as shorts? Besides the reasons stated in that previous post (warnings don’t always play out), the other reason is that very often, some of the largest and most rapid gains come towards the end of a trend, whether long or short. The risk to chasing breakouts during the tail-end of a trend (assuming that we are close to one) is that those breakout are at a much higher risk of failure and often, the reversals come very swift and may be hard for less nimble, inexperienced traders to avoid.
From corresponding with many of those who frequent RSOTC.com, I know that some of you are seasoned, experienced traders while others are relatively new to trading and investing. Although I can not give specific investment or trading advice, I will say that generally speaking, I believe that less experienced traders might want to keep their positions and or trading on the lighter side until the R/R on either the long or short side improves and also make sure to utilize stops to protect any gains on existing positions or limit losses on any new positions. If we do get that wedge overthrow on the $SPX that is still my primary scenario, then we could likely see the selling accelerate very rapidly once prices fall back within the wedge and/or especially if they break down back below it. Again, there’s nothing wrong with trading a trend as long as it’s in place, the key is to not be the last guy (or gal) to leave the party.
On a final note, one other option to reduce risk besides reducing your positions would be to hedge your long exposure with the most attractive looking short trades. There are still plenty of active short trades offering objective entries and many of these stocks are in bear markets of their own, regardless of what the 30 stock Dow Jones Industrials Index or some other index is doing. In fact, I just started building a tracking list of the Active Short Trade Ideas. I’ve only inputted the values (original short entry price and date) on the first 13 so far and of those, 9 are profitable, 3 are at a loss, and 1 at breakeven. A good percentage of these trades were entered last fall and several are at double-digit gains already and still have plenty of downside left before the final or preferred target is hit. Just as the old Wall Street adage goes: There’s always a bull market somewhere, the corollary to that would hold true as well (There’s always a bear market somewhere).