i’d imagine that’s the question that a lot of traders who weren’t already short coming into this week are now asking themselves, especially with the market catching a nice bid today. here’s my thinking, fwiw: do i have any thoughts whether the market goes much higher before going lower? of course, i’ve been very clear on my interpretation of the technicals and where i think we are going, ignoring the day to day gyrations of course.
however, my primary scenario, like anyone else’s, is only a guess. it’s my best guess but just a guess nonetheless. however, as a trader my job is to make trades based on my “best guess” as long as that guess comes from careful analysis of the market using all of the resources at my disposal. once i’ve formulated a near-term, intermediate-term and long-term bias of where the market is most likely going, then i must act and (this is probably one of the most important things i can say here, at least when it comes to my own personal trading style); i must act proactively, not reactively. every trader has their own style. from my personal observations, it seems like the majority of retail traders are reactive in their trading style. these are the trend-chasers… they are only interested (regardless of their rhetoric, i’m referring to their actual trades…ie-actions) in going long once they see that the market is clearly moving higher and vice versa when it comes to shorting.
basically, from my observations and interactions with other traders, the trend-chasers do great from about the middle to the top of a strong uptrend with only the occasional, mild corrections/pullbacks along the way. however, they tend to give back a lot of those gains during the topping process preceding a primary trend change as well as the first 1/3 to 1/2 or more of the new primary downtrend lower, as (to use an EW analysis) they are buying the dips all the way down the wave 1 down (1st leg of a 5 wave primary downtrend), then when the wave 2 up comes, they are even more emboldened and convinced they are correct. then it’s usually about the time that the powerful wave 3 has clearly exceeded the bottom of the 1st wave down where they take a look at their cumulative losses since the downtrend began before they start to throw in the towel. trend-chasers also get chewed up and spit out during choppy, volatile sideways markets like we had from february all the way thru december of last year.
honestly, each style has it’s own pros and cons and i’m not trying to promote one over the other. my point is that if your trading plan is to, for example, try to get some very attractive short entries to profit from a substantial pullback that is likely to come sooner than later, then you need to be proactive in establishing or scaling into the most attractive looking short set-ups not while the market is down 3% and bearishness, the VIX is up sharply and bearishness is running rampant but you need to get in the mindset that if this is what you want to do (short the next significant sell-off), then you want to be selling (shorting) when everyone else is either buying or too afraid to short…like today for instance.
please don’t confuse being proactive with trying to catch tops and bottoms or positioning in a stock before the actual buy or sell signal comes. for those that follow the trades posted on this site, they often come very early, and right around when a stock does make a major trend reversal but these entries are almost always based on breakout or breakdown of a clearly defined technical pattern or key support/resistance level. the proactive part refers to having the gumption to enter these trades, which often appear to be completely counter to the stock’s prevailing trend when most trend-traders would shy away from the trade. it also means shorting on big up days and buying (or covering) on big down days when everyone else is thinking about shorting or selling their longs. again, assuming that this fits with your pre-determined plan and trading style. never short an up market just because it’s up big and ditto for shorting on a big down day. there needs to be an objective reason for entering a trade such as a bounce back to recently broken support (now resistance) or going long on a pull-back to support during a healthy uptrend.
in the last two days we have seen a lot of stocks, including many key stocks and indexes, make solid breaks of support. for those uncomfortable with shorting, there is absolutely nothing wrong with sitting in cash or tightening up stops on your longs if you think the R/R in the market favors the downside vs. the upside. however, for those looking to get short, then you need to comb thru your watch-list or existing short positions and find those that are offering objective entries on the bounce today. i have tons and tons of existing short set-ups and active trades on the site right now, as well as plenty longs for those interested. here’s one of many recently triggered short trades, INTC, that is offering a text-book objective short entry as it re-tests it’s recently broken rising wedge pattern. of course, there is no guarantee that this, or any trade will work-out but as far as risk vs. reward goes, a short of INTC here (and so many other similar shorts bouncing back to broken support levels, which is now resistance) with a stop not too far above is really about as simple as it gets. the thing is that you just have to have a plan and stick with it without second guessing yourself unless the technical evidence starts to prove that your analysis might be wrong.
on the flip-side, if you are bullish for the intermediate and longer-term time frames and think that the mild correction that we’ve had in the last couple of days is all this market needed to make the next thrust to new highs and beyond, then you should have been accumulating shares yesterday. bottom line is that a trader should have a plan, including a contingency plan, even if those plans are flexible and need to be adapted to unexpected market conditions, and stick with that plan until/unless the technical evidence supports modifying or abandoning that plan. i would also say that if your degree of confidence in your plan, or your analysis of the market is not very strong, then there is no better place for your money than cash until you do feel that the market, or a particular stock, is offering you an above average R/R entry.
