Last week in my "Side-Way Trading" post I mentioned about a possibility of short-term up move, yet, I was skeptical about strong up-move. It appeared to be that I was wrong. We did have a strong up-move. One more time the stock-market has proved that sooner or later everybody makes mistakes in analysis and stop-loss strategy should be used not just to cut losses but to protect profit as well.
During the last four positive sessions the indexes (Nasdaq 100, S&P 500, DJI, etc) have come close to their June's and Augusts' high levels. So far, the odds are good (from technical analysis prospective) we may see the indexes third time at those levels. Twice the stock market (indexes) has bounced down from these levels and most likely we may see slow down again.
Majority of technical indicators continue to be bullish and as I already mentioned, the technical analysis suggests that we may see the indexes moving higher. There are only two negative sings from my point of view.
First thing is high volatility level. The stock market continue to be highly volatile and this is a bearish sign. In such volatile market we could have strong down move in the same short period of time as we had the current 4-day up-run.
Second negative thing, from my point of view is that the market was not strongly oversold, yet it did make strong up-move in short period of time. It is more like some institutional investors came back from vacations, they saw stocks cheaper than a month ago and they started to buy. What is going to happen when their buying power became exhausted?
Because of these two points above, it is still difficult for me to believe in strong recovery (Yet, I could be wrong). Because of that I would not be playing long at this moment. At the same time there is no bearish signals and because of that I would not be playing short either.
One of the rules in my trading strategy is staying in cash until I see a pattern. I missed the last up-move - I did not lose money on that, I just did not make as much as I could. Still, the fact is that I missed this move and now it is better to stay in cash in order to avoid another mistake. My view on the current stock market condition is that I would expect to see indexes at their June's and Augusts' high levels. Then, depending on how those levels are hit (is they are hit) I would built further analysis.
In other words, he's a chart gazer, looking into patterns and trends on charts and searching for good opportunities to get in based on momentum and reversals. This type of trader is closer to the type of strategy that we want to implement. He very likely has a system for determining when to buy and sell in his head, when to get out of a losing position to cut and run before the loss gets too big, and how big of a position to take on.
The only problem is that he doesn't sound like he has a specific set of computerized rules for any of these aspects of his internal mental trading system. So while he has a loose trading system, he might not be able to specifically distill it into set rules in order to backtest it over the past and see how profitable it is before he trades it. He can fudge the numbers one way or another according to his gut feeling about something, which makes it impossible to test over the past. Kind of this cute little comic that I just found:
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