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    Wednesday, June 4, 2008

    Adjustment


    The recent lack of follow through in either direction indicates a sort of stalemate. Although I was hoping to have a strong short side trade in stocks, I must be flexible and adjust now that the signal is weakening. To force a situation, with capital at risk, is a recipe for disaster. I've had to shorten holding times, reduce profit targets (discussed yesterday), and tighten stops. Some traders prefer to sit out when they don't have a strong signal, while others (me), still feel that there is usually one good entry per day (either side) in times like these. I'll look for potential day trade signals until more significant setups present themselves.

    Readers here know that I prefer to have an indication of direction, over a specific price to enter/exit. This is what allows me to adjust when we see a stalemate. If I traded with price as my most critical input, I would get whipsawed repeatedly. By focusing on direction, I can clearly see there is no real momentum or follow through. After all, a trader not only prefers to get the direction correct, but the timing, too. Nobody would argue that it would be best to watch and get involved just before your move occurs, versus weeks or months in advance. All open trades are subject to headline risk, and manipulation by government officials (PPT) or CEOs, as well as the market risk we expect. Environments like we're currently seeing are just consolidation areas before the next major move in either direction. I use this time searching for more setups that are as reliable as the ones I currently use. The point is not to trade because you need action or profits each day. The most productive thing a trader can do right now is review past notes, realize that opportunities are limited, and tread lightly.

    A few days ago I discussed how "normal" relationships don't necessarily hold up at all times. Oil lately has been a great example. Everybody has been preaching how high oil prices are damaging our economy. A weak economy equals weak stocks, so when oil prices turn lower, stocks will have support to go higher. Well, oil is off over $10 bucks from the high, and even down yesterday, and stocks were lower. These typical, simplistic analyses are not good reasons to take a trade. The same goes for the recent $USD "strength". First, it is faulty to assume the dollar just gets stronger from here because the PPT "supports a strong dollar." They have supported a strong dollar for a long time, as it's headed into the toilet. Second, commodities have risen in the face of a stronger dollar in the past. It just depends on what is grabbing the headlines that particular day. Bonds too, should be very strong when stocks are weak because the "flight to safety". Not so, lately, as bonds are still relatively weak and stocks go nowhere. When the recent, typical relationships are decoupling, it's a sign some big changes are on the horizon.

    Taking the above into account, I would not call the end to the agriculture commodity bull, or the end to the $USD weakness. Same for stock weakness, even though it might take a while to kick in again. It's important that I'm not stuck justifying my economic analysis to readers. I arrive at these conclusions from looking at charts only (the trend of 200 day MA's are a good place to start). I can and will trade both sides in the short term, but on a longer term basis, these trends will re-exert their influence as always.

    In case you missed this from Minyanville, regarding the Bernanke Doctrine

    2 Comments:

    Blogger Dan said...

    Follow you on twitter, do you track your @ replies?

    Anyway, while I am here I am wondering why you use SRS as your short vehicle? Why not something like QID?

    June 4, 2008 3:15 PM  
    Blogger itrade4real said...

    Hi Dan,

    I have used QID in the past, and just today had a trade in the TWM etf (2x inverse IWM). When I look to go short (or long), I usually just pick the strongest signal of the bunch, which has been the SRS lately.

    I'll look into the "@ replies" on Twitter, and use it if it helps communications. Twitter has been unreliable, and I might make some changes there.

    June 4, 2008 3:24 PM  

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