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    Tuesday, June 3, 2008

    Setups still intact


    The recent setups I've been tracking are still intact, but I'd like to see more confirmation with industry groups, the $USD, bonds, and the indexes in general. Typically, the moves are stronger and more predictable when the above confirm each other. That's not to say I won't get a signal, but I am less enthusiastic. Action like we've had recently can often suggest more range bound markets for awhile. Recognize this, and adjust slightly, by being patient for extended moves before initiating new positions. The reason I adjust is that the expected follow through is diminished, meaning profit objectives are smaller. Smaller profit potential also necessitates tighter stops.

    Yesterday was a good example of remaining flexible. Although I got a signal that was contrary to my overall opinions (to get long stocks, specifically FXI), I took the trade. It did not work, and I was stopped out. In review of my trades yesterday, I am comfortable knowing I did act according to my system and that this system has paid me well over the years. After that, there is not other analysis or monitoring necessary. Think of this for a moment. After I was stopped out, FXI got hit further, making me a genius! Then, by the close of trading, I would have been UP on the trade. Now I'm either a genius for being "correct", or a loser for selling too soon. The point is that this energy can be better spent in reviewing your trading psychology throughout the day. It's natural to want to follow trades after we exit, but this can only be useful while constructing our "edge". After that, it's detrimental to trader performance. New traders especially, will spend too much time, even obsess over finding an edge. This is the easiest part of trading. Trading that edge consistently is the key.

    I was fortunate to come into Monday with stocks short, via the SRS etf long. This trade made me a net winner on the day, and confirms my setup is still valid, if not slightly weaker. I sure would like the financials to pick a solid direction, but as long as they meander, stocks will float around. This group gets blasted with terrible headlines, then sells off, only to drift back to where they started. I wouldn't be too quick to suggest this is bullish action, because they have had every wind at their back (via rising indexes, weak bonds, "strengthening" $USD), and yet they can't get started on the upside. Financial stocks do lead the indexes in my experience, and right now they don't have direction. Technology stocks have performed very well, yet financials drag. I cannot be sure which direction they choose, but I remain flexible and ready, with a slight guess it'll be lower. One thing I am very sure of, I will lose small if wrong, and win much more than that if I'm correct.

    Video: Bill Gross on inflation

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