Keep swimming but with an eye on the shore

• Posted by admin on May 18th, 2013 at 11:48 am
• Comments: 0

What a market.  Our mantra for months now (and if you follow our stream you will have heard this a number of times)  is don’t worry about indices, just trade individual set-ups.   As long as there are individual set-ups, stay long.  However, it takes some effort to to follow our own advice.  Why?  Because often when markets get this extended they have sharp, quick pullbacks that can maim the longs.    All our experience tells us to be wary, and yet we ultimately will always defer to price-action, and this keeps us long.   As you can see, there’ s some conflict in how we feel, and the same wariness is present in the minds of many veteran traders.   Conflict isn’t however  a bad thing — it makes us nimble, keeps our ego in check, and on our toes.

We aren’t that present on Twitter these days — so we thought we’d give a quick update of where we are and what we’re thinking for our non-newsletter followers:

We went to cash on Wednesday afternoon — felt pretty smart by Thursday as market pulled back, only having to go back into swings on Friday as market moved forward.   We are wrong all the time, but we’re pretty good at not staying wrong for long.

On the plus side,  the stocks we sold on Wednesday were extended, and the stocks we entered on Friday were close to bases and gave us a cushion of profit by the close which made us feel a bit more “safe”.   That’s what we’ve been trying to do all year long — sell out of extended stocks and entering fresh breakouts close to bases.  Albeit the latter is becoming more scarce.

$SPY chugging happily along in between standard deviation 1 and 2.   First big red flag would be a break of standard deviation 1.

Financials getting to top of Bollinger Band which usually means they’re due for a rest.   We sold out of our $JPM $GS swings on Wednesday.   We’ll be watching to see if this means simple rotation into other sectors (like $XLE which caught momentum on Friday) or whether it cools the market as whole.

We bought four small positions Friday and swung all of them — three out of the four belong to the $XLE.    The oil sector is one of the few non-extended sectors out there right now.

As our readers know we prefer to go long on oversold markets in longer term bull trends — that’s our favorite spot to bite.  This means for example buying a pullback to bottom of bollinger band on daily while the weekly is still in uptrend.   It’s kind of like short-term reversion to mean within longer term trend.

However, when markets go to top of Bollinger Bands we don’t go short swing (but will do quick fades on day-trades) since in our experience that doesn’t nearly work as well –in bull trends of course, but we would argue it doesn’t work as well/messier strategy even in bear markets.   Fear of missing opportunity > fear of losing money.

Right now we’re close to the top of the BBs in a bull market — this means, keep swimming long, but keep an eye for changes of character, and rotate into stocks that are close to bases.