This past week was historic in many ways, not the least of which being the selloff in the financial markets. This would be a good time to review how you acted and reacted to the market action last week. If you were trying to buy every new low, you probably lost a lot of money. On the other hand, if you traded with the trend, you could have made a year's income in a week.
Let's look at a couple of different ways you could have traded the Dow. Using the traditional MACD with the 8-26-9 settings, we can see that the monthly MACD crossed below the zero line at the end of August indicating a major monthly sell signal, while the weekly MACD remained in negative territory failing to cross above its signal line during the month of August indicated significant weakness in the July/August rally. On September 4, the daily MACD crossed from above to below the zero line and crossed below its signal line. At the same time, the Dow made a new 3 week low and broke below the August low, the low of the high month of the rally. So, we had 3 different concurrent sell signals on the daily time frame. The Dow trend was (and is) down on the daily, weekly and monthly time frames.
On the cash Dow, if you had sold short on the open of 9/5/08 with a trailing stop at the daily swing highs, you would still be short with an open gain of 2,734 points. One e-mini Dow futures contract would have yielded $13,670. This approach took only one trade.
If you had traded the daily chart going short at 3 day lows and exiting at 3 day highs, you would have an open gain of 2,115 points. One e-mini Dow futures contract would have yielded $10,575. This approach took 3 trades with 2 winners and 1 loser.
If you had traded the MACD on a 60 min chart going short when the MACD crossed from above to below the zero line and exiting when it crossed above its signal line, you would still be short with an open gain of 2,430 points. One e-mini Dow futures contract would have yielded $12,150. This approach took 5 trades with 3 winners and 2 losers.
If you had traded the 60 min chart going short at new 3 hour lows and exiting at 3 hour highs, you would have a realized gain of 2,915 points. One e-mini Dow futures contract would have yielded $14,575. This approach took 13 trades with 9 winners and 4 losers. The largest loss was 155 points. Even with 13 trades, this intraday approach took only 1 one trade every 2 days on average.
It's clear that the successes achieved above were due primarily to the accurate assessment of the trend. This is where you should focus your efforts in becoming a successful trader, I believe. A variety of entry and exit techniques can work if you are trading with the trend.
This week, Marketclub's Saturday Seminar featured John Hayden speaking about The Holy Grail of trading, and does it exist. His conclusion is that it does, but it is not in the indicators. It lies in your beliefs about the market and yourself, because you always trade what you believe. If you believed this market could not go any lower after the Dow made a low of 9525 on Monday 10/6/08 and you went long, you lost money. If you are losing money, you must examine what beliefs you have about the market and yourself that are preventing you from recognizing and trading with the trend. I encourage you to check out Marketclub at www.marketclub.com and INO TV and listen to successful traders describe how they see the markets. If you can align your beliefs with the beliefs of other successful traders, you are well on your way to consistent profitability.
The question now is what next. Perhaps a rally is in store, but the trend is down, except on the 5 min and lower time frames, so unless you are trading those time frames you are not going long. Given that the markets are at historically extreme oversold readings, it would be prudent to take some profits regardless of your trading method.
One very significant event will occur this month if the Dow does not recover dramatically. The quarterly MACD will give only the second negative divergence double top sell signal in the past 100 years. The last one occurred after the 1973 high. It was October, 1982 before the Dow broke out to new highs again. If the current signal is any indication, we are only at the very beginning of this bear market, whether it trades in a huge range or crashes to 1000 as Robert Prechter suggests, it could mean huge profits for traders. The next level of support on the quarterly chart is at the 200 quarter ema at around 5000.
Take some time to write out your plan for the week ahead, what you will do specifically, and then follow your plan.