Low In Sight

I don't know how much lower the markets will go, but I think the end of this decline is in sight. I am not adding new short positions at this time, but continuing to exit existing positions on new lows. I have a little room left before my stops are hit in my index long positions from last Friday's close. There is a good chance we will see a bounce tomorrow into options expiration Friday. I will not exit these long positions unless my stops are hit, as the risk for a surprise rally, in my opinion is significant.

The recent index long positions I entered were clearly countertrend, and based solely on the expectation of a continuation of last Thursday's rally. I was not alone in this view as Mike Paulenoff was also looking for a continuation. (See Mike's free market analysis at the link on the left - click on Markets) One thing I would like to say about why I am still in these long positions is that I do not use very tight stops. In this case, I am using 1/2 ATR(10) - daily below last Thursday's low. For years, I used tight stops only to get stopped out and see positions move to my expected targets. My profitability improved dramatically when I reduced position size and widened my stops. For most trend following systems I use a minimum of the lesser of a 3 ATR(10) stop or 2 ATR(10) below the nearest swing low, meaning if 2 ATR(10) below the nearest swing low is closer to my entry I will use that instead of the 3 ATR(10) stop. I rarely use discretion to exit early due to sell signals when a position moves against me, as at least half the time I have found I would not have been stopped out and the position recovered to hit my targets. By being consistent in this I have improved my results.

The important point here is that if you are right on the larger trend, you may find it easier to be consistently profitable with wider stops and smaller positions. And however you choose to exit, be consistent in your approach.