Well, early this morning it looked like the markets were ready to turn down, but by the end of the day everything was positive, except for the Transports, which closed decisively negative for the week. More importantly, the Transports broke the uptrend line from the 11/21 low and penetrated the 12/5 swing low. The VIX remains atop the upsloping trendline on the bottom of the triangle.
There's little to add. Until the markets roll over to confirm the triangle pattern or breakout to continue the rally there is not much to do. I am partially long and partially short, as a few stocks are acting well, but the indexes remain in monthly downtrends. We can look to any number of signals to indicate the weekly downtrend has resumed: 1) A break below this week's lows on volume (28.47 in the Qs), 2) a high volume reversal day, 3) a macd sell signal (approaching), 4) a solid close below a 10 to 13dema, 5) a close below the mid-point of the range of the last 10 to 14 days (28.84 in the Qs for 14 days), etc. I will be using the macd and this week's lows to confirm the resumption of the trend.
During the next three weeks I will be re-evaluating my methods and strategies to develop my plan for 2009. I will be making some changes. This year I have primarily used three ETF pairs to trade the indexes: QLD/QID, UWM/TWM and UYG/SKF. Next year I will be adding the USD/SSG. I am expecting some large moves in the semi-conductor index and the Nasdaq 100 is no longer just a technology index. While the above markets are highly correlated overall, my purpose in using 4 pairs is to allow me to use different trend following strategies on each pair. In addition, I will use two strategies on each pair as well as a method for taking partial profits. This will allow for asymmetric entries and exits, reduce drawdowns and eliminate most discretionary trades. While overall I have done very well with discretionary trades because I am fairly consistent in my approach, I want to reduce discretionary trading for one main reason: stress relief. Even when things are going well, I tend to get caught up in over analyzing outcomes when I am in a discretionary trade. I have also systematized all of the strategies that I use for invidual stock trades to further eliminate descretionary trades there as well. The discretion will be in final selection of stocks to trade, as opposed to entries and exits and trend determination.
I share this with you to encourage you to start now in making a successful plan for 2009. I believe 2009 may be an even better year for traders than 2008 has been. The next 3 years may offer an opportunity for traders to make 10 years of profits (or more), an opportunity that doesn't come around very often.
I am anticipating an explosive rally off of a climax selloff to come in January. The rally should last well into the summer and retrace 50% to 62% of the decline from the October 2007 highs. That rally alone will offer the opportunity to make as much profit as the entire decline has. For example, if the Dow bottoms around 7000, a 62% retracement will also yield a 62% gain vs a 50% gain for the shortside from the highs. At that point, I anticipate we will see another decline of the same magnitude as the current one into a 4 year cycle low in 2010, which should yield another 60% opportunity. That works out to almost 300% without using margin, or 900% using double leveraged ETFs. Of course, discipline in risk management will be key as drawdowns are inevitable.
Plan ahead for this exciting time and remember to keep it simple.