What I Said

It is important for all of us to understand that the human brain is a marvelous creation that operates in ways that are not very well understood. When we make statements to ourselves and others that are intentional, our brains store this information within the matrix of our already existing knowledge and beliefs about the world. If we do not consciously make a effort to change that stored knowledge, we will act on it subconsciously, ie without thinking. This can be a good thing if our beliefs and knowledge are consistent with reality. This can be a bad thing when it is not. Therefore, the greatest challenge is to always operate in the now, which means to be ever aware of the current reality that is unfolding without the filter of our knowledge and beliefs. My study of successful traders shows that all of them do this whether by natural instinct or by intention. It is so important to realize that it is not the indicators and analysis that ultimately determines our success, but rather our ability to act in response to what is actually happening.

I am bringing this up now, because I did in fact feel strongly that I needed to be exiting short positions this week, and looking back to my post on February 10, it is clear that my actions were at least partially the result of my stated intent to exit positions if the Dow did not break 6400 by March 10. This has probably worked out well, and I have acted in accordance with the plan that I set out one month ago. The point here is that a well thought out trading plan will prepare you to act appropriately as the market action unfolds. If you do not have a plan, you will probably act in a manner consistent with subconscious beliefs that have no relation to the reality of the market, e.g. subconscious fears and beliefs about money, ideas and beliefs of others that you have seen in the media, or unintentional statements that you have made in the past. Afterward, you will wonder what in the world you were doing.

A trading plan is not just a static statement made at the beginning of the year stating what method you are trading, your position sizing, etc. It should also include strategic planning that reflects the current market reality. My strategic planning for the current period was based on years of studying elliott waves and cycles, and having traded through (and badly at that) the prior bear market of 2000 to 2002. Your ability to develop a strategic plan will depend on the depth and breadth of your experience, and it should be crafted carefully as it will probably determine how you act in difficult situations.

One thing that I don't like about my actions this week, is that I had forgotten how intentional my statements were on February 10, and therefore, my actions were not totally conscious. Just because it may work out well, doesn't mean it is always a good thing. It may not work out so well next time. We must work to remain intentionally conscious in life and trading.

The following is commentary from my February 10 blog post, which I believe is pertinent to this week's action.

Looking at the Dow, I see the two primary targets at 6400 and 5000, based on fibonacci extensions and long term moving averages. I really don't think 5000 is likely, so 6400 is the most probable bottoming area. 6400 is at the confluence of the 400 month ema, a long term trend line beginning at the 1987 low and is a fibonacci extension of the recent decline from the January high. If we happen to hit that area around March 10+-, then I will be exiting all short positions at that time regardless of whether or not other targets have been hit as the upside risk will be tremendous. The rally off of the upcoming low will most likely be similar to the rally after the 9/21/01 low and the 3/12/03 low, the kind of rallies that can wipe out a month's worth of gains on short positions in a couple of days. The point is: don't be greedy.The most likely bottoming time frame should be March 10 to March 21 based on the 10 month cycle and Gann turn dates. Due to the large number of turn dates in March, it could be a violent bottoming process with several big swings before it gets off the ground. Either way, again it is best to be out of shorts during that time frame.The only thing that would alter this outlook would be a collapse below 6400 well before March 10. If that were to occur, then the 5000 target would be the next most likely outcome.