Tuesday, July 14, 2009

Correction May Be Over

Today the Dow and the SP500 closed back above the neckline of the HS Top pattern. My first thought was that this was not a factor as the volume was so light, but the market reaction to INTC afterhours will likely change that. Unless there is a substantial change in the futures between now and tomorrow's open, I will be selling my positions in the QID and the TWM for a small overall loss, loss on the QID and flat on the TWM. As I indicated in recent posts, the market was at a critical juncture, and we needed to be ready to let go of the short bias in favor of a renewal of the uptrend. One of the key levels that I cited was a sustained move back above 35.50 in the Qs. If the Qs open higher tomorrow, then that will have occurred. The Dow and the SP500 still need to hurdle the 200dema, however, I suspect that will not be problem.

I will be looking to take initial positions in the USD and UWM. I will wait for a pullback to go long the QLD. If it doesn't happen then so be it.

It also looks like the financials are headed higher, so the UYG may be worth considering.

If the Qs close higher tomorrow, they will trigger a perfect MACD buy signal. The MACD has pulled back below the zero line and will cross above its signal line, while the 50dema of the Qs is sloping upward indicating a positive trend. The MACD sell signal came at 36.06, so the loss on that trade will be small, which is great.

I have repeatedly said since this rally began in March, that the risk was to the upside. While I had strongly believed that we would see another low in this correction, the lack of downside follow-through is pointing to the likelihood that the correction is over. In fact, IBD noted this morning that yesterday counted as another rally follow-through day. I have one criticism for myself and that is that I attempted to short too many individual stocks during this correction, and have realized only limited success, ie a few winners, but mostly losses.

One area that is clearly a problem for all trend following methods is the mechanism for dealing with flat markets and mild corrections, and once this rally is over I intend to spend some time looking back on how it could have been recognized and handled better.

13 comments:

dave said...

In after-hours trading (INTC), we're into the the June 1-2 downgaps for SPY&Q's. IF we CLOSE those gaps tomorrow, which i suspect that we will, it will be a Ralph Kramden mkt "Alice, one of these days...Pow! Right to the MOON!".

Regards,
dave

dave said...

"One area that is clearly a problem for all trend following methods is the mechanism for dealing with flat markets and mild corrections, and once this rally is over I intend to spend some time looking back on how it could have been recognized and handled better."

Narrow, horizontal Bollinger Bands

Regards,
dave

dave said...

Craig, are you OK ? I sense that you're in a mood to beat up on yourself.

In a 2-month narrow, trading range, swing traders of both stripes are going to get beat up. Even before i was a floortrader & member of a commodities exchange i understood that off-the-floor traders needed a "move" whereby they could get in too early or too late & get out too early or out too late & still make a good risk-adjusted return. That's been virtually impossible the last two months as it has in other long protracted trading ranges.

Regards,
dave

R. Craig Pritchard said...

Dave,

Thanks for your keen observation of my mood. It has been difficult to maintain an even keel this year. My oldest two boys are going off to college, my wife had major neck surgery followed by a stroke in April, and my draftsmen had open heart surgery and I ended up having to do all of the drafting work on a major university project while finishing up two townhomes for sale.

Nevertheless, I am tantalizingly close to meeting my capital objectives to trade full time, so it is a little frustrating to have to take that one step back after 3 strong steps forward in March and April.

I am probably too hard on myself.

Thanks,

Craig

R. Craig Pritchard said...

Yes, definitely the bollinger bands should play a role in evaluating the sideways action.

Craig

R. Craig Pritchard said...

Yes, I agree that if those gaps are filled we will be solidly on our way up.

If we see a solid 5 wave count up off of the July 8 low, I think it will be wave i of C or Y of this rally, ie we may see a sharp wave ii correction to shakeout some more weak hands, followed by a strong move in September.

dave said...

I have always said that THE most important characteristic of a good trader/investor is the ability to admit a mistake (not to others but even to oneself). How else can one prevent a small loss from becoming a large loss ?

Craig, you have more than done that. It's time now to ease up on yourself & stop feeling bad, stop beating up on yourself. Move forward emotionally & feel good about yourself.

RE: sideways summers. Believe me, i understand that. Looking backwards to other dull sideways summers it would have been cheaper & more enjoyable to have spent the summer in the George V in Paris. I'll try that next year. :)

Regards,
dave

P.s., Let's get 'em.

dave said...

Even closing the downgaps today, i was worried about breaking above the upper downtrend channel line for SPX. That has been done. I think it's important for most things to close above today's opening prices.

Regards,
dave

dave said...

"Nevertheless, I am tantalizingly close to meeting my capital objectives to trade full time..."

Craig, have you considered managing money, starting a hedge fund ?

Regards,
dave

R. Craig Pritchard said...

Dave,

With regard to managing OPM, I am both tempted and wary. Having worked in construction for many years, I am well aware of how brutal people can be when they believe you are not performing to their expectations, whether you are or not.

OTOH, a friend has requested that I manage an account for him. I doubt that I will, because as you may know, friends and money don't mix, most of the time.

Anyway, once I have a very clear and rigorous model for equity curve smoothing, I might be interested.

Thanks,

Craig

dave said...

When it comes to individual clients in the beginning, i think it would be helpful to be very selective. Clients who have actually traded themselves would be best because they know from experience that it's not like a soda machine or microwave. They have some appreciation of the process. Best of all though would be a small piece of institutional money.

I'd like to start a small hedge fund, but i'm not an administrator. However, i do have some unique ideas about mixing approaches & traders to even out risk.

A friend once worked for a bond firm that had 29 traders. He said that they only lost money 2 days a month on average because of the mixture of traders & trading approaches. As the owner said to me "It's very much a team approach in that we encourage team players who are communicative despite have different trading styles".

Despite all of the chaos in the hedge fund world i think a lot of client money is coming loose for other potential managers. It's not going under mattresses.

Regards,
dave

R. Craig Pritchard said...

This morning it was reported that the average hedge fund was up 9% this year. Perhaps my expectations are too high, but that seems to be pathetic given the round trip that we've had. Am I wrong? Are these guys just churning clients money?

dave said...

Craig,

I don't think that they're just "churning clients money", however, i do think that there are a lot of young, lazy people who "are connected" that opened hedge funds but really don't know that much about mkts. Here's an example http://oiltradersblog.blogspot.com/

I've been skimming his blog & have seen little demonstrated knowledge of mkts. Craig, you OTOH, have constantly demonstrated an intellectually inquisitive mind that has explored mkts trading theories in depth. I like to call people like you & me the equivalent of gym rats (people that the coach had to throw out of the gym late at night so he can turn off the lights & go home himself. LOL).

I haven't explored mkts trading theories that much; i haven't even read Welles Wilder. However, i use many of his oscillators in a very serious fashion because i am very visually observant & have explored charts in many time frames in depth. I am constantly learning. Just in the past two weeks or less i've learned two very important things.

This bear mkt is weeding many of these mediocre hedge fund mgrs out.

Regards,
dave