Wednesday, August 19, 2009

La La Land

Is the correction complete? It could be, but I don't think so. The SMH (not shown) really needs one more decline to complete its correction. However, the DJ Utility index shown above looks ready to launch into its final wave up. The measure move target is 402.14, just above the 38.2% retracement level shown in the original I posted on July 27. Since that time a triangle has formed, which should lead to higher prices. Even if the next move in the Utility index is down, it is overall bullish, as that would complete an ABC correction.

At moment, it is most likely that this correction will extend a few more days in the major indexes. However, be prepared to go with it if you see a valid follow-through day which could occur as early as Friday.

So far I have been fortunate as I have not been stopped out of a single stock position during this correction. I expect that will change, but so far so good.
Once the rally gets going again in earnest, we should count approximately 15 trading days and then begin selling. It will not matter if stocks have hit their desired targets, the fact is that after that point there may be only 2 to 4 weeks max before the top is hit. One approach would be to sell 1/4 of your positions each week until you are 100% cash. Another would be to take half profits on your profitable positions, sell your losers, and tighten your stops to breakeven or better on your remaining positions. The point is to have a plan. Don't wait until after the rally has topped and the market is down 15% and wake up one day to see that you have given back all of your hard won profits and more.

I sold my DTO position for a loss today. So far, I am now at breakeven on 3 trades since July 1, but up for the year on the DXO & DTO. For now, I will sit on the sidelines until I see a valid fractal pivot setup on the long side. I will not buy a breakout above the June high without a pullback. If it runs, it runs.

Gold remains at a crossroads. It could easily go either way, but the fact remains that the balance of risk is to the downside as long as 972 is not exceeded. If 972 is exceeded, then we should see a run to 1100 or above.

I have been reading Todd Harrison's (see Minyanville) recent articles on his experiences with Jim Cramer back in 2000. Todd and Jim Berkowitz worked with (for) Cramer at his hedge fund and Todd was primarily responsible for the running the trading room, as I understand it.

Beside Cramer's antics, which makes one wonder how they could actually run a profitable fund, it was interesting to see that Todd stated in his last article that the fund was up 36% in 2000. He was basically saying that they had a great year. Folks, my takeaway is this. If you are making 30%+ a year, pat yourself on the back, you are doing a great job. This is a hard business in the best of times, and these are not the best of times. If you are doing better than that, consider yourself fortunate and don't get complacent. If you are making less than 20%, take some time to evaluate all of your trades and try to figure out why you are losing money. If you are honest, you will find a negative pattern of behavior that is causing you to lose. Eliminate that behavior and you will see things change for the better.

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