TO FADE OR NOT TO FADE, THAT IS THE QUESTION?
I don't know what it is about the human psyche, but so many of us always want to sell whats high and buy what is low. After all isn't that the old adage? Well you can really get into some trouble in the trading and investment world at times by doing exactly that. Shorting strong uptrends and buying strong downtrends can be very dangerous as we have seen in some very extreme trends in the last 2 years. Your timing better be good and your pockets big to be a trend fader. Every month there is a new gimmick about how to time the market better.
Make no mistake about it, timing techniques for determining trend changes are at best hit and miss. You may catch a few, but you also will get your pockets drained in the process of catching those few. I speak from experience here. The 2 most frustrating trading years I had were back in the mid 90's trying to implement techniques such as this. Fibonacci, reversal bars, Gann, all that crap that does not work. One of the best quotes I have ever heard was "If you draw enough lines on a chart something will happen at one of them." This is so true. One look at a Gann chart and I feel like Christopher Columbus looking at a map on his ship.
The Russell 2000 chart above is an example of a trend that has been tough to fade recently. Last week I posted about a shorting opportunity which I did take. It was only a very good judgement on my part on the gap down opening following the one big down day, that allowed me to sneak away with some money. That was the only pullback at all of any kind for quite awhile here. Even though I was able to time that, overall I would have to say that trade was lousy. Just look at this chart, is it really a market you want to have been trying to short? Obviously not.
There are once again a couple of things that are saying we could short this market here. We have some divergence in the Pro Go Indicator, and one of the momentum oscillators is also indicating a down trend. However, the longer term momentum indicator shows an uptrend which of course we can see just from looking at the chart of the price. We hardly need anything fancy to see that.
As a short term trader for the most part, I am tempted by what we see above except the one thing I do not like about it is the inside bar with a down close. In certain instances they are good setup bars, and you have tight stops for the entries. However, with a trend this strong, I just want a bit more than this to short this market. It certainly is not a buy for me here under any circumstance even though I do expect this rally to continue for awhile. We are extremely extended on a short term basis, so a sharp correction is coming. Sharp nowadays could just be a couple of weeks or less, this is one of the strongest trends I have ever seen in stocks.
This post is more of a thinking out loud, inner monologue for me. I have alot of the casino's money in the bank this month, so I am going to be very picky about entries for the balance of the month. There are several individual stocks that are setting up short entries, so I do believe we are close to a minor peak here. I urge you caution in equating politics to the markets. Alot of the negative things that are going on will not effect the markets on a short term basis. The long term effects I think we all know, but until we get something telling us the trend has changed be careful about big short positions. If and when this trend changes it will be obvious, if we miss the peak we can enter on the first retracement. Some of the commodity markets are developing sideways trading ranges, so we may correct by moving sideways here.
Another good month is close at hand, so I would expect fund managers to try and hold this up with all they got, especially with it also being a quarterly ending period as well.