NEVER SELL A DULL MARKET?

This is an old Wall Street saying that gets thrown out quite a bit. You can see 3 distinct dull periods where the price has just continued to creep higher. In this case obviously shorting would have wiped you out. It is the nature of price up trends top behave like this. They tend to just stair step upward. Downward moves tend to be faster and more violent in nature. This is why short term traders like me love shorting because you can make more money faster. This does not mean you should have a bias, that is a major mistake. Short only funds have been killed this year, and long only funds get killed during declines. You need to play both sides of the market, but you also need to understand the differences in the nature of price moves.

Let's say you had a negative bias in stocks due to the feeling or even objective analysis that you do, that told you the stock market is likely to reverse back down. You would then go to the chart to see where to go short. There are certainly plenty of divergences in the momentum here that you could have justified taking a short position. However, what I would recommend, is requiring a substantial trend change in the price before doing so. That has never happened in the above chart, so at the very least you would have stayed out of trouble. There are always bad periods, times when you just can't get anything right. I have had one of those this year. It is imperative that you keep your draw downs low. I have kept mine under 12% during one of the worst periods of my career, and believe me in the overall scheme of things, that is nothing. One of the ways I have done that is trying to stay clear of some of my signals that have occurred during this recent upward run.

There have been sell signals in my short term patterns. I have taken them with smaller size and quick exits due to not everything being lined up perfectly. You could argue, well why wouldn't you just wait for everything to be lined up? The answer is a trade is never perfect, the ones that are seem to be bad trades. We are basically probing for a move when the evidence leans in one direction. If the evidence was always air tight for trades, all traders would be mega rich tycoons and the CSI labs would be out of business also. It is not a perfect world and there is no "perfect" trade.

If you can keep your losses limited during bad trades or bad periods, the good periods will take care of themselves. I will admit that as per my recent posts, I am getting bearish on stocks right here and I am chomping at the bit to participate in what I think is going to be a decline in January. However, I also know that so far there is nothing in the price structure to support my view, hence there is not a trade here. At the same time, I do not see a buy signal. Even if I am expecting a decline, if a valid buy signal shows up here in an uptrend this strong, I will take it without hesitating. My view on a decline could be wrong, and who is to say we don't go all the way to QE 10 with the FED which would probably take us to 20,000 in the DOW. They have shown they can completely lift the market in spite of all contradictory influences, so don't be a fool and fight it. Make sure the price action ties into your overall view, then enter your trades.

The next chart is an example of where I had a bearish view on the market and waited for price structure to come in line with that. It is one of the best trades I made this year. You can see how much different this overall picture is than what we have going on right now.

Price here was obviously in an overall downtrend and you can also see the sharp declines we had during this period. You can certainly make alot of money during these moves if you can catch them. However, I think you can clearly see the differences in these two charts and why I am telling you to make sure price action ties into your directional view. Fighting trends no matter how fancy your techniques are, is a very difficult way to make a buck or even keep the bucks you have!