3 Reasons I Don’t Ignore Counter-Trend Trades

  • June 18, 2003
  • Rob Hanna

Frequently,
when I discuss the market, I will say something like “focus on the
long side,” or “it appears the short side is the place to be.” When I make
statements like this, I am typically looking at the market from an
intermediate-term perspective. The methods I employ look to buy strength and
sell weakness for intermediate-term positions. Over the last three months, there
has been significantly more opportunity and follow-though on the long side of
the market for the methods I use.

At night and on the weekends, I do a substantial amount of work scanning the
stock market, looking at charts and fundamental information. When the market is
steadily trending in one direction like it has been recently, I will have a
significantly larger number of candidates to examine on one side of the market
than the other. For instance, this past weekend, about 95% of the charts that I
looked at were long candidates and 5% were short candidates.

When researching both sides of the market as I do, it sometimes becomes tempting
to ignore the countertrend candidates and just look for those stocks that agree
with the overall market trend. In the case of this past weekend, that would have
meant not bothering to consider any shorts. Past experience has taught me that
it’s very important not to give in to this temptation for several reasons:

  • Not much time is saved with this
    “shortcut.” Mark Boucher followers can attest to this. Last night his High
    Relative Strength/EPS New Highs List had 86 stocks. The Bottom Relative
    Strength/Earnings New-Lows List had two stocks. If you follow Mark’s methods
    and are willing to look through 86 stocks in the hope of finding a valid fuel
    candidate that broke out of a 4+ week consolidation to purchase, why not look
    at two more? How much more time would you need to invest to examine the 2
    short candidates?  30 seconds?  A minute?

     

  • It will help give you a more
    complete view of the market. If you recall the two articles I wrote on

    May 12     and

    May 14     about the UUWNHI (Unofficial, Unscientific, Working/Not
    Working Hanna Indicator), both I, and other TradingMarkets members noted at
    the time that Intermediate-Term Shorts were not working well. This observation
    would not have been possible had I not been examining these type of
    opportunities. It has allowed me to avoid taking excessive risk on the short
    side since then. When this changes, I will want to have a way to observe it. 
    That way I can adjust my strategies when it’s appropriate. (Use less strict
    criteria, loosen stops, take larger positions, etc.)

     

  • By monitoring short opportunities
    now, just as would have been the case in monitoring long opportunities in
    March or last October, you may be able to position yourself in some stocks
    that will help you to reduce drawdown or increase profits when the market does
    turn.  This rally may last a very long time, but at some point there is going
    to be a leg down.  If you do your homework (all of it), and continually look
    for opportunities on the short side, then you may have a head start when the
    market does eventually begin to fall.

    The markets put in a mixed performance today, with the Nasdaq up a little on
    slightly higher volume, and the S&P 500 and Dow Industrials down a little on
    slightly lower volume. I haven’t seen any blaring warning signs yet, so I
    would still continue to favor the long side (just don’t ignore the short
    side    ).

    Best of luck with your trading,

    Rob Hanna


    robhanna@rcn.com

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