The Bounce
At this point,
if you’re following the strategy laid out in the Intermediate-Term
Trading Course that I wrote with Greg Kuhn, you’re sitting in a heavy cash
position.
You should absolutely not be
holding onto stocks that have broken down materially, hoping that they’ll
rebound back to your entry point.
Since the list of stocks that have
broken down includes most all leading growth names, there’s nowhere to hide for
the intermediate player but cash.
Hopefully, those of you that were
bruised in the March-May Nasdaq bear market learned a lesson or two about
exiting positions and were quicker to push the eject button this time around.
If not, chalk it up to the ongoing
education that the market is so good at giving us.
Above all, don’t argue with the
market, as a friend of mine did, to his peril.
I refer to this friend of mine, a
chess master, in Part One of the Kuhn/Marder
Intermediate-Term
Trading Course.
I taught him the strategy outlined in
the course, and saw him do exceedingly well with it in the first few years of
his trading career.
However, after notching a good return
in the first quarter of this year, and exiting in time to avoid the bear market,
the Chess Master frittered his gains away over the past few months.
A month ago, I could tell something
was amiss when he told me he’d bought a stock that was low in relative strength
and had a shoddy chart pattern.
At the time, he defended this purchase
by telling me about the company’s fundamentals.
I was puzzled, since I knew he was
smart enough to know that the market is smarter than he.
Over the weekend, he fessed up.
"It was my ego," he said,
explaining why he didn’t heed the market’s message.
And therein lies the greatest
challenge to the trader of this strategy, or of any strategy: discipline.
It’s one thing to understand the
mechanics of a strategy — the buy criteria, the sell criteria, general market
analysis techniques, money management principles, etc. — and another thing
entirely to execute.
By "execute," I refer to
having the discipline to honor your buy criteria (including refraining from
buying extended stocks!!!), your sell criteria, and your money management
principles.
It’s easy enough to learn a strategy,
but something else to follow its rules.
If you argued with the market and
didn’t sell even as your stocks were coming unglued, I suggest going back and
looking at all of your purchases, asking yourself "Did I purchase extended
stocks?…did strong volume accompany the breakouts? etc."
You will likely learn a ton.
Much like the market of the spring,
there is precious little to buy at this point — and even less to be believed,
as recent failed breakouts have shown us.