Trust Your Instrument Panel
Webster’s New Riverside
dictionary defines the word “discipline”
as a condition of order based
on obedience to authority. Its second definition, putting it in more layman’s
terms: a set of methods or rules of conduct.
What have been your rules of conduct
over the past six weeks?
The Nasdaq Composite, in particular,
rallied during the entire month of August — even moved sharply higher at the end
of the rally phase on its largest volume day. However, the second part of the
buy equation — searching for aggressive-growth stocks properly set up in basing
patterns — should have left the intermediate-term trader mostly high-and-dry in
decision-making process.
In the market, the most difficult part
of a disciplined approach is not buying — even in the face of a rising market.
The hallmark of a sound trading
approach is in waiting for the exact right moment to pounce: Buying at exactly
the right point as a stock breaks out from a base. It takes a lot of nerve to
sit out during a rally. But if you study this stuff long enough, and go over
your mistakes honestly, you’ll know exactly what your buy setup looks
like. Having the confidence to wait for that setup is akin to a pilot
trusting his/her instrument panel while flying through the clouds. If the pilot
doesn’t, then he/she is, as the saying goes, lost in the clouds. Nothing can
affect a trader’s confidence more than trading without a sound plan of attack.
The result of sitting out the last
rally? Not having to deal with that high aggravation-to-reward ratio I warned
about weeks ago, as the Naz suffered yet another “whipsaw” pullback
over the past week.
But not all is for naught.
Although base setups are still few and
far between, some of the names discussed in my last
column have held tight in
their basing structures over the past week, like BEA Systems
(
BEAS |
Quote |
Chart |
News |
PowerRating) and
Network Appliance
(
NTAP |
Quote |
Chart |
News |
PowerRating). Perhaps the week-long decline may have been just
what was needed to separate the better stocks from the also-rans. The better
ones held tight, while the others folded.
The Naz held tight, reversed and
closed higher Wednesday on increased volume. Another pullback low in its big
base-building process? Or just a coffee break before the downside resumes? I
don’t know. We need to see more data points. Meanwhile, there’s no reason to
force the market’s hand. Let it show its set of cards first before you place
your bet.
Just think. If you could play poker
this way you’d lose a lot less and make a lot more money. And always remember:
No one hand you play has be your swan song. There’s always another hand.
This column will not be
published through the remainder of September. I will be away on vacation.