Connors Weekly Battle Plan
The Perfect
Week
This week was a good week. Maybe one of
the best of the year. Rarely does a week like this unfold but when it
does, it’s awful nice. It’s even nicer when it happens after three or
so months of churning. As I mentioned a few weeks ago, the lack of
volatility and the sideways movement has left little opportunity for
profits for most traders. But this past week, it changed. And in this
week’s lesson, I’ll replay some of this week’s trading in order to
learn from the events as they unfolded.
A Word Of Warning
If you’re a long-term reader of my column, you know I’m the first to
admit just how difficult successful trading can be. Discipline,
structure and commitment must be combined with strategies with an
edge, portfolio management and proper money management strategies in
order for you to have a long-term edge. And then, even with all these
pieces together, you must also have a little bit of luck. But most
importantly, “you must be there” in order to take advantage of your
edge. You never know which part of the year, month or week the edge
will be most prevalent.
Most unsuccessful traders will jump
from one strategy to the next because they are not “rewarded” daily
for their efforts. But that’s wrong. Profits for most successful
traders don’t come every day. They come in clusters. And you never
know when that cluster will occur. But, if you are doing the correct
things, they usually will occur. And Friday was the beginning of a
cluster I’ve been waiting three months for.
Friday After The Close
Markets move sectors, sectors move stocks. It’s a trading reality that
I’ve talked about for years and a trading reality that you should
apply. And last Friday the market took the first step in setting
itself up for the perfect week. I look at overbought and
oversold market conditions using many indicators and the main
indicator I look at is the VIX. When you look at the following chart
you will see the VIX making a 5-period high and above its 10-period
moving average, telling us the market is likely oversold. The VIX also
closed well below its open for the day, telling us that fear was
likely lessening, a sign that the door for buying was potentially
beginning to open. This got us long the SPYs, due to the potential
upward bias, plus we also went long a couple of Window
positions in strongly trending stocks which have had small pullbacks
in strong sectors. Markets move sectors, sectors move stocks, and if
we’re right, we’re positioned to take advantage of the move if the
scenario correctly plays itself out early the following week.
Monday
The market does nothing, our positions remain essentially the same
except we become more long. National Semiconductor
(
NSM |
Quote |
Chart |
News |
PowerRating)
has a beautiful Window setup and it triggers a buy for us. The market
is still oversold in our opinion, and we believe it has room to run.
Plus, we’re now in three stocks which we believe have the potential to
participate if it does make its move.
Tuesday
You live for days like this. The perfect storm. All the pieces come
together. The market starts strong, moves sideways for a few hours and
then takes off. And it’s led by the momentum stocks. If you are long
momentum, you likely had a very good day. And we aren’t only long
momentum stocks, we are also still long the SPYs. We’re now long five
names (plus the SPYs) adding Timberland
(
TBL |
Quote |
Chart |
News |
PowerRating) to our
holdings. And when the market takes off, especially in the last hour,
we are there for it. Three months of boring churning and it’s all
forgotten in one trading day. Trading is a game of “make a little,
lose a little,” over and over again, until you get a cluster. For many
professionals, this cluster of gains makes their week or month or even
quarter. I’ve seen it over and over again amongst the better traders
out there. And for us, this first cluster is now happening on this
day.
Now, Here’s The Key
And Something That Most People Do Incorrectly…
We’ve all been told to “let your gains run.” Good advice if you are a
very long term buy-and-hold investor (and don’t mind 40%-70% bear
market losses as seen from 2000-2002). But, as a short-term trader, we
rarely have the luxury of letting gains run. And we certainly want to
minimize losses. So what is the best way to maximize this? In
my opinion, you start locking in gains immediately if they exist. For
us, there’s three components involved: price, time and how
overbought/oversold the overall market is. The more price moves in our
favor, the more we’re taking pieces off the table. The longer we are
in the trade, the more aggressive we are in getting out. And most
importantly, the more overbought the market becomes when we are long,
the more we want to be out, as the likelihood of a reversal (and the
giving back of existing profits) has increased. And with Tuesday’s
strong move, we were aggressively locking in gains in order to
assure that we didn’t let these gains get away. And we also take
our market timing position off the table as we’ve gotten our move
there also and the market had moved into more neutral territory.
Wednesday
We come into the day with four partial positions left and tight stops
on all of them. The market has some early weakness and then it begins
to rally off the lows of the day. One of our stocks sells off and hits
our protective stop, a second does nothing and we exit it late in the
day, and two of our stocks have moves and these moves are solid. The
first is in our remaining piece of National Semiconductor. We’ve been
locking in gains on it along the way especially yesterday, and the
remaining piece is exited on the close. (We’re in day 3 of the trade
and we’re nearly always out within three days. This is what our rules
state and we try to never deviate from them.) We still have a healthy
position in TBL and it also has had a nice move. And by the close, we
have a decision to make. The market is now short-term overbought. It
does not mean it will not go higher, only that the more overbought a
market becomes (especially the stock market!), the more likely the
market will reverse. We don’t know if it will be tomorrow or a week
from tomorrow, but we know we’re getting close to the rally possibly
hitting a wall. Plus, we’ve been in TBL for two days and Thursday
we’ll be out, no matter what. Putting these pieces together, the
decision is easy, lock in all the gains and go into cash. The gains
for the week (and a chunk of the month) are now pretty much assured.
Thursday
We come in the market in overbought territory and we won’t buy stocks
when these conditions exist. Yes, overbought can become more
overbought, and the rally can continue but if it does, it will happen
without me. It’s our philosophy based upon years of experience and
statistical evidence. It certainly is not perfect but it’s where we
think the bigger edge is.
The overbought conditions take hold as any attempted rally is
meaningless with no steam behind it and the market finishes the day
basically unchanged.
Friday
Same as Thursday. Our indicators tell us there is no edge and that the
market is still overbought. Again, markets moves sectors, sectors move
stocks. And if the market is not going to move (it moves best to the
upside from oversold conditions…statistics plus common sense both
prove this out), there is no edge. We again sit in cash all day, the
market again does nothing and we finish the week and month ahead of
where we started it.
Summary:
The perfect week does not mean you make money every day. It means that
you take a culmination of your knowledge, execute it exactly as you
have it planned, and then the market falls into place. IT RARELY
HAPPENS THIS WAY. As I stated earlier, most successful professional
traders I know make most of their money in clusters. Most days (and
even weeks) are “make a little, lose a little.” It’s a waiting game.
And then, usually when it’s least expected, the gains come. It’s why
they are successful. They have the discipline and knowledge to stay
structured and focused while waiting for a cluster to occur. And for
me, last week was one of those clusters. I have no idea if it’s an
isolated cluster or if it’s the beginning of multiple clusters. I
can’t predict that. What I can do though is control the process. Stick
to the rules and stay disciplined. It’s not always easy…but I’ve
seen it work for many friends who have been doing this successfully
for years and in some cases, decades. And the same can work for you,
too.
Have a great week trading!