Friday’s Dominant Theme

Monday through Thursday reflected a continuation of the recent summer pace with
one- and three-minute trends — and more importantly “turns” — providing the
dominant rhythm, as we have been discussing ad infinitum during the last
few weeks.

Selling was Friday’s dominant theme once INTC’s “improved” guidance (yea, right
… whatever) sent shorts scampering in the illiquid pre-market session which
popped indices to somewhere just this side of Jupiter. Yet, as we’ve discussed
time and time again — both in this column and in

the courses — the only relevant issue at any point in time is where
is the market likely to go “from here.” CNBC, momentum traders and the
bullish press aside (more on that in a minute), even the semis couldn’t sustain
a staggering 60-point gap between today’s opening SOX.X price and daily
support.

Nasdaq

Moving Avg
Legend: 15MA
Larger Timeframe 15MA

See https://www.donmillertrading.com
for Setups and Methodologies

Charts © 2003 Tradestation

Once again I’m seeing a plethora of bullish financial and trading press
providing “all-clear” and “dig in your pockets and go long” mantra. Now I’ll be
the first to respect any trading method, knowing full well that trading remains
a business about probability and appropriate risk/reward, and that any of the
hundreds of decent methods out there will be “good enough” with strong
discipline and management, even while folks step over each other to sell you the
“best product”. Plus as most of you know, I’ll go to my grave believing
effective trading is skill-based, vs. method-based.

We also know that the styles of successful traders are as varied as the Red Sox
pitching rotation, and are far too numerous to list here. Yet this morning
reminded us once again that timing and risk/reward are everything, especially
when trading momentum. Even if you didn’t short the morning bungee upon the
abundance of triggers that we discuss in the

video and
simulations, if you didn’t mentally tape over the “Buy” button (as Kevin
Bacon did in Apollo 13) in the morning session, then effective pre-trade
risk/reward analysis may be where your improvement opportunity lies.

I mentioned earlier that the SOX opened nearly 60 points above its daily
support on Friday. The Nasdaq at one point traded 90 points above its
daily support — and that’s using the more conservative 15 period (vs. 50)
moving average! Now aside from the early morning scalpers — who had strong
premises to take early morning long scalps on the one- and three-minute Globex
trends — other “long” traders had virtually no supports in the neighborhood on
any timeframe until the 13 was tested, and even then, the three-minute trend
never confirmed a turn.

At this end, I’ve always preferred and recommended entries as close to supports
as possible. First pullbacks, cup handle entries, divergence foundations,
oversold prices on uptrend supports, and overbought prices on downtrend supports
are all examples. The level of confirmation then becomes an issue of choice for
the trader in terms of whether or not to wait for the lesser frame to trigger,
with confirmations eating into potential profit and resulting in occasional fake
trend continuations while providing some degree of safety and minimizing the
chance of a dead-cat bounce.

Yet whether one adopts the methods that I encourage or any of the hundreds of
other methods that share similar objectives of skewing probability, asking
oneself “Where’s the net?” can help maintain one’s emotional stability and trade
decision-making while others are losing theirs. And doing so may provide a
brand-new and relevant meaning to the term “nothing but net”.