If you’re looking to go long, here’s why you should wait for a pullback
The market has put on a
nice move over the last week. We’ve seen some solid accumulation and strong
price movement. The Dow and S&P both closed very close to their 78.6%
Fib retracements from their early August highs to their late August lows. It
will be interesting to see if they have enough power left to move through this
area and then break out to new highs. In addition to the potential overhead
resistance, one thing that is beginning to concern me is the VXO. After
consolidating for the last couple of weeks it began to break down today. It is
now approaching oversold territory in relation to its short-term moving
averages. Many times VXO stretches will occur just prior to a reversal. Combined
with the overhead resistance, the potential stretch in the VXO could help to
produce a pullback sooner rather than later. While I wouldn’t want to jump the
gun, it may be prudent to use extra caution on new long positions until this
situation resolves itself.
Why it’s important to
wait for the ideal setup
I had a conversation the other day with a trader who had recently begun trading
a methodology he created himself. While he had been researching and developing
the techniques for several months, he had just lately begun to put them to the
test in live situations with real money. In doing so he experienced a situation
where a stock made a sudden and unexpected move just prior to his entry. This
caused him to miss his fill, and he was wondering what I thought he should have
done when the situation occurred. He showed me several potential entry points on
the chart that occurred after his fill was missed and wondered which ones would
I have taken in a similar situation. My answer was none. While I didn’t fully
understand his method, I did understand two important factors in assessing the
situation:
1) He was new to trading this technique.
2) This was not an ideal setup. That’s all the information I needed to tell him
the correct decision was to pass on the trade.
When you have limited experience in trading a certain methodology, I’ve found
the best thing to do is simply limit your trades to those “ideal†situations.
While the method may appear solid or backtest well, you simply won’t have
confidence until you’ve got some profits under your belt. Don’t ignore the
borderline situations, though. Use them to learn from. Any time you see a
borderline trade, paper trade it and note it. In this way, over time you may be
able to better understand which borderline situations are tradable, and which
are to be avoided.
Best of luck with your trading,
Rob
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.