I’m bullish but cautious, here’s why
The market continued its
march northward today. I do have several concerns about the market
currently–the largest of which are the poor breadth statistics. The rally has
been extremely narrow and has not shown significant signs of broadening. Also,
we are overbought on a price basis and sentiment is too bullish. The market is
due for a pullback.
But as I discussed last week, overbought is more
likely to become more overbought when the market is in a long-term uptrend. So,
just because we’re overdue for a pullback, doesn’t mean we are going to get one.
In fact there are some very strong seasonal biases over the next week that would
indicate a continued rise might be more likely than an immediate pullback.
Wednesday and Friday around Thanksgiving have been significantly positive on a
historical basis. The positive price and volume action combined with the strong
seasonality leave me biased slightly to the long side on a short-term basis.
All the crosscurrents along with the seasonality
talk are leading me to talk again about appropriately incorporating your market
opinion into your trading. Correctly guessing the direction of the market can be
a substantial help in generating profits, yet it is not necessary, nor should it
be overemphasized. The exception to this of course is if you consider yourself a
market timer and only trade the broad indices. Market opinion should not be used
to enter trades. Market opinion should be used to put together a game plan so
that you can maximize profits if you are right, and minimize damage if you are
wrong.
Successful traders tend to be methodical in their
approach. They look for situations in which they believe they have an edge, and
then look to exploit that edge by going long or short the given security. For my
own trading, I am always on the lookout for opportunities on both the long or
short side of the market. When my bias is strongly bullish I will simply look to
trade my long candidates more aggressively and my short candidates more
conservatively. I do the opposite when I have a bearish bias. The bottom line is
that I don’t ever KNOW whether the market is going to go up or down. What I do
know is what a good trade setup looks like, and how to manage a trade once I am
in it. Over the long haul, it’s my trades setups and management that make the
money. My market opinion just helps things along.
Best of luck with your trading,
Rob
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
signals for spread trades.
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.