Pullback Paramount

• October 16, 2002
• Don Miller

The S&P and
Nasdaq futures are both reminding traders of the longer-term bear trend this
morning, and are locked in a classic 13
minute (down) vs. hourly (up) intraday battle.  As such, many intraday traders
are left in scalp mode playing off either trend support, as we await resolution
of the conflict.  ES has remained north of hourly support while NQ (courtesy of 
(
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PowerRating)‘s forecast which was about as murky as today’s weather in the
Northeast) has probed south.

Given hourly trend supports that have been in place since Thursday’s longer-term
long triggers, and since much of the recent climb has been the result of
illiquid overnight Globex gaps, which side of the hourly support we trade on
this afternoon may go a long way in providing clues as to whether the recent
extreme run has exhausted itself for the time being. Longer term, both markets
have support on their daily 15MA, and in my view a pullback is paramount for a
lower-risk entry for those who missed Thursday’s trigger, to avoid entering into
the recent low probability retail panic.

ES (S&P)         
Wednesday October 16, 2002  11:15 A.M. ET            NQ
(Nasdaq)

Moving Avg Legend:
5MA
15MA 60-Min 15MA

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While I try to avoid
reading industry press most of the time, lest it impact trading which I believe
is best done with blinders and earplugs, I must admit I’ve been scanning some
material over the last few days which has only served to reinforce my continuing
desire to return to “ignore” mode.  And while there’s some good stuff out there
(I’ll withhold judgment on this column), I must say many of the comments I’m
seeing from various traders, analysts and columnists who insist on
chest-pounding these days — whether it be because they “called” the downtrend
right all the way down or “called” the latest bungee reversal, and as a result
their “methods,” “calls,” or whatever are the best — is enough to make one
nauseous. It frankly makes me sick and always has.

Now yes, I write a daily column and certainly believe strongly in the material
presented in the educational courses and that which I share to a small extent in
this space, so we may have a case of the pot calling the kettle black. Yet my
point is this — I will go to my grave defining profitable trading as:
“the result of ‘effectively’
using ‘a’ method that skews probability in one’s favor, while keeping all
variables constant.”  (“Effectively”
meaning using proper discipline and trade management, and “a” meaning no one
method is the best.)

As I’ve said before, many highly successful traders are effective with win/loss
ratios far below 50%, and I’ll easily give my capital to a sub-50% successful
trader with strong discipline over one who is “correct” 80% of the time who is
weak in the discipline area. 

Trying to solve a trading problem or slump by searching for that highest %
method? Stop wasting your time … that isn’t where it’s at. “Call” the summer
trend or recent bottom right? Give me a break. At the risk of stating what I
hope is ridiculously obvious, but suspect isn’t, based on the current level of
industry rhetoric, no one can predict what
is going to happen in the next minute, hour, day or week. Markets will always
alternate between trend, chop, and reversals, and there are ample ways to
specialize in trading any of them.

It’s quite comical how you don’t hear from trend folks during chop and reversals
— except to hear excuses.  At least the better traders
in such cases appropriately state “probability didn’t work this time,” although
I still wonder why we never hear “this could have just as easily stopped and was
one of the times probability favored us” when it does “work,” instead of
inflated-ego chest-pounding… but I digress. Same
goes for reversal folks during a trend (although technically a market is always
trending on some timeframe, even if just one-minute). And if you ever catch this
trader doing that — and heaven knows I’ve probably slipped a few times —
please feel free to give me a wake-up slap. Lose the ego, people.

Good Trading!

Don Miller