This Is The Most Important Part Of Any Trading Plan…
Those of you who have been reading
my recent columns know that I have been stressing that the short side was the
place that traders may want to focusing their energy. In the last few days,
things have gone from bad to downright ugly. The major indices have all broken
the March lows (price support).Â
All but the
S&P 500
are now also below their 200-day moving average, a view the averages haven’t had
in over a year. The market is out of the choppy trading range that plagued it
for over a month and a downtrend appears to have emerged. How low we can go is
anyone’s guess. It won’t be a straight shot, though. It never is.
At this point the market is now oversold by many measures,
the extreme
VIX
reading being the most notable.
As I discussed
last week, the reward side of the risk/reward calculation is normally not as
high for intermediate-term short positions as it is from the long side.
Therefore, to trade the short side profitably, you need to be extra vigilant
about controlling the risk side of the equation.Â
One way to help control risk is to avoid taking on new
short positions when the market reaches extremely oversold levels. Rather, you
should use the opportunity to manage your current positions more closely. This
could mean taking partial profits, tightening stops appropriately, or a
combination of both.
Overbought/oversold conditions have two ways of correcting themselves. Either price or time. This means that I would expect we are due for
either a bounce or a multi-day consolidation to begin sometime in the next few
days. Either way, once the oversold condition has been worked off a bit, then I
would anticipate that a new batch of favorable short opportunities would be
available.
Remember, money management is the most important part of
any trading plan, and this is especially true from the short side.
Best of luck with your trading,
Â