This Week’s Battle Plan
Sherlock
Holmes and Dr. Watson went on a camping trip. After a good meal and a
bottle of wine they lay down for the night, and went to sleep.
Some hours later, Holmes awoke and nudged his faithful friend.
“Watson, look up at the sky and tell me what you see.”
Watson replied, “I see millions and millions of stars.”
“What does that tell you?” inquired Holmes.
Watson pondered for a minute, and said, “Astronomically, it tells
me that there are millions    galaxies and
potentially billions of planets. Astrologically, I observe that Saturn
is in Leo. Homologically, I deduce that the time is approximately a
quarter past three. Theologically, I can see that God is all powerful
and that we are small and insignificant. Meteorologically, I suspect
that we will have a beautiful day tomorrow. What does it tell
you?”
Holmes was silent for a minute, then spoke:
“Watson, you idiot, somebody has stolen our tent!”
———
When
it comes to trading, sometimes we can think like Holmes. A
look at the world is quickly reduced to its simplest elements.
Everything is black and white, simple to understand, and our thinking
leads us to quick and powerful conclusions. Late September through
November was a Holmes scenario for us. It was black and white. The
stock market was going higher…period. And certain commodity markets
were too…cotton (last piece of the position was sold at 41.70 on the
July contract), copper (still in) and coffee (not yet) were
undoubtedly going up. Things were simple to see and like Holmes, we
made the obvious, obvious.
Holmes’ World vs.
Watson’s World
But trading is sometimes not
this simple. And that brings us to this week. Today we are in
“Watson’s World.” We can analyze things over and over and
come to different conclusions. Here’s why:
1. If you look at the Market
Bias page today you will see that the bias for early in the week
is pointing higher. This is good.
2. If you look at the trend line drawn from the September lows in both
the S&P
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) and Nasdaq
(
$COMPQ |
Quote |
Chart |
News |
PowerRating), you will see a
market that has violated its uptrend this past week. This is not good.
3. If you look at the 200-day MA on the
Nasdaq Composite, and the 50-day moving average on the S&P cash,
you will see two markets that have successfully bounced off these key
levels. This is good.
4. If you look at the past few weeks’ economic reports, you will see a
definite pickup in business. But you will also see a pickup in
business that is hard to justify a nearly 20% rise in market averages
in 90 days. And based upon these reports, it’s even harder hard to
justify stock prices moving drastically higher. This is not so good.
So there you have it. We lived in Holmes’ world for 2 1/2 months as the
archives to the right will attest. And now, based upon the above
scenarios, we’re moving into Watson’s World.
Analyzing markets and trading is
sometimes black and white and sometimes it’s a bit more complicated.
Learn to correctly identify and successfully trade the markets when
they are in either scenario, and you will prosper for many many years.
Successfully trading the Holmes market requires you to be a pig (as
stated by George Soros after he broke the Bank of England). And I’ll
admit, this is not always easy to do. But the second market scenario
is even harder and requires you to use a very different approach. A
lot more caution is required, a lot more patience is required, and you
must wait for the market to tip its hand instead of diving in head
first with no clear signals. Few traders play both games well. The few
who do, prosper the most and the longest.Â
The Path Back
to Holmes’ World
Now looking ahead to this week, the hand will be better tipped if one
the following two scenarios occur: The first is a hold of the moving
averages mentioned above accompanied by at least one solid up day with
volume. The second scenario is last week’s trend line break being
accompanied by a closing under the moving averages. Should this
happen, I suspect lots of money will be made on the short side with
the stocks found in the downtrending
indicators lists. The next 1-3 days will likely give us the
answers and hand us a few good opportunities.
Nightly To-Do Lists
Thanks to everyone who has been sending me emails about the
Nightly To-Do Lists. I’m glad they have been of help. If you missed
them, they can be found in the past few week’s archives. Next week
I’ll cover options, the week after futures, and the week after that,
daytrading.
Don Miller-QQQ’s
In October, Don Miller did a live one-day QQQ trading seminar
which was taped and made into a video course on how he makes his
living. We knew that the course would be well received, but the
reception has exceeded everyone’s expectations (Don is a superb trader
and is a real pro). Don has decided to expand his course into an
online virtual university, teaching traders exactly how makes his
living. Don’s university will include technology that lets you
simulate live trading on an intraday bar-by-bar basis. And at each bar
you are required to answer how you would react to and trade that bar.
I took a sample of the course last week and it was very exciting. Even
when you do the correct things in the real world, there are times the
market does the opposite. Don’s course beats that into you. You are
rewarded (scorewise) for trading correctly but punished financially
for your incorrect actions. And you are forced to deal with this
in his course, just as we all deal with this in the real world. Don’s
course will be live by mid-February.
If you want a head start on his university you can
purchase his video at
TradersGalleria
and apply the cost of the tape to the online course when it goes live.
If you bought his video course earlier, you’ll be able to do the same.
TM Site
As I have mentioned before, we’re redesigning the site to better
segment it by trading style. Still another month to six weeks away
from completion, and if you have any thoughts or a wish list, send
them to me and we’ll see what we can do. We have many, many changes
and improvements coming, but more is even better. Therefore I’d like
to encourage you (and bribe you) for your thoughts. If your idea(s)
and suggestion(s) is implemented, you will get an extra six months
added onto your TM membership. Send them to LConnors@TradingMarkets.com.
I probably won’t be able to answer all the emails, so I’ll thank you
ahead of time for your thoughts and we’ll contact you after your
suggestion is implemented.
Good luck in your trading this week!
Larry Connors and Brice Wightman
Larry
Connors is CEO and co-founder of TradingMarkets. He is also the author
of four books on trading, including Street
Smarts,
co-written with Linda Raschke, Connors
on Advanced Trading Strategies, and his latest release, Trading
Connors VIX Reversals.
Brice
Wightman is a Market Analyst at TradingMarkets.com.