When you are wrong, admit it and move on
One thing traders must learn early on
is the importance of admitting when you are wrong. Traders that don’t
learn this don’t last long. After a little bit of practice, admitting you are
wrong becomes easy. You take your loss. You exit your position. You look for the
next trade.
That’s where the difficulty sometimes comes in — looking for
the next trade. Many traders feel like they need to have an opinion. They need
to be able to say they are bullish or bearish. They need a position. They want
to be in the market — after all what trader doesn’t want to be in the market?
But what happens when your indicators send mixed signals, and only marginal
trading opportunities appear?
That’s what I am dealing with at the moment. As the market did
its low-volume creep at the end of August, I found myself more and more
skeptical of the rally. I was turning from my stated neutral stance to outright
bearish. When the market fell rapidly on last Wednesday and Thursday, I felt
more sure of my bearish convictions. When the market rose last Friday on light
volume, I felt good that it was a weak oversold bounce. Today has confused me a
bit.
A gap down in the morning followed by a sharp reversal would
seem bullish. Rising volume would seem bullish. Yet there were more decliners
than advancers. The Nasdaq, which finished the strongest and in the green more
new lows (66) than new highs (65). And the turn around in the market was not
reflected in most of my portfolio’s long positions. Semis did well, so that
helped. Retail also did well, and that didn’t help..
Sectors saw the following action: Semis did well. Retail did
well. Oils tanked, metals tanked, materials tanked.
So the message from the sectors seemed to say that cheap oil
means more money in consumer’s pockets to spend at the stores. Unfortunately,
that isn’t quite right. If oil is dropping due to speculation of a big increase
in supply, then the above logic would work great. That’s not the case, here. The
drop in oil and basic materials is more likely a warning that demand for these
products may drop off. Demand drops off when a recession occurs. Recessions mean
lower corporate earnings and ultimately lower stock prices.
It’s options expirations week. I expect we’ll continue to see
some volatility. I don’t know which way the market is going to go over the next
few days. I don’t even have a good guess, since many of the things I look at are
giving me conflicting signals. We’re in the middle of the recent 3-week trading
range and right where we began it on 8-18 after the strong 1-week rally in
mid-August.
I still expect September/October will have some real
difficulties and we will see a significant sell-off that will at least test the
summer lows. Whether that is ready to begin just yet, I’m not sure. Therefore,
I’d suggest continuing to play defense and waiting for a higher-odds situation
before committing too much capital one way or the other.
Good trading,
Rob Hanna
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.