Why I Don’t Pick Tops And Bottoms
The trend debate continues with those new to this column.
Maybe I should explain my methodology even further. I am a momentum based swing
trader. Momentum is the key word in that sentence. When the trend of the market
is higher, I’m either long or looking for a place to enter (usually on a
correction, i.e. a pullback). When the trend of the market is down, I’m either
short or looking for a place to enter. I don’t question it or try to outsmart
it, I simply look at the direction in which the charts are headed. I do not try
to pick tops or bottoms. In fact, I will be wrong when they do occur. I do have
some transition patterns I trade such as Bow Ties and First Thrusts (as usual,
email me if you need the rules) but these only tend to kick in AFTER a market
has made a top or bottom. Said alternatively, these patterns set up after a
thrust in the new direction and then look to enter after the first pullback.
I believe picking tops and bottoms is a loser’s
game–period. For example, I have been receiving emails for months telling me about how the top is
here. What’s interesting is that these people aren’t idiots. Most are highly
educated. And, their arguments have been very convincing. However, the market has
risen over 20% since these prognostications first began to appear. They WILL be
right–someday. Remember, predict early and
often.
For more on my methodology, see recently commentaries or go
through my articles and column archives here at Tradingmarkets.com.
Looking to the indices, on Wednesday, the Nasdaq opened
weaker but found its low fairly quickly and began to rally. It found its high
late in the morning and generally worked its way lower throughout the rest of
the day. Once again, it closed at new highs for the year.Â
The S&P put in similar performance but wasn’t able to
close in the plus column.
So what do we do? The fact that the indices are
stalling around their old highs is somewhat concerning. Looking to the sectors,
the action remains generally constructive. It’s almost as if there is a
“rolling correction” within the market. For instance, the semis, which
have sold off fairly hard lately in spite of the continued move up in the
indices, were up nicely on Wednesday. As another example, the homebuilders,
which have been hit fairly hard over the last two days, so far, appear to be
setting up as pullback. Considering the above, continue to focus on the long
side. However, you might want to stick with those sectors that have
corrected (or are in the process of correcting). Further, you might also
continue to consider some issues that can trade contra to the indices such as
the energy stocks.
Looking to potential setups, Encana
(
ECA |
Quote |
Chart |
News |
PowerRating), mentioned
recently and in the strong independent oil & gas sub-sector, still looks like it has the
potential to rally out of a pullback.Â
Icos
(
ICOS |
Quote |
Chart |
News |
PowerRating), mentioned Monday night and in the strong
drugs-“other” sub-sector,
still looks like it has the potential to resume its uptrend out of a Trend
Pivot Pullback (email me if you need the rules.
Centex
(
CTX |
Quote |
Chart |
News |
PowerRating), in the strong homebuilders (and let’s
face it, who wants to live in a weak home?), looks like it has the potential to
resume its uptrend out of a pullback. Wait for an entry though, since the sector
was down fairly hard on Wednesday.
Best of luck with your trading on Thursday!
Dave Landry
P.S. Reminder: Protective stops on
every trade!
“….. The best thing about Dave Landry on Swing Trading is that it is so easy to read and understand. Examples are numerous and the theme of money management – with concrete examples – is repeated throughout the entire book.
..”
Active Trader Magazine, February 2002
Â
