Why I don’t trade breakouts

Dave Landry is principal of Sentive Trading, a money management firm, and a
principal of Harvest Capital Management. Mr. Landry is the author of two top
selling books,

>Dave Landry’s 10 Best Swing Trader Patterns And Strategies

>Dave Landry On Swing Trading.
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On Friday,  the Nasdaq sold off in early trading and  then
chopped sideways throughout mid-day. Finally, it resumed its sell off going into
the close. This action has it closing at fresh multi-month lows. 

The S&P generally worked its way throughout the day.       

I’ve taken a lot of heat lately for being bearish. As a trend follower (or as
some say, a trend following moron), it was tough explaining to everyone why I
wasn’t buying a market hitting 5 year highs. In case this is your first column,
here were my reasons: First, tech wasn’t joining in for the ride. Second, the
S&P was held up mostly by commodity related stocks–this is not what
a bull market is made of. And finally, nothing has been following through for
months–So, why should I have trusted  the market to follow through?  

Speaking of follow through, this week exemplifies why I do not trade breakouts. Everyone and their
brother had to own stocks last Friday. However, there was NO follow through
early in the week and  you know what happened late in the week. 

So what do we do?  Tech remains a wreck. And now, the
aforementioned commodity related areas are beginning to slide. If they continue
to slide, this will help to sustain the S&Ps free fall. And if this
happens,  I think selling
could beget more selling. Why? Well, as we approach new lows for the year,
anyone who has invested  in stocks in 2006 will be faced with a loss. Also,
the more the market slides, the more overhead resistance is created (a place
were investors may look to get out at breakeven). So should we short like it’s
1999, er, I mean 2000? Well, if you’re not already short, you might want to hold
off–it’s dangerous to sell into such an oversold market. No problem though! On
the first bounce, we will see a plethora transitional setups (i.e. early
trend).  And if you are short, trail and scale. 

No setups tonight.

Best of luck with your trading on Monday! 

Dave Landry


P.S. Reminder: Protective stops on every trade!

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