Focus on Your Profits and Losses When Trying to Time This Market
Casual market observers tend to think that aggressive traders love the days when the indexes suddenly make giant upside moves. While many traders are enjoying some sizable gains, there tends to be plenty of grumbling and many complaints by those who are struggling to keep pace with the 3.5% jump in the Dow Jones industrial average. It is not enough just to be holding long positions on a day like this, it is necessary to be heavily long to keep pace.
While the price action is downright giddy, there is significant unhappiness by both bears and underinvested bulls. Ironically, it is these unhappy traders who help to keep the action running as they try to reposition a little, so it doesn't feel quite as painful.
From a technical standpoint, the indexes are now at the very top of the trading range, which has developed over the past month or so. Typically, at this juncture, many traders are looking for a failed breakout and will look to sell into a move over recent highs. The thinking is that the buy stops that are triggered on a new high will exhaust the buying pressure and cause a reversal.
One of the big benefits of trading range action is that it produces better stock picking. I've mentioned a number of times lately that less correlated action is better for trading. Unfortunately the strength today is highly correlated, which means that it is primarily index driven rather than driven by individual stocks. That suggests that it will be difficult for the action to continue as the leadership is more diffuse.
My main focus here isn't to try to time the indexes, but to manage my individual stocks. I don't want to sell on the basis of the indexes, I want to based on the price action in the stocks I'm holding.
There is no better technical indicator than your profit and loss statement. If you are making money then its usually a good idea to keep looking for buys, if you are losing money then it is time to make some sales. It is a very simplistic approach but it works better than almost any other method I've tried.
At the time of publication, DePorre had no position in the securities mentioned.