Sunday, January 15, 2012

It's not the charts, it's what mood the market is in

Almost every break-out we had in our newsletter last week worked, from copper stocks, fertilizer, biotech, oil, tech, no wonder what sector, it ran.  They were the same patterns we had in second half of 2011 which often didn’t work.  Same charts, very different success rates.   Why?   Sentiment of course.  We wrote a few times in the last few weeks how this has been one of the most “benign” markets we’ve traded in for a long time (since earlier parts of 2011).    Even the gap-ups would offer opportunities, as stocks would be faded to alert numbers, and then spring like a rabbit up for fantastic moves.   Dips are shallow, buyers are aggressive, and everyone is a genius.       Indices go to resistance, stall, digest and then go higher the next day.  Enjoy it while it lasts because it never lasts for too long.
We’ve never been interested in mechanical strategies exactly because of this — in some markets the exact same chart pattern fails 80% of the time, while in other markets the same pattern works spectacularly for 80% of the time.    Figuring out how benign/generous a market condition is for us is integral to our way of trading.     In easy markets like this mistakes are forgiven, as long as they’re on the long side.   You chased up?  No worries, after a shallow dip stock goes right back to the highs.   What is essential for us now is to look for signs of when this mood starts to shift — the first will be a dip that is not bought, i.e. a trend-day down.   That could start shifting the psychology.
We watch our favorite tells all the time,  the Euro ($6E_F),  silver ($si_f),  bonds, copper, etc, but in the end, all decisions defer to price-action.  How does a stock act at support and resistance is ultimately the most important piece of information for our type of trading.
On a different note some of you have noticed that we’re not “tweeting” that much during session hours — this was part of our 2012 resolution, to keep our focus on trading during trading hours and make appearances more during after-hours.    If things get less busy we’ll probably tweet more but trading will always be priority number one.    We’re grateful to be part of such a wonderful community but after the honeymoon stage of social media is over, the next pivotal stage to conquer is finding a work/life balance.