Weekend Review July 25th, 2014

Market Wizard Wisdom

I often write about being in cadence with the market and attempting as best as possible to trade when my time frame is in sync with the market.  Unfortunately my discipline often wanes even when all the data I follow indicates it's time to: slow down, be more selective, increase patience, or even get out of the market all together because I'm not in tune or the market is in a difficult period from my trading style.  I've become increasingly aware that these are the times to isolate myself, turn down the noise and influence, and perhaps just out right step away for a day or two.

I've also written about being a fact based trader and insisting that my trading record be the ultimate determinant of whether this (in sync or not) is true or not because it is the only factual information I have.  Much else is merely my belief about the market as I perceive it and the tools I use to hone in on periods where I can exploit my edge to maximum effectiveness.  However, even when all indications suggest it's go time, there's no unwritten rule that I have to be successful during this time and make money, just as when my indicators say lay off the gas there's no fast rule that the market should reverse.

I consider my vehicle selection to have vastly improved, but the window of opportunity I was expecting this week and attempted to take advantage of shut exceptionally quickly.  The trades I took lacked follow through and traction.  I intentionally undersized my positions to deal with a potentially chop and slop environment, but perhaps it would have been better to have stepped aside as the bigger picture seems to be having a larger influence on my time frame than I anticipated.

So, when trades are now working and I consider my selection fairly solid, and my trades are not making money, I must defer to the market itself as being unhealthy.  In commentary this week, Zortrades post In Case You Are Struggling This Month is well worth a read as he breaks down multiple data sources that inform what stocks are actually doing and not merely what we think we see they are doing.  There are times when the maxim "Trade what you see," is useful and there are times to realize that what we see has often put an innocent man in a line up behind bars for life.  We must be aware of the deception of our senses.  Merely because we see most indexes churning up to new highs doesn't mean the body of stocks underneath are behaving in a healthy manner.

Going into next week I continue to see signs of caution on my time frame and will stick to a primary cash strategy and avoid long positions until things clear up.  If anything I'm actively looking for an opportunity to go short index ETFs because there are increasing signs that the market is vacillating in a manner that suggest it is waning here and losing steam.  One sign I am looking at is the number of stocks in my universe that are breaking down has been increasing in July suggesting slow distribution.

Break Out/Break Down

There is also some vacillation on higher time frame breadth readings I follow.

MM

Primarily what I take from this is that there are fewer stocks breaking out and their potential for gains on my time frame is limited at best.  As an overall 50/50 trader in the best of times, down shifting into a 40/60 or worse during these periods is a recipe for draw downs.  I've experienced periods of explosive markets where I've struggled to make dimes, so in unhealthy markets even expecting nickels could be asking for pennies.  There are larger dynamics at work in the market currently that are not conducive to my trading and sometimes we just have to admit this to ourselves as a reminder, especially when noise around us suggest that there's gold to be vacuumed up at will.