Friday, April 04, 2014

A one day blip?

Today has seen both the Dow and S&P make marginal new highs on an intra-day basis, only to see the markets try and reverse.

Below are daily charts of the FTSE, DAX, and the Nasdaq. The common denominator here is that there are lower highs in place on those indices. This is a warning flag for me, and is mainly the reason why I have been so cautious in recent weeks. Indeed, both the Nasdaq and the Russell 2000 (not shown) are close to giving short signals tonight. On this side of the pond, the FTSE continues to be weak relative to the German DAX. But even with the DAX, it is clear that the pattern of lower highs throughout 2014 is intact.

Now, a new trend simply doesn't happen in one day - changes in trend direction normally take time over several weeks. On a longer term system, this process could take several months. However the charts since the start of the year, based on my own parameters, have shown indecision at best. Hopefully regular readers of the blog will have picked up on this in previous posts such as here and here.

What else has led me to be this cautious?
  • A lack of decent set ups appearing on my scans (both long and short) further indicating that the markets have not been favourable to my method of trading;
  • A lack of performance on the most recent trades taken (with one or two exceptions);
  • The majority of new signals quickly failing.
I would rather be too lightly invested, rather than be over exposed at any one time. By the same token, I have rules limiting how many trades I can open per day, as well as limits on the overall number of position. Why is this?
  • The general markets tend to be choppy and volatile when the trend changes. There can be wild moves in opposite directions from one day to the next;
  • This gives rise to being whipsawed around in individual positions, potentially leading to stops being hit and losses being incurred;
  • Limiting the number of new positions therefore limits drawdowns at these times.
All I can do is control the risk, observe what is happening and act accordingly. I don't have opinions on what will happen - the charts will tell me. If the markets start giving off short signals, then that will mean suspending looking for long trades and looking for stocks to short.

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