Thursday, July 17, 2014

Warning signs?

A couple of months ago I put up this post about two-way markets. This is again relevant as the Dow made further new highs early on today, while from the beginning of the month the much broader based Russell 2000 has fallen right away from its highs and is trying to move downwards (charts below).

In Europe, the FTSE and the DAX have also shown weakness over the last couple of weeks. The French CAC40 has shown weakness over the last 6 weeks or so. Some of these charts are showing signs of a pattern of lower highs and lower lows. 

Over the last month or so, what trades I have taken on the long side have tended to fail. Fortunately, we take our losses very quickly which has kept the loss of capital as small as possible.

It should be clear that, if I traded using longer term parameters of timeframes, then the current market action would probably be viewed simply as noise within a long-term uptrend. However, on my own timeframe, and with my parameters, it is not.

The mantra so far this year has been patience and discipline. It is time like this when following your trading plan is of utmost importance. When the markets are similar to the early part of 2013 (a stable, quiet uptrend), the conditions are much more favourable, and to a degree you might be able to get away with a few trading mistakes.

As a result of all this, I have been a lot lighter invested so far this year - you can see this on the trading frequency graph shown here. The last few days I have been 100% in cash, awaiting further developments. This will remain the case until the picture is clearer. I would far rather wait for the odds to be more favourable before risking further capital. As the old saying goes "I'd rather be out of the markets wanting to get in, instead of being in the markets wanting to get out."

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