After last Wednesday?s brief pullback, the market resumed its upward trajectory, this in defiance of those skeptics who continue to espouse their bearish views. I’m sure at some point the market will experience a considerable correction or even go into a full- blown Bear market (we haven?t had one of those in over 4 years). For now at least, every piece of news is being spun positive. The inflation data, the housing data, good news is good news and bad news is good news. The glass is half full. This is emblematic of a market in a bull phase.
As traders, my view is that we should take our directive only from the market itself; not the media nor the pundits nor anyone else for that matter. I believe a trader’s job is to get good at identifying patterns, executing trades, managing those trades and going along for the ride in whatever direction that maybe. This, of course, is much easier said than done.
Why is it that so many traders try to ?outsmart" the markets? I think it has to do with human nature and particularly with ego. We as human beings like to be right and hate being wrong. We take it very personally when we?re wrong and hence avoid it at any cost. Unfortunately for new traders the tuition to learn this lesson can be very costly. Successful trading goes contrary to human nature. Successful traders quickly admit when they are wrong. They view losing trades as learning experiences and hastily clear those trades from their memory so they can move on to the next opportunity.
The common rationale I observe among traders is that if a market has been rising or declining for an extended period of time and thus becomes overbought or oversold, it cannot keep going and thus has to reverse. We have all at some point in our trading careers had the painful experience of finding out that the market can keep going farther and longer then we or anyone expects. The point to stress here is that to improve as traders we must strive to devoid ourselves of any opinions and trade in the direction of the prevailing trend.
Let us move our focus to current market conditions. In my previous post I wrote about the ?battleground? in the ER2 which was designated as the Feb 27 down gap. As we all know by now the Bulls took the spoils on this one. We have closed this Gap, erasing the entire decline since late February. This finds the ER2 very near the prior highs at 838. By most measures the ER2 has been overbought for the last two weeks, yet it continues to rally. (See chart below) This is a fine example of a market that continues to trend unmitigated. When will it stop? Nobody knows.
The ER2 moved up a whopping 29 points in only 4 days (12 of those points came on Thursday of last week and another 6 on the gap on Monday). Much like a sprinter needs to take a pause to catch its breath, so does that market at this point.
We see on the 10 min chart below that the ER2 actually retraced the 23.60 retracement today before heading back up. It would not be surprising to me for the ER2 to come down to fill that gap left on Monday which also corresponds to the 38.20 Fib retracement.
The bottom line: We are moving into the meat of the earnings season and also have options expiring this week. My take on the market remains the same as last week. As long as the market is able to sustain its upward trend I will have to favor the long side. In the short?term (5 days or less), the market may need to consolidate or pull back slightly as previously mentioned. This morning as I finish this piece the ER2 will gap down on disappointing earnings reports from Yahoo and IBM. I will be looking at this as a buying opportunity.
So until next time, I hope everyone has a profitable week.