It has been a rough couple of weeks in the stock markets with big head fake swings in either direction. Traders have heard the adage "sell in May and go away" and wonder if they can make it through a summer that may be difficult to navigate. While summers have been known to chop these last few years, trends can still be found reading candlesticks and other methods of trading can be profitable in a choppy market.
While there are several ways to tread these waters, there are a few important things to consider for newer traders trying to make their living in the markets first.
Traders should have at least a year's worth of living expenses for when times get tough. At any given time, no matter how good you are as a trader or how many strategies you have to employ in various types of markets, there will be times when going to cash is the best move. If you can't afford to take a few weeks (or months) off each year and be in cash, don't quit your day job. If you already have and you are counting on trading to provide your income on a month to month basis, you are setting yourself up for a difficult time. That pressure to perform will not help you to keep your emotions at bay. That said, there are ways to navigate various markets.
If you are getting frustrated over losing money these past couple of weeks, stop trading. All traders should take the time re-evaluate what is or is not working during a given market. When losses start to pile up, the best move is to stop trading with real money. Preserving capital becomes your priority when you are in a slump. Paper trading is a great way to get back on the right side of the tape without risking capital along the way. All traders lose at some point. I have had an epic year but these past couple of weeks have vexed me with some losses. For months, followers have been teasing me that my results seem unbelievable, but as soon as I have a couple of weeks of losses, those same followers start criticizing my analysis. Overall, my results for the year are still quite good and my rules and risk management skills have kept my losses small.
My analysis these past weeks of the overall market has been based on a couple of factors. One is, of course, the candlesticks and their patterns. But with huge swings in both directions from one day to the next, those patterns become difficult to read. I can only read the market as I see what it is doing. I do not have a crystal ball and cannot tell you what the market will do today or tomorrow. I can only look at what it did yesterday and in the previous days, weeks, months etc. The strong run in the bull market of 2013 has had very mild corrections along the way. Each time, I stopped trading and got ready to take a bearish stance, and each time, the market came back to rally with a continued zeal. This time however, the correction has doubled back after touching the 50 day moving avg and current up-trend line.
Yesterday's morning report included a cute photo of a girl in a skimpy bear suit. I thought it would be fun for the idea that a bearish summer would require a skimpier tuft of fur. But I did NOT say that I was bearish on the market currently which some seem to have intuited. I laid out what it would take for me to become bearish on the market and to believe that we are in for a deeper correction. I said that if the market closed below the 50 day sma and the up-trending line, AND then went lower the next day as confirmation (because every candlestick signal requires confirmation) THEN and only then, would I get on board with the idea that this market is in for a heavier downside this summer.
As it turns out, bulls showed up in full force yesterday nearly completely negating the previous day's very heavy red marubozu candle with a strong even larger green one that nearly engulfed the previous day's in all the indices funds (SPY, IWM , DIA, QQQ) and SPX and DJI actually had engulfing bullish candles. Talk about a head fake!
For all intents and purposes, yesterday's action turned my trade timer back to green but with caution as we have seen the quick turn around this market can make. I also note that a descending triangle is forming in SPY with the flat support line at the first fib retracement line. (Hat tip to Victor in the chat room for pointing this out.) This triangle falls within the symmetrical triangle which uses the uptrend line as its support line. It is impossible to know which condition will win out and which team will take control - Bulls or Bears. Again, all I can do is watch the tape and trade what I see.
It's not the first time we have seen this kind of action. In fact it has become somewhat typical of the past few summers. Day trading is possible if you are on the right side of the trend but swing trading becomes more difficult. There are two ways to go here. Either you have a mix of longs and shorts in a lighter portfolio, or you stay out of common equities until a definite trend can be defined.
The other strategy I like in this type of market that always works really well for me is trading options for credit. I have a few trades on that I put on this month that are working well and I will be looking for more of these trades until a trend ensues again.
Here is the SPY chart. Good luck everyone!
Click on chart to pop out.