Traders always need to hone their skills to seek out new chances for another high probability outcome. It’s not enough to be comfortable with success of a trade gone by.
You’re only as good as your next trade and your ability to find good setups. Each day the market provides more clues, more details and setups to take advantage of.
MY BEST EDGE
As a combination short term to intermediate term swing trader, I find my best edge by pairing technical analysis across markets with opportunities that I see caused by extremes in sentiment.
By the very definition, you don’t get to see extremes on a daily basis. Sure, there are always short-lived price spikes due to news that are absorbed in a matter of minutes, but that sort of “extreme” is transient, without long lasting effects on the participants of the market. Usually this takes time, sometimes weeks or months to give you an edge for a relatively small window of opportunity. I believe this is one of those times where you must swing when the “fat pitch” comes your way.
NOW IS NOT THE TIME
At a time when equity markets are at or near all-time highs, it’s not a time to go fully long. Yet seemingly every single day there is a new anecdote that makes the individual feel like they are about to miss out on something fantastic. Bullish sentiment is prevalent; this alone doesn’t make it wrong. Paired with seemingly endless cries of “just buy the dip,” as every single dip continues to be bought up, and no news being bad news, something isn’t adding up.
The same people that were saying to sell every rally are just now coming out of the woodwork to say it’s time to buy stocks. Even celebrities and teenagers are starting to get into the investment game on CNBC, claiming success without having even seen a full market cycle. Even the housing market is trying to get back into the spotlight, with news of new housing starts continuing to rise.
I DON’T BUY IT
I don’t buy it one bit. Foreclosures are still on the rise in middle & low income areas, new home builders are flooding the market with supply, state and local governments need higher tax revenue, and this doesn’t equate to an attractive purchase. Yet — optimism abounds!
THE TECHNICANS
Now let’s look at the technical side of things. I call shenanigans. If you are to put on a trade, especially a counter-trend trade, you better have data to confirm your outlook. Take a look at a chart of the E-mini S&P 500 futures ($ES_F) paired with that of 30-year bonds.
What’s interesting to note is there are three nearly identical uptrends and measured moves in the S&P as we are approaching all time highs. At the same time, bonds have come out of fashion, yet the reality is that bonds are at strong weekly support and nobody seems to want them. Combine this with literally extremely weak Yen fueled rally in the Nikkei’s 40% run since November, and it makes for a perfect storm that awaits a dollar/yen ($6J_F) squeeze, bond rally ($ZB_F) and equity correction to scare even the strongest SPY bull.
HAVE A PLAN
Whenever I bring mention to these points, I’m asked “why fight the trend?”
Perhaps George Orwell said it best: “Whoever is winning at the moment will always seem to be invincible.” Trends with sentiment that have run amok tend to also break down quicker than they let the last boat riders out in a tide that lifts all ships. You don’t have to play the short side aggressively like I will be, but make sure you have a plan to protect if you’re not willing to see the coming correction.
This bear will hunt.
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