By: Scott Redler
Broken patterns can be the most painful trading scenarios in the business if you let it get out of control! You can be wrong and be fine, but being stubborn is what gets you in trouble.
In the Morning Call today I showed some comparisons of the head and shoulders patterns
from 2009. During May-July a smaller similar pattern ignited and failed, then took off to the upside. It was a very similar pattern, it broke the neckline and hovered below for a few sessions. But then Meredith Whitney came up and Upgraded the banks. Within an hour the market flew through the 890 area. Those not stubborn admitted they were wrong and stopped themselves out and COVERED SHORTS! Others fought the market for months and got put out of the business. You are never more powerful than the market!
I’m not saying it will play out in exactly the same way, but the pattern looks similar on a bigger time frame. We hovered below neckline for the past few sessions, the whole world
got super-bearish, including me. And now we ignited back above 1040-1043. I don’t know what this will lead to, but I covered because it is the prudent thing to do. I will evaluate the action to see if this rally can stick, and what it will lead to.
I don’t think we blast off like that July, but I’m disciplined enough to act and ask questions later. We didn’t know when Goldman Sach’s was accused of fraud how long the stigma would last but we sold and asked questions later . When Massey Energy had the mine blow up (stock price around 45), we sold and said lets revisit later. You even had many chances to sell BP before the stock was cut in half. Bottom line, if something changes, or you step on a landmine, you always have some time to lose a limb without blowing up. Always follow the rules to stay in the game.
