Tuesday, August 23, 2011

Sometimes Flat is the Best Position

With today's 3.2% up day on the S&P,  my warning yesterday for profitable shorts to unwind their positions proved prescient. We bounced from oversold levels and the bullish Histogram divergence and Graveyard Doji proved too much and the bears threw in the towel, at least for a day.

My indicators have not yet turned to "Enter Long" from "Exit Short" so I still have no comfortable entry for either a long or short trade. Wednesday should tell us more. I will be watching to see if we break the falling wedge we are in or if we work to a lower low with a more classic bottom and more pronounced divergences. This latter scenario would actually strengthen my belief that a rally back to the Head and Shoulders neckline will be coming in the next month or so.

It's important to note that if one goes counter-trend in a volatile environment, it can only be done following strict rules. I only do so when there are clear divergences on the MACD, as it is the strongest technical indicator around. Even then, I trade just a very small portion of my account. Fewer shares with a wider stop if the reward outweighs the risk. Trying to catch a bottom is perilous and has destroyed better traders than myself. Discipline is all that keeps us in this game for the long haul, doubly so in when going against the primary trend. Until then, I'm sitting tight and flat until the market tells me which way to trade instead of listening to my own biases.

Good night all! Will update more tomorrow.

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