Over the years I have learned to be wary of strength after 8-12 weeks move. For short term tactical swing trades it always helps to have your strategy aligned with the anticipated market direction. Mid July is when many of the stocks stabilised after a brief and vicious correction. Since then the DOW, S&P and NASDAQ have creeped higher. Along the way there were many good opportunities for trades lasting months to weeks.
It always helps to buy on negative sentiments. In July the sentiment was extreme. Now many of the thesis's on which the July correction precipitated have proven not to be necessarily true. Now there is a gradual realisation that things are not as bad as proclaimed by the bears predicting doom.
The home builders is a classic tale of how you should discount news and look at the tape to make your decision. Everyday the bears come with more dire predictions for home building stocks, but the stocks have not budged and in fact rallied. A clear lesson in how trader should think differently from TV pundits, analyst, and newsletter writers. That is the kind of case study one should write down in a trading journal for future reference. You will find same things repeating in other sectors again during your trading lifetime.
The energy sector offers another good lesson on how to think like a contrarian and trader. This time it is on a bullish side. There was not even one analyst who was predicting a drop in oil prices a quarter ago. Now they are falling over each other to explain why oil is down.
Now we are at an interesting juncture. There is the quarter end, there is an upcoming earning season and there is the last quarter of year with the tax related issues for many institutional investors as well as individual traders. Analysing them correctly is the key to anticipating the likely market direction. Many times the quarter end strength is deceptive. Somewhere waiting is an ambush. So I have trimmed my positions and will start positioning for shorts sometime soon. At the same time I am willing to go long some selective earnings/momentum plays.
Whether you are a Macro trader or a micro trader, developing a skill in anticipating the possible market direction can pay rich dividends. Many of you have asked how to develop the skill of anticipating the market direction. I have replied to many of these emails. I am planning to schedule a online chat sometime on Friday with some of those who sent emails. If you are interested please send an email and I will let you know about the time and other details.
Don't trade based on this analysis. This might be completely wrong.