Good morning, and welcome back to the tapes of wrath. We fire up our turrets this morning to find the European Bourses putting their heads down and trying to brave the vicious winds. Our friends across the pond will certainly take their cue from the stateside futures, but the early action warrants attention nonetheless. Pay particular attention to the German DAX, it's been a good "tell" for Europe and it just turned negative. Meanwhile, in the land of the rising sun, the Nikkei actually eked out a 20 point gain! Wasabi!
As we roll up our sleeves and prepare ourselves for another day action packed adventure, I wanted to quickly touch on the subject of style. No, I'm not referring to the pseudo-preppy wannbe biff outfits that Lappy wears everyday, I'm talking about trading style. Some professionals believe that a consistent method is the best approach to trading and I would say to them "If it works for you, don't change a thing." However, I've always been of the belief that you must adapt to the environment you're in and augment your approach as a function of the crosscurrents.
When I was a young buck working on Chuck Feldman's derivative desk at Morgan Stanley, I was taught to build core positions and "trade around" them. As the bull matured and the bubble grew, momentum trading was all the rage and the only risk to the tape was not being involved. Ironically, it was during that time of blind belief that discipline was needed most and you're trading style needed to be an extension of that Sure, it's easy to say (with the benefit of hindsight) that the "easy" trade was to ride the bull to NASDAQ 5000 and flip to the short side---but if we learned anything during that period, it's that picking the direction wasn't good enough---you needed to nail the timing as well. The ability to shift your style, hit for average (stick and move) and emotionally accept the prospect of missed opportunities served many traders in good stead. Indeed the ranks have thinned substantially since then and the notion of a "bad" trader is quickly becoming a memory.
Taking our discussion one step further, those that live the tape on a daily basis must make more granular choices. The goal, when trading the nuances, is knowing when to be the salmon and when to be the stream. Sure, the ebb of the tape will serve you in good stead when it flows at your back, but taking the other side of the herd can be a profitable endeavor as well. We often talk about "selling hope" and "buying despair" and, when timed right, that's been a money trade. When the cusps of a move are identified and the psychological metric reverses in tandem, you're looking at a powerful combination. Keep in mind, please, that we're not talking cycle turns...we're simply talking tradable moves in the market. How and if you choose to approach these is unique to your particular risk profile and time horizon.
After this latest precipitous decline has brought us within schvitzin' distance of the July lows in the S&P (SPX 775) and banks (BKX 602), one of two things will likely happen. As a function of the oversold nature of the tape, the obsessive focus on these levels and the high fear factor (I'm VIXing!), the market "might" hold that zone...perhaps sparking a reactive rally to keep the bears honest (as we saw on the first test of S&P 800). If this happens, these "levels" will become inherently weaker (with each test) and we'll need to remember this the next time we visit these price points. Conversely, an immediate breach of this zone will likely beget more selling as the technicians focused on the "double bottom" take their loss. Ironically, this second scenario, while painful in the near term, is more desireable (in the big picture) as it could create the flush necesserary to begin a new bull "phase."
As you know, this column is NOT trading advice, it's about education and information. The reason I share my "eyes" with you is to add value to your process and allow you to "see" what I'm looking at. The point is, the style you employ should be an extension of your view while incorporating the discipline necessary to survive if you're wrong. My goal, again, is to bait the hook, hand over the pole and allow you to catch some lunch. Whether you're playing from the long side, the short side or sitting this one out, the mechanics of your style are as important as the results.
Good luck today
No positions in stocks mentioned
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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