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Strategies for an Uncertain Time


If Toddo is right, this is going to be a long, hard road!


Good morning and welcome back to the city of critters. With geopolitical concerns and fundamental invisibility dampening the collective psychology, last week's marginal losses made it three in a row for Boo's crew. Now, with the war drums beginning to beat a bit louder, we awake this morning with a handful of questions and a head full of concerns. These are difficult times, my friends, and the financial landscape is treacherous. Finding a profitable path has never been a more daunting task.

While nobody can consistently outthink the Minx, successful trading is a function of the proactive assimilation of our metrics. Every trader has a unique style and while I can't tell you what will work best for you, I share my thoughts with the hope that it adds value at some level. I often qualify my approach as it's not meant as financial advice. Rather, it's a look into my structured thought process as I attempt to view the big picture as a series of little pictures. By operating in this manner, my goal is to take (solid) steps towards profitability while limiting my mistakes to trips rather than falls.

The first decision we've gotta make is which critter we're dancing with. As you know, I've been slipping in and out of my bear costume lately as the charts I watch have "broken." Last Wednesday morning, I (humbly) opined that a rally towards S&P 870 would be a good fade (read: sale) and begin a hard sell-off (before eventually giving way to a stiff rally). I used that level as it was, quite simply, the most important technical development to cross my screens. When the index broke that zone to the downside, support became resistance and the tenor of the tape shifted in Boo's favor. Couple that with the troublesome pattern in the SOX (head and shoulder break), the brief but confirmed violation in the BKX (triple bottom at 725), the lethargy in the NDX (breached the October trendline) and the high level of complacency (I.I bulls at 50) and, well, you can understand why I want to keep my right hand up.

That's not to say there won't be wiggles and jiggles as we find our way. The market remains oversold and, as such, we must appreciate the potential for a bungee. Further, I've got stochastic buy signals in almost every sector I monitor and, over the many years I've followed these guages, they're eventually proven correct. As such, and as I always attempt to line up as many ducks as possible when forming a thesis, I'm not being too aggressive with my capital commitment. I still want to trade with Boo (for the time being) but if the S&P takes out S&P 870 to the north side, disicpline dictates rethinking our thesis.

Until that happens (in the near term) or we get appreciably lower prices, my inclination is to fade rallies. If the Shim Sham thesis unfolds, we'll have an opportunity to add inventory at lower levels for the eventual upside trade. However, that's putting the cart before the horse and if we're to successfully walk our journey one step at a time, we've got to focus on the days (and trades) in the same manner. There remain a ton of crosscurrents and, with them, substantial risks to both sides of the tape.

Along with the technical issues, fundamental uncertainty and ever-changing psychology, our jobs are complicated by the geopolitical uncertainty and looming threat of war. My contacts--and take this with a grain of salt as virtually nobody can game this catalyst--tell me that we ARE going into Iraq and that the most likely timeframe will be between February 20 and March 20. Obviously, this is speculation and subject to change but, as it stands, that's the period I'm keeping in the back of my mind. It remains my opinion that the market's reaction to such an event will be a function of our field position when (if) it occurs. In other words, if we're grossly oversold, an initial rally wouldn't shock me. If we rally in anticipation of an attack, I think it'll set up for an "easy" fade (read: sale).

As I was thumbing through Barron's over the weekend, I noticed the charts in The Trader section of Market Week. What jumped out at me, and this shouldn't come as a shock, is that both the Dow Jones and S&P are "churning" under support. This type of (sideways) action is often mistaken for basing (particularly after a significant drop). However, the half-empty crowd will argue that this type of action is a simple alleviation of the oversold condition and, as it's occuring beneath technical resistance, I have a hard time arguing with them.

All of these arguments beg the natural question: If I have this thesis mapped out in my head, why am I not fully dressed in fur and taking a shot? The answer to that question is simple--I appreciate and respect both sides of the tape and, rather than betting blindly on a thesis, my goal is to identify situations with a compelling risk/reward profile. That's not a directional call, mind you--it's a view on the entire dynamic of money management. If I'm correct in my big picture beliefs, we remain in the early innings of the bear market and capital preservation will be an integral component of any successful strategy.

With that said, we won't reach tomorrow without getting through today and each day is full of opportunity and promise. Attitude is everything, Mon Frere, so roll up those sleeves, pour yourself a fresh cup of joe and focus on our talk at hand. This business surely isn't as fun as it used to be but that's no excuse for mental errors or lapses in judgement. With a little luck, a lot of discipline and the patience to wait for the right pitch, we'll find our way to better times and better tapes.

Good luck today.
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