When crafting a trading strategy, note the levels of each "higher low."
Good morning and welcome back to the freakfest. This has been one of the nuttier environments in recent memory and the price action is enough to drive a trader insane. In an attempt to assign a method to the madness, I asked the Menagerie to join me for a group therapy session after the close. It went a little something like this:
Hoofy: What was that noise? Did you hear that? They're out there again...I can hear them!!!
Daisy: (stroking his head) Shh...it's ok, I'm here. (Looking at me) Toddo, who lives like this? It's just not right!
Boo: (looking at Hoofy and Snapper) Hey nurse Ratched, cry me a river! Which one of those nuts has any guts? Did you see them yesterday? They walked into the session yelling about the softer side of Saddam, the big weekend capture, the inevitable breakout of the SOX--then when push came to shove, they couldn't walk the walk!
Toddo: Settle down critters, we're all on the same team here. Hoofy, take a deep breath and relax--nobody's trying to get you. Traders tend to get bullish when they see green and bearish when it's red--sorta like a financial Pavlovian response. That was fine during the mo-mo go-go days but it's a recipe for disaster in a choppy tape. That's why selling hope and buying despair has been profitable--it's zag city out there!
Sammy: But what if the tape spends the majority of it's time nestled in between high hopes and deep despair, what do you do then?
Toddo: There's no blanket answer, Sammy--different folks have different strokes. For my part, I spent the time "between the cusps" looking to grind out performance. That could mean finding the "easy" trade each day, looking for individual ideas or, most likely, doing less until a perceived edge is identified. The hardest thing for a trader to do is not trade. The ability to discern an advantageous risk/reward is the key to profitability.
Boo: (shaking his head) I must be crazy to be in a loony bin like this. Look Toddo, enough with the Zen nonsense--it's really quite simple. The market has spent the last month churning back and forth under resistance and all it's done is embolden the bulls. Look at the flow the last two sessions--they've been buying calls with reckless abandon! Why? Because they think we're breaking out? Because they fear missing the rally? Because there's clarity to the world? Think about it--nothing has changed except the alleviation of the oversold condition!
Hoofy: (getting pissed) I wouldn't be so smug hairball...if last week taught us anything, it's that the sentiment can shift on a dime. I'll give you yesterday's session--it was quite a shock treatment. But I'm not done fighting and you'd be wise to recognize the upside risk to the tape. There's a fair amount of bears floating around and the short side isn't exactly novel anymore.
Sammy: You've got a point Hoofs but you've gotta admit that we're a long way from a disconnect in that regard. If you're looking for historical precedence, read some of Snoop Tony's work--he's made some salient observations.
Toddo: I concur, Sam. I always like to juxtapose my view against Tony's intermediate work and see if our ducks line up. I've said it before--right or wrong--I don't think the bottom we've seen offers a stable enough foundation for a sustainable bullish phase. I'm not claws to the wall short--I'm admittedly a scared bear--but absent a duct-tape zag, I've been trading from the short side. In a perfect non-perfect world (follow?), we'll get our downside resolution, take out those shaky October lows and get some REAL despair. If (big if) that happens, I think Hoofy's got a real good chance at a nice trade. One...
Sammy: (cutting in) ...step at a time. We know Toddo. Thanks for taking the time on a Monday night--we know you must be fried. Go home and turn it off--we've got four more sessions to battle and we need you to be sharp. Daisy, take Hoofy home and get his mind off trading. Snapper, go toot your horn--I know how music soothes your soul. Boo...go do whatever it is you do when you're not busting our chops!
With that, we all got up and shuffled our way to the door. It always helps to talk it out and I could tell by the looks on their faces that they were somewhat relieved. It was good to see the critters relax a little after battling the fakakta Minx. Balance is an essential element of perspective and perspective is necessary when making lucid, intelligent decisions. They had a long day at the office and a little R and R was just what the doctor ordered--for critters and humans alike.
Good luck today.
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 email@example.com.
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