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Form a Plan of Attack


The key to navigating any environment is simply understanding in which direction we are heading in the long term.


Good morning Minyans,

One of the most important traits a trader must possess and something you will see me write about often is staying open-minded in order to remain flexible. Now that we have all had a day off to ponder the market movement, our economic state of affairs as well as the dire technical picture, I am sure most are coming to accept what looks to be the inevitable; a longer term down trend. Once this has been accepted and embraced the pro-active trader then focuses their attention on a plan of attack to not only weather the conditions but profit from them as well.

While this is normal, it is at this very juncture where remaining open minded and flexible is of the utmost importance due to simple fact that regardless of what may be developing as a longer term down trend, the tape will still be comprised of extreme thrusts higher as shorts cover and others reallocate funds. These moves can be big and one who remains fixed only on the longer term trend can easily be hurt should they be leaning too far to one side. Just as all traders are starting to embrace the downside at this very moment, it makes sense that Mr. Market will look to throw us off track in the near future through one of these counter trend rallies.

The key to navigating any environment is simply understanding in which direction we are heading in the long term. This is powerful within itself because it helps to understand what the general theme should be. While over the past 5 years the prevailing idea has been to buy weakness and sell strength, if in fact we continue down the path we are headed the new strategy will be for us to short strength and cover during weakness. Ironically, this is actually the same in that we are buying low and selling high however rather than be in on the broad upswings, we're seeking to be on the sidelines during the moves higher and in the market during the broad downswings.

Jessie Livermore tells a story of a wise trader during his days who, when asked, would simply relay to the inquirer the prevailing trend. I would imagine this irritated some and this man more than likely wouldn't have been a successful author however as a trader I suspect he did very well.

One of the biggest problems average investors face is simply not understanding these rules and rather than keep the broad trend in perspective at all times, they ride the emotional roller coaster as they go through the ebb and flow of the intermediate movement.

Ironically, I write all of this while the S&P 500 remains in a longer term uptrend and therefore may be a mute subject altogether however it is something we must understand should these levels be breached. If we were to approach Jessie's friend today, he would say "It's a Bull market" and leave it at that.

So while it is very important for us to understand how we should psychologically approach a trend change, we aren't there yet and therefore while we may start to embrace the possibilities for the future, we must remain flexible and open minded to the possibility that this is actually another dip in the longer term trend that goes steadily higher.

  • The NASDAQ has come down very sharp off its 10/31 high and the leaders are looking very precarious with Research in Motion (RIMM) and Apple (AAPL) hugging their 50 day moving averages. Will this be the area that holds or will these stocks succumb to further pressure and take the index down with it?

  • Baidu (BIDU) is sitting in a bearish pennant looking very dangerous on a push through $301.50.

  • Top tier solar stocks have held relatively well with First Solar (FSLR) and Suntech (STP) leading the way. Sun Power (SPWR) and Memc Electronic (WFR) are sitting on their 50 days and it will be very interesting to see if they hold these levels.

  • I suspect retail will bounce on the heels of Black Friday. Once the dust settles there are many in this area that look ripe for shorting. At the top of my list are: Guess Incorporated (GES), Men's Wearhouse (MW), Startbucks (SBUX) and Coach (COH).
No positions in stocks mentioned.

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