ART & SCIENCE of Active Trend Trading 4-13-2014

Good Day Traders,

As the weekend quickly slips away it’s time to pull together some thoughts about the current market condition and perhaps life in general.  The big question on many traders’ minds is “where’s the bounce?” and the follow-up question, “will it be just a sucker rally?”  As always, the quotable answer to each of these questions is—Time will tell!

During April the Mid-Week Market Sanity Check Webinars at ActiveTrendTrading.com will provide training on Candlestick Reversal Patterns.  A potential trend change is a great time to brush up on this topic, so, for those who are interested in learning more about how to interpret Candlestick Patterns properly, register at ActiveTrendTrading.com or drop me an email at dww@activetrendtrading.com.  Lastly, every Friday at 1:30 p.m. Pacific, the Active Trend Traders is one of the hosts for a free “Market Stock Talk” Webinar.  I want to invite you to attend register here:  Register for Free Webinar

Please keep those great personal stories flowing, it is awesome to share in each other’s successes!

 

General Market Observation:   The market continues in Correction. Hopefully this correction will have some teeth and take us down to at least the 10% correction level or lower.   Now, one may think it odd that I would be cheering for the market to fall, but great bull markets are constructed from great carnage.  Some of you may remember the chart I showed at the beginning of the year of the S&P and DOW on a yearly chart.  Here’s DOW chart in the monthly version.

DowClick to expand

The huge expanding top is still intact on the DOW, so 2014 is working within its confines; will we see a huge drop over the next couple of years as happened after previous sustained bull markets?  Clearly, we don’t know, but it is at least interesting that both the DOW and S&P finally broke through support this week, joining the RUT and Nasdaq in the plunge.  Over the last few weeks both the RUT and Nasdaq have been the weak players amongst the indexes with a trajectory resembling a ball bouncing down a flight of stairs.

The key point to remember here is to pick the places on the chart where there is likely to be a bounce.  RUT approaching the 200 day SMA and the Nasdaq quickly approaching a support zone and the 200 day SMA.  The upward sloping channel that had contained much of the uptrend since late 2012 is now broken and we are seeing a short-term downtrend moving towards becoming an intermediate downtrend.   While the path of least resistance appears to be down, we’re kind of in “no man’s” land—too late to go short and too early to go long.  It would not be surprising if we do bounce a bit this week, perhaps back to a new and lower drop zone—that’s the time to look for the shorts!

 

Outs & Ins:   Wholesale swap out on the IBD® 50 this weekend, with 6 new stocks added to the Running list.  Out of the stocks that now populate the Running List, 14 of 120 finished Friday in the green, and none by over a dollar.  This points to weakness present in these high quality growth stocks. The wise trader will look for the strongest stocks, or those holding up better than the market in the event a rally attempt comes soon.  The other side of that is to look for some weak strength in the laggard stocks forming a bear flag moving up in lower volume, which could be preparation for a dive to the downside.  Of the stocks that debuted this weekend, less than half are still holding above their 50-day SMA (EOG, MTDR, PRAA & WLL).  On the complete Running List only 17 of the 120 stocks are holding above the 50.  Like we said, this list of strong candidates is looking weak right now!  But several are approaching ideal bounce levels at horizontal or moving average support.

If one does nibble a bit at a proper Action Point, don’t go in with a full position.  A quarter or half is a conservative way to go, but the safest way is to wait until the bounce proves itself, and that may be a few days or weeks away.

o-i 4-12

 

 

Tech Talk:   So what do we do when the market is falling?  There are several things that one can be working on to improve their skills while waiting for prices to turn back up.  Here’s a few suggestions:

–         Learn to trade to the downside in a paper account.  Almost every year both the indexes and leading stocks provide opportunities for bearish trades.  Knowing when and how to properly and profitably trade these opportunities can add to your yearly gains!

–        Back test your system and practice trade.  This provides excellent reinforcement of trading rules, as well as visual training in spotting proper Action Points on the hard right edge.

–        Clarify and simplify your process by writing out rules to trade by.  In reality, this isn’t that hard because it’s basically typing up existing rules from a successful system and then putting your name at the top!  (This is a huge clue!)

Comments and opinions written below this line of text may be provocative and only obliquely related to trading.  Some may find these “Off the Wall” comments challenging to their outlook on life.  I will not post any comments made on subject matter below this line to the group, so if you disagree blast away. 

OFF THE WALL

Main Wall

Off the Wall:   I love reading the ancient text!  I find it so revealing to read about the human condition from thousands of years ago and see that despite all of our technological advances our human condition has pretty much not advanced—regardless of what we may believe.  Many times the text points out that those with ears should hear and those with eyes should see.  Then there are numerous examples of the author expounding on a brilliant concept that could be life changing, but the audience isn’t even fazed.   Often, in both anger and sadness the author of the text cries out, “They have ears but cannot hear and eyes but cannot see!”  So what was going on with the eyes and ears of our predecessors?   Despite our advances, are we still plagued with as much blindness and deafness as our forefathers?

I do believe that we are still plagued with eye and ear trouble, and the ailment shows up consistently in relationships and circumstances.  The question that we too seldom ask ourselves is, “what seems to be the problem?”  Why can’t we accurately hear or see, and then understand?

A big part of the reason may be what’s already in our head that filters both our vision and hearing.  If this filter is really messed up, it can distort what’s seen and heard, resulting in severe consequences that can, in some cases, lead to death.  I know that sounds a little harsh, but I’ve had several friends fly into the ground because they thought they were interpreting the aircraft’s instruments correctly, but what they were seeing wasn’t reality.  For each of these guys there was usually an emergency going on in the cockpit that heightened their emotional state (they were afraid), and then the brain took over and misinterpreted the information being presented from the reliable instruments!

As traders, we are also prone to look but not see and listen but not hear what’s truly going on in the market or with a specific trade.  When this takes place the root cause is typically fear or greed gone awry!  While our failures don’t result in smoking holes in the ground, they can cave in our trading accounts and psychological capital and cripple us moving forward.  Learning to trust our systems is one of the means of coping with the emotions of the trade—so ensure your system will save you!

Remember, nothing is sadder than a person with eyes who will not see or ears who will not hear!

Share Your Trades:   Many of you have sent me notes regarding the success you are having with the Active Trend Trading System.  Please send you stories to me at dww@activetrendtrading.com so I can share them with our fellow traders.  Plus, if you are considering a trade that appears to be at a proper Action Point, send that alert also!  Thanks!

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