Wednesday, June 2, 2010

State of the Market - 6/2/10

So I ask again....are you having fun yet?   The roller coaster ride continues on Wall Street, as intense volatility remains the number one story out there.   After seeing a very bullish 3% gain last Thursday, we saw two back to back selloffs on heavier volume of over 1%.   Today, we saw a very strong session with gains of over 2%, except that it came on much lower volume.   So what exactly will tomorrow bring?  I haven't a clue.

I think it is still possible we are forming a very choppy bottom in this area but given volume patterns it is far from certain.   I still tend to think the best play is to wait for a bounce up to the descending trendlines now forming and look for short candidates at that point, but that is just a guess too.   I remain in cash and am completely content in doing so.   If we clear Thursday's highs, I may look at some small long positions, but there is still resistance above those levels so a rally is not certain.

I look at it this way.   When you have increasing volatility, you can theoretically combat it with smaller positions and larger stop loss levels which allow for the large swings you see with increased volatility.  That makes sense, and although I prefer to cut my losses very quickly, I think I could withstand those larger swings if I had enough confidence that my overall outlook was correct.   I guess that's my problem.  Do any of you have enough confidence in the future direction of this market over, let's say the next two weeks, that you really want to risk taking the very large losses that would occur if you are wrong?

One of the first lessons you learn as a trader is that you are probably going to be wrong at least half of the time - it is just how it is.   With good money management, however, you can still do well.   If I make a mistake or am wrong about a particular stock, I get out, take my losses quickly, and move on, leaving myself plenty of capital (both physical and emotional) to look for the next potential play.    This market however is just too easy to make mistakes in.  If you follow good sell discipline, you will likely drive yourself batty because you will be stopped out constantly.  The swings we are seeing are just crazy and unpredictable.  Trading a market like this with discipline will cost you not only a lot of physical capital but also a lot of emotional capital.

This again is all from the mouth of someone who would prefer to hold a stock for a few days to a few weeks.   I am not a daytrader due to work commitments - it is not really an option for me.   So I remain in cash and am fine with it.   Someone posted last night the following comment - "The bounce has already happened. Not sure what you are waiting for ? We will slide down to 950 while you are waiting for a good bounce."   I am curious on how he feels after today's session.  

I am slightly bearish longer-term but I also realize that in order to take positions in a market like this, your timing has to be almost perfect.   That perfect time to short is not yet here in my opinion so I wait.   Sometimes that is all you can do.   Unless you're day-trading, I would urge you to do the same.   I haven't made any money the past month or so, but I haven't lost any either, and I would guess that's much better than most non-day-traders out there right now.   Take care and be careful. 

1 comment:

Anonymous said...

I spoke too soon about the trip to 950 but I did cover my shorts this morning dip since we didnt fall apart and went long immediately. Stay long till Fri payroll hopefully. The payroll # will be awesome (in the headlines anyway). Game plan now is to stay long till Q2 start of earning season. One must be flexible regardless of what type of trader you are.