Thursday, May 12, 2011

State of the Stock Market - "Adapting to a Volatile Market" - 5/12/11

What we have here folks is a really, really tough market.   It has been since Bin Laden was captured and today was a prime example of the volatility and how it is making swing trading rather difficult.  We saw some major selling yesterday on heavier volume, giving the market its fourth distribution day in its last seven sessions.   This, along with major technical breakdowns in many leading stocks, certainly seemed to be pointing to a topping market.   We saw some more major selling early in today's session, but that didn't last long and the Nasdaq rallied about 45 points off of its morning lows.  In fact, it seems like every session now involves intraday moves of 40-50 points on the Nasdaq. This type of volatility is great for daytraders but is very difficult for swing traders, short or long (and I should know because I've done both the past two weeks.)

Going forward, anytime you have range-bound trading going on (and pretty clear boundaries high and low have been established the past two weeks on the Nasdaq) you need to change your strategies a bit.   Ideally, I would love to start positions and hold them for weeks, even months at a time, and allow them to develop into gains of 20% or higher.   I don't think that's possible right now.   I know my account has been going sideways for two weeks now as whatever gains I get in stocks quickly disappear the next day as the market reverses and instead of nice sized gains I have been getting a good amount of small losses.   I know personally I need to shift into "take profits quicker" mode and I will aim to do that until this range is broken.

I would also warn about overtrading in an environment like this.   I say this because I can admit that I have been guilty of this the past two weeks.   I was tempted to take a few potential longs at the end of today's session but I passed.   We could easily be down again tomorrow.   Setups are out there but very few are seeing any follow-through more than an hour or two.   Your account can easily be chopped to bits if you take every setup you see, so it's best right now to take a step back and trade less while the market figures out what it wants to do.  

I went into today with four short positions (DECK, RAX, OPEN, and BEXP) but was stopped out of two of them by midday (DECK for small loss, RAX for small gain).   I added to my long position in REDF as it showed some strength today but it didn't exactly close strong so we'll have to see about that one too.   Because so much of this market is being controlled by commodities (which just had historic moves) and the dollar, I'm beginning to think this volatility will unfortunately continue for a while. 

I am not dismissing any outcome from here but given the number of ugly, messy charts out there along with the overall volatility (which is typical of topping patterns) I would still guess the market is lower in a month or two than it is today.   Looking out that far ahead doesn't affect my trading too much however, and in the immediate time frame, I think caution remains key, at least until this range is broken.   Good luck Friday.

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