Follow-through Finally

 

As preached, the market has finally shown its true self. After many days of toiling in a useless range that whipped back and forth, the market, in my opinion, already showed its hand yesterday and broke wide open today. SPY and QQQQs were both well off 2%+ with extremely high volume. The weak stocks got weaker and defensive stocks, like Biotechs, held up very well. I, due to my more risk averse and longer-term view, did not get involved in today's slide even though I saw it coming (refer back to my shorting into pullbacks approach to shorting a stock). But eventually, if this correction does amount to something substantial, the vast majority of stocks will fall.

Now that we have clear confirmation of the psychology of the market, it is important to note that the markets themselves are very extended to the downside, meaning that they have come off very hard very fast. It would be quite likely for the indexes to pullback to the upside for a few days on lower volume. And as a trend trader, it will be then where I will be searching for short opportunities and entering into positions in hopes of a downtrend continuing based on this week's action. I will be watching FSLR and RIMM closely.

On a side note, a mental aspect that I still have trouble dealing with days like these is the problem of feeling like I missed out on a huge move. While this is true that I missed out on a day where many day traders and early bears made tons of money, it is important for me to remind myself that as a trend trader, my money is to come in the following days. The reason why huge days like these happen is because all the stars are aligned together: The bears become aggressive, the bulls exit out of their stocks and the day traders rattle the weakest stocks. Usually after a big storm, there is a calm and that is what I will expect for the following few days. And although the price I will enter into my trade will probably be worse than if I were to enter into them this week, I have confirmation on my side, which will make me more certain and aggressive with my position sizing. It's easy to forget that trend trading is reactionary, not predicative.

Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss.