Wednesday, November 7, 2012

How Oversold Are We Really?

Just because we are down over 300 points on Dow Jones today or down to 1400 on SPX, DOES NOT MEAN THAT THIS IS A BUYING OPPORTUNITY.
Be very careful falling into the BUY EVERY BIG DIP mentality. Obviously, that all just depends on your timeframes as a trader and the time frame of your trades. Even for my short term nature, i am a little hesitant getting long right now. Yes, some stocks are very OVERSOLD and could bounce nicely for 1-2 days, but keep in mind, OVERSOLD can get even more OVERSOL ..... very quickly. Ask anyone who was bought AAPL recently because it looked "oversold". 
This entire week, My goal was to keep ART OF TRADING members out of trouble; Remained in a 100% cash stance for the entire week pretty much. 
It has helped many based on emails i received and stirred most out of harm's way. That's GREAT as that was the intention. 

Sometimes, in trading, its NOT how much money you make but how money you keep that matters most. If by standing aside you managed to avoid account damage then that's a big win and puts you in a mental and financial position to attack with more confidence when the time is appropriate. 

Look at the chart i attached . You will see that we are nowhere near "OVERSOLD" really. If this maket wants to, it can easily keep drifting down and selling off in the days/weeks to come. The downside risk is very real and it needs to be respected. Sure there will be PLAYABLE bounces(like yesterday's bounce) but let's keep in mind the bigger picture. 

Study the TRIN and SPX relationship in the attached charts. Study how SPX and TRIN behave during times of 'EXTREMES', watch how TRIN spikes up into EXTREMEs on days when SPX tanks and especially near climax bottoms where the selling really intensifies indicating CAPITULATION. 

 If you not sure what you are looking at or don't understand it. email me at, and i'll help explain it(maybe in a video). 


Anonymous said...

We are in an interlude where the game has changed. The election is over, and so the motivation to manipulate markets and skew the economic numbers, is lessened. It's also time for the administration to say what it's going to do, and that can't be very bullish. All eyes are shifting back to the fiscal cliff. The new normal may be a new range between 1200 and 1300, or new territory.

Recognizing that good trading has a pace to it, and going to cash for a short time, is good advice. However, there's another option. Instead, I choose to reduce position size and limit the number of my trades.

My favorite saying is "The best time to make money is when you are making it." That is to say, you have to take on risk to make money, and we take what the market gives us, refraining from planning a grand attack to wrest money from the market. Reducing position size and trade frequency reduces the anxiety of seeing the market take off without you and keeps the calluses on your psychology tough as you remain accustomed to taking little hits.

The longer I trade, the more I am convinced I just can't predict a damn thing, especially in this market, so I have to rely upon what I can rely upon, which is my money management.

I'm not sure if I went to cash I would have the guts to get back in. Does anyone expect things to get better any time soon? The longer I sat on the sidelines, the more important the result of those first few trades would become, and I've spent too long learning to love the scourge to go back to thinking that any small series of trades means anything at all.

Good advice, going to cash, but I'm reducing position size and slowing everything down instead. I'm not going to put myself under pressure by trying to predict the future. Been there, done that, and it didn't work very well.

Good post, thanks.

Brian Fortin

Anonymous said...

I didn't really clarify what I thought, so after my morning coffee, please let me take a more succinct wack at the apple:

It's our jobs as traders to manage risk, not run from it. It's entirely appropriate to go to cash if you are in a drawdown, your system stops working, or you are physically or emotionally compromised.

On the other hand, I have heard many traders say that their best trades are the ones they feel the most uncomfortable in. Maybe that's why most retail traders lose, they can't hold those trades.

I learned how to trade like everyone else. I foolishly believed I could read sense in the noise, and pick tops and bottoms, but still meet with different results than all the other primates. It didn't work. So rather than going to cash when faced with uncertainty and fear, I just reduce a combination of position size, holding time, and/or stops. As the adage goes, I try to manage risk, not run from it. In doing so, I avoid a lot of predicting, the hoping for the market to do something, the recriminations, and emotional scarring I used to endure.

On the other hand, if you are saying there are good times to make money and bad times to make money, and this is one of those low probability times to make money, it's hard to argue with you. It's just my feet get cold real quick after leaving the market and I start to think like retail.

Brian Fortin

Chadwick Montgomery said...

NOO we have not oversold on SPX, we have been oversold on facebook stocks. I highly recommend writing about trading with Facebook stocks.

Kristof George said...

Oversold or not.. trading will go on. And we all just have to follow where the course takes us. Maybe it's time to change the way we trade?

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