Lessons from a Fortune Cookie

With the strong surge in stocks over the last few days after the carnage we witnessed on Friday, I think its safe to say that the dips are still being bought in this market. While many signs still hint that we may be in the process of topping out, the truth is that noone knows how long this incredible rally will last. (maybe Goldman Sachs does, but they aren't returning my phone calls) As traders, it is our job to react to what the market gives us instead of trying to impose our own ideas on it. Therefore, regardless of our beliefs, if the market is trending up, we keep trading to the long side. Sounds easy, I know. While I could get lazy and just tweet that and tag it with $study, I prefer to offer advice with a little more substance.

See that guy sitting on the rock. He speaks in vague hard to quantify phrases. He must be wise.

One important point to keep in mind is that even though traders should follow the trend, we have to guard against becoming complacent when a market becomes too easy to trade. We have to hit it as hard and often as we can, but while still honoring our trading rules. During good times such as what we have experienced over the last few months, the underlying strength in the markets erases a lot of mistakes traders make. All of a sudden, chasing a stock into a higher move or ignoring your stop because you want to give the trade a little more “wiggle room” gets rewarded instead of punished. Also, traders naturally assume that their performance is all due to their skill and forget that in fact almost all stocks have trended higher during that period. This is not meant to dismiss the contributions a trader's skills make towards their profit totals, but in order for traders to look at their performance more objectively. Afterall, even though most stocks go up during strong bull markets like this crazy pomo train we've been riding, some stocks do get punished.

For instance, look at all the support levels Ford (F) has blown through during its recent slide after a poor earnings report. So far, any trader that decided to give his stop a little space has been toasted.

While I can see a knife catcher eyeballing the gap fill at $15.20, why be the bag holder hoping this happens instead of the opportunist jumping in at the right time?

Another stock that has punished those that chased it at its highs is Sketchers (SKX). While the markets have been in a nonstop rally since last summer, SKX has been busy losing 50% of its value while steadily diving through all levels of support. It has consistently offered the tease that it was bottoming out only to break down to the next level of support before pulling the same stunt over again. Any trader that ignored his stops or attempted to catch the bottom on this early has payed the price.

While we don't know when this pomo train will end, it will at some point end. Whether this happens later this week, next month or some time after that, at some point we will experience a more bearish market and charts like the two above will become much more common. In order to protect yourself from getting smoked when it happens, make sure you are trading with the proper discipline now instead of waiting to learn this lesson the hard way.

By the way, if you follow me on twitter, you will never see a tweet like this: “Do not mistake temptation for opportunity. $study”

If you want advice from a fortune cookie, order chinese for lunch.

If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you're not a member, what are you waiting for? Contact me at twitter if you would like to try us out free for two weeks.

Posted in Commentary