Saturday, January 29, 2011

My thoughts heading into next week....

It is now my belief that we are at or near the start of a correction. This based on the T2118 (McClellan Oscillator);the price action in the stocks that I am scanning and those in my watch list and the similarity in the price action of the indexes now to that of the late 2004/early 2005 period.How deep it will go or how long it will last; I have no idea. My belief is that it will be similar to the correction of January 05' and only last 4 - 5 weeks. What I can tell you for certain is that during corrections trading on the long side is best left to day traders as up moves tend to get sold into just as dips were bought into during the rally.

A change in trend in the markets will not mean that long trades will not work out. What it does mean, however, is that the success rate of long biased trades lasting more than a day will drop dramatically compared to what it was during the rally. In other words, your stop loss is more likely to get triggered before you get the move you anticipate. So you will see some stocks set up and break out and think...hey I could have been in that. But what you really have to think about is the many more that will fail and cause a draw down to your account before you are lucky enough to catch a successful long.

So as of next week, my bias will be to the short side as I now believe that shorts will offer better risk/reward as well as higher success rate swing trades. One thing I must say is that when the markets get very oversold during corrections the violent 2 - 3 day bounces can offer some excellent long swing trades but your timing has to be on the ball!

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