Tough Trading Ahead – Rolling Over Danger

by Olivier on March 9, 2011

The market is starting to get much more difficult to trade from a position trader’s perspective. First signs of danger are starting to show up. It feels like more and more dark clouds are starting to build. It is not raining yet and it is far too early to predict it is going to pour. The mixed signals the S&P 500 is sending are increasing and the picture is getting less clear. We are at a crossroads, a critical juncture in the markets. The trend is still up but price is now trading in a sideways consolidation pattern. A breakout is imminent and the direction the market is headed to is unclear. As a trader, predicting directional moves before they actually materialize is not going to lead you anywhere.

The right course of action is to be defensive and to protect your capital. Once you get paralyzed by fear you’re done. Your goal is to avoid being trapped, being unable to react to price changes and act objectively anymore. Fear and mistakes are an integral part of trading. It is what I refer to as embracing ambiguity. But when danger signs increase and you start noticing red flags, there are quite a few things you can do in order to avoid paralysis:

That being said, one of the red flags I see is the lack of follow through in the Fiber Optics Sector. This was the best looking sector and healthy sector rotation was suggesting the fiber optic plays would emerge as the new leaders. FNSR – Finisar got killed today and is dragging down the whole sector. Technical damage is huge but some stocks like IPGP – IPG Photonics are holding up extremely well and still look like they will be able to assume a leadership role. Time will tell.

As far as charting and analyzing my own equity curve is concerned, I will simply raise more cash if a specific threshold I have defined is breached. That way, I avoid reaching a state where I freeze because my mind and my judgment get clouded. It is also the most effective way to protect my capital. Should the market technicals keep deteriorating I will keep raising cash. My opinions do not matter. My number one goal as a trader is to stay in control. Simple as that.

Distrust and caution are the parents of security. – Benjamin Franklin

My public list with all my charts can be viewed here:

Buenas noches!

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