This past week was a rough week for most of us here at Big Wave Trading as an orderly pullback turned into some nasty distribution at an extremely rapid pace. However, in light of the tragedy that unfolded in France on Friday, everything is obviously relative. That being said, the past week was definitely the worst week for me from a trading standpoint in 2015. Coming into the week I was nearly fully invested and while the market was overbought short-term I remained ready to take all long signals as it appeared, via individual stocks, that the market was starting to form some solid foundation.
Right before the trading week began on Monday, I happened to read Steve Burn’s weekly SPY analysis and I must say the slightly bullish bias I had somehow managed to build up was definitely questioned following my reading of his analysis. While I attempt to always trade in the moment with the stock market without a bias to the long or short side I was content that I was seeing enough bullish consolidation patterns forming in individual stocks to shun any potential short-term overbought situation in the overall market. Since 3 out of 4 stocks follow the market and not vise-versa, this was foolish.
The came Monday’s trading session. Despite the market being down on the day I received a few long signals in high quality stocks. But I also received an extremely strong hedge signal in UVXY (a Pocket Pivot Point signal on top of that). However, since I was fully invested, I decided that the market looked strong enough that I was going to use the remaining capital and invest in the new long positions instead of first taking the UVXY trade and then dividing whatever capital was left into the other long positions. Big mistake and a big lesson learned. The market moved up slightly Tuesday and then rolled over dramatically over the course of the next thee sessions.
This one missed trade, combined with a fully invested portfolio, has caused a larger than anticipated drawdown in my personal portfolios. While we have gains, small gains, or tiny losses in our current holdings, and will leave most names with profits if the market pulls back, we will still have seen a lot of gains evaporate without any hedges. We now have an ultrashort Real Estate position but we should also have long UVXY position. This would have us appropriately hedged here. Instead, we were caught on the wrong side of the market. It happens to the best of traders and it will happen to us again. Fortunately, this was the first time in 2015 that I felt clearly on the wrong side of the market. My analysis was proven incorrect by the realities of price. Well done, Mr. Market.
As we head into the new week, futures are obviously selling off following the terrorist attacks in France on Friday. What they do from today–Saturday–to the opening bell on Monday is unknown. What is known is that our operational models are on an across the board NEUTRAL operational signal. This means that new long positions must pass much tighter criteria before being allowed in our portfolios and that current long positions will have their stops monitored to make sure profits do not turn into losses.
This sell off could easily continue as we are not yet oversold on the momentum oscillators I track. At the same time, following 5 straight days of losses in the Nasdaq it would not be shocking to see the market higher on Monday. The point is that it is wise to be very neutral here and let the market tell you what you should do next.
There are some very bearish items in the news lately with Gold hitting 5 year lows, Copper hitting 6 year lows, Oil continuing to downtrend, and the terrorist attacks in France. A strong dollar is also another concern. The market doesn’t like uncertainty and a lot of traders think it is a certainty that this market is going to rally into the year end. We are wise enough at Big Wave Trading to know that nobody knows what is going to happen in the future. You don’t need to know.
All you need to know is what price is doing right now. Take your signals, cut your losses when you are wrong, and ride your winners when you are correct. Repetition makes perfection. When you give up needing to know what is going to happen in the future, you start to take care of yourself in the present when it comes to trading. Learning from your mistakes is also key.
The lesson learned from this past week is that whenever I am fully invested if I receive a hedge signal along with new long signals I will always allocate my capital to the hedge first. If I am wrong on the hedge, I can cut my losses and be nearly 100% sure that a new long signal will present itself shortly. If I take the hedge, and the market takes a nosedive like it did the past week, my overall drawdown from my account highs will be reduced. Either way, taking the hedge is a win-win when nearly fully invested. I made a mistake. I have learned my lesson. Always learn the lesson.
Our thoughts and sincerest condolences go out to everyone effected by the France tragedy. We wish you all the best during the upcoming trading week. Have a great rest of your weekend everyone.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL – SIGNAL DATE
PAYC long – +135% – 10/30/14
HCKT long – +49% – 6/18/15
MEET long – +42% – 10/9/15
NHTC long – +29% – 10/22/15
CLLS long – +29% – 10/30/15
