From the Trading Desk

Big Wave Trading Weekend Update: Price Is All That Matters

The past six weeks has been a perfect example of why you should always obey your signals and never obey your feelings or emotions when it comes to trading the stock market for a living. For the past six weeks, I have been nervous about the overall bullish sentiment and the mere fact every major market index continues to be extremely extended from their 200 day moving averages. Despite this nervousness, my accounts have remained fully invested the entire time only changing when I have/had to rotate out of a laggard and into a new leader. Following this past week, it has definitely paid off.

All of my long positions look solid. I continue to ride the trend higher in most names while taking some profits along the way in the names that get extended in the short term. Some stocks, like IRBT, are failing but like I said earlier they are immediately replaced with new long positions. This has been the theme for the past six weeks, despite the choppy Russell 2000 and bullish sentiment. As long as new long signals trigger, I am going to continue to operate the same way I have been this entire uptrend, no matter how bullish the overall sentiment becomes.

Speaking of sentiment, it is still bullish overall. Investors Intelligence bulls are at 62.7% (4 out of 6 weeks over 60) while bears are only at 16.78% (a 1 1/2 year low). The NAAIM exposure index is at 96.26 (bullish), the CNN Money Greed/Fear index is at 69 (greed), the VIX is at 10.85 (complacency), and the IBD put/call closed Friday at .87 (no fear). There is only one sentiment gauge that does not show this level of bullishness and that is the short-term AAII survey and it still has more bulls than bears. All sentiment readings are “bullish” across the board.

If you were simply trading on a contrarian basis alone, this would have cost you dearly as stocks are hitting new all-time highs in every single major market index including the NYSE Advance/Decline line. The Nasdaq and Nasdaq 100 are overbought but the other indexes still are not in overbought territory and every index I track is showing their MACD (12,26,9) lines curling up after a long downtrend. The bottom line. Price is all that matters. Trading off sentiment alone will never pay the bills. Always obey the price signals.

Just because my personal holdings are all working higher and everything is going along hunky dory, do not think that this is going to change my trading approach here. I remain very cautious “up here” as the Nasdaq and Nasdaq 100 are hitting their upper channel lines and even though the Russell 2000 has broken out slightly to new highs it has now created an even more pronounced broadening megaphone pattern going back to the early December highs. I am definitely going to want to see the recent resistance in the market become support when stocks do decide to consolidate their recent gains.

Right now, I am going to continue to monitor my personal holdings very closely. I have some serious gains in a lot of positions and do not want to see them disappear. We are now at the point in a lot of my holdings where I am looking for extended, climatic, or parabolic price moves to start trying to occur. Whenever I am long a stock, like RARX on Friday, at the close if the stock’s RSI(14) indicator is over 80 I am going to be taking 20% to 25% profits every time. This has happened in quite a few holdings the past few weeks and whenever it happens in the near term future I will be taking my profits.

For the stocks that do not go extended into overbought RSI(14) territory I will continue to move my stops higher as the stocks make a series of higher highs and higher lows. As long as a stock is uptrending and not becoming overbought I will continue to ride the trend higher and will wait for short to intermediate term moving average or support violations on heavy volume to expedite the profit taking process. Right now, its all about securing the gains that have been unrealized since the uptrend really started taking off in November.

What a great lesson in learning to be patient and prudent with one’s methodology and not let emotions take over one’s investment approach. At some point the bullish sentiment and extended prices will matter. When it does, guess who will be taking profits on his winning positions and not be losing money in the next downturn? Me. Guess who will be more-than-likely adding shorts/hedges before the downturn? Me. Guess who will not be caught bagholding a bunch of losing stocks? Me. Guess who will always obey his stops when they hit/trigger? Me. It’s hard to not succeed when you are obeying all your rules.

There are zero new long positions of any quality this weekend. I do have a decent speculative long position that is bouncing off strong support but did not wash out before the bounce. Hence the decent–and not great–status. Have a great rest of your weekend everyone. Trade smart. Aloha from a very rainy west side of Maui.

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