We are finally seeing some pullback in the markets. Volume is a bit elevated and the Russell 2000 losses are a bit much. However, we have come a long way from the December lows and a little volatility should be expected. Overall, the market was a bit overbought and a nice consolidation period here would do a lot of good for the market as a whole. We would prefer a nice quiet tight consolidation, but we can only trade the market in front of us as we have said many times. The best case scenario for the markets here quiet consolidation with very minimal if at all distribution. Strong stocks will form new potential buy points and we will continue the march higher. Continue to monitor your position sizes as well as your exits (stops). Your risk management process must be on point and you must remain disciplined in your approach. Otherwise, you will experience pain and lack of gains.
Sentiment has certainly shifted off last week’s levels. AAII Sentiment last week showed Bulls were above 40% and Bears at 20%. Those are pretty telling market participants were a bit too bullish in the short-term. This week Bears jumped nearly 7 points to 26.7% and Bulls dropped from 41.6% to 37.4%. While bullishness still a bit elevated, you can be sure after this week’s selling you will see more Bears show up in sentiment. Does this mean we are going to see more selling? Most likely we will, but to the degree we have no clue. We aren’t about to guess at what might happen only we will control what we can. We can control our entries, position size, and exits. Odds do not favor us moving higher in the short-term and we will adjust our trading accordingly.
It is quite remarkable how the market has lifted off the December lows. Mutual Fund holders withdrew more from equity funds than in 2008. The crowd in December showed signs of panic, no question about it. Most still have the pain from the collapse of 2008 into 2009 in their memory and would want to avoid that pain at any costs. Unfortunately, they missed out on an incredible opportunity for more gains. We do not want to miss out on gains, but first we never want to take on huge losses. Small losses are perfectly acceptable and will occur quite a bit. Big losses will lead to ruin while missing out on huge gains will only limit your ability to extract gains from the market. Stay disciplined and follow a time tested approach to this market.
We hope you did suffer great damage this week. Opportunity is all around us. Are you willing to do what is necessary to take advantage? Stick with Big Wave Trading.
