Can We Survive the Blitzkrieg?

• Posted by Derek
• on October 25th, 2011

“In uptrending markets, buy weakness as it returns to strength.  In downtrending markets, sell strength as it returns to weakness.”  Mercenary Trader

While the debate about Europe remains comical, our stock market is rendering its own verdict by rallying amidst the noise.  We have a bunch of obstacles nearby in our path, namely a flat/falling 40 week moving average, a significant 61.8% Fibonacci level between the 2011 highs and lows, and the overhead of the June lows that proved a fortress when stocks tried to bounce on August 3.  These will not be mounted without refueling, but the broadening of the rally has me expecting an eventual continuation higher towards this year’s $SPX highs above 1350.

That analysis matters not a whit, except for keeping me from fighting a rally too soon.  What matters is finding spots along the way to join the movement, one that could gain quite a following as the calendar ticks toward Dec 31.  It’s easy to find myself unsure in the heat of battle, and silly sports metaphors can bring a surprising perspective in finding clarity.  Of all the various angles from which I can view an opportunity, I do my best when I remember this simple process…value, memory, momentum.

1) Value- I may be looking to position for weeks or months, but the price I pay or receive today is pretty important, right?  Taking note of where current price stands relative to recent price is helpful in preventing the chase impulse.  So on a 15 minute chart, I keep a 78 period, 104 period, & 130 period average and at the very least know not to enter index trades a full daily ATR away from recent value.   Consider “value” the football equivalent of knowing not to throw a 5 yard pass into triple coverage, one needs to know the broader context of risk and reward.

2) Memory- I used to mark up my charts with all kinds of levels, from S2 to R2 to Fibs to important highs/lows.  I’ve abandoned much of it in favor of something more relevant to my approach…horizontal lines connecting levels where prices at some point in the last week paused for at least 30 minutes.  This takes away my tendency to anticipate support/resistance, yet has me prepared once a level shows itself to matter.  Consider it the equivalent of waiting all game for the blitz formation that has shown itself before, and attack knowing that swift execution offers a chance for a huge play amidst the chaos.

3) Momentum- like the guys at HCPG, I learned the hard way not to buy the first time the market offers me a chance to fix my regret for not having more on the initial run.  So I track the % of stocks above their 10 day MA on an hourly basis, and avoid fighting a 24 hour trend that runs counter to my bias.  I don’t have the informational edge to line up and power my way to profits; the smarter play for me is to wait until the other side gets caught leaning run and look for one of those easy passes to a streaking tight end.

Today, I find us closer to “value” than we were yesterday…that gets me interested in buying again.  I also find us closer to an area that has been touched enough times that even I can deem it important regardless of my lack of Fib or Market Profile prowess.  What I don’t have is momentum; breadth is rightfully off after an incredible couple of days.  If I were short, I’d take the value and memory evidence and cover under that 124 area on $spy.  I’m not, but as an interested buyer want evidence that the 3rd leg of the stool(momentum) is back in place.

I’ve traded like a 3rd-stringer way more than I care to remember this year, expanding my playbook at a time I should have been simplifying it.  Judging from the past, it won’t be my last but the common theme of each slump has been added complexity, and theme of each slump-buster has been simplification.  Boiling down to the simple mantra of “Value, Memory, Momentum” is one hell of a way to act on the Mark Douglas description of successful traders as those who can “remain disciplined and confident in the face of constant uncertainty.”  If All-Pro QBs can keep a cheat sheet on their wrist, I’m not at all ashamed to do the same to keep my eyes focused on what matters to my plan.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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