I think I may have outsmarted myself today. It didn’t hurt me financially except it may have cost me in potential gains, but that happens from time to time and you just have to deal with it and move on. My wife likes to play the “what if” game from time to time and I always try to avoid it because nothing ever good comes out of it. The minute a trader starts to play that game with imaginary profits you might as well retire and move onto another profession. Let me explain what happened.

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This morning I was confident that the market was going to rise as I had entered fresh longs the day before. When the futures indicated a strong open I thought we may have some follow through to yesterdays rally. Now let me be clear about my bias on the markets. Overall I’m still bearish as my signals still point down, however we did reach some extreme sentiment readings on Thursday morning and I thought we were due for a bounce. So I am only playing the long side as a countertrend rally until one of two things happen:

  • My market timing system issues a buy
  • We turn over and begin moving lower when at that time I will short heavily

So when today’s rally started to fade I thought that may be it as people were scared to hold over a long weekend right before President elect Obama’s inauguration. I then sold my longs and entered a few shorts. Initially they proved me right as the market dropped like a rock, but they quickly found support. See, here’s where I went wrong. I had it in my mind that we were going to fall no matter what and I dismissed the possibility of the market rallying to close the day near the highs. When the market rallied I decided to cover and end the day flat, both in positions and balance for the day.

After the close I decided to look at the 15 min chart to see what I could have done differently. There are a few points of interest I want to focus on that might have gave me more confidence in holding my longs a little longer.

  1. Using the RSI trendline from the previous day the selling never violated that line, which should have told me the selling wasn’t that intense.
  2. The selloff in the final minutes of Thursday’s trading could have been more of a reference point as to how far today’s selling might have carried it.
  3. Using Fibonacci it would have given me a 3rd point of reference of where we might bounce. Just as the Dow broke the 61.8% retracement level it quickly reverse and rallied hard. I should have been adding long positions at that time instead of messing around with shorts.

Today reminded me very much of the last quarter of 08′ and as I said I’m glad to be in cash this weekend, with my equity and confidence in check. As for what I think the markets are going to do next week it’s a coin flip, but I think I’m learning towards a somewhat ultrashort bullish stance. That’s the trouble with trying to play countertrends though…they can turn on a dime and it’s hard to time them perfect. So keep your position sizes small and your mental stops tight going into next week.

2 Responses to “The Trouble With Countertrends…”

  1. Nicholas Says:

    I utilized one of your trades yesterday (SQNM). I needed pair something to my QQQQ short. I saw you cut your loss pretty quick but since I was paired I held in there and ended up with a tidy profit at around 2pm. Thanks dude..
    Heading out your way next week for some skiing in Whistler. I hope theres some snow left. Negative 20 here in toronto today.
    Shlick

  2. Jeff Pierce Says:

    If the market continues moving higher SQNM is going to be a real winner. The 15min chart is coiling and should pop soon.

    Don't worry, Whistler will be full of snow and you will have a great time!

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