Traders getting chewed up

On Aug 3 I mentioned how the charting service I used decisionpoint.com had just issued a LT buy signal after getting whipsawed with a sell signal near the July low. Well, they just issued another LT sell signal yesterday thus getting whipsawed twice. Will this sell signal be yet another whispsaw? Probably. These guys use mechanical buy and sell signals which are based purely on momentum as do a lot of traders. This type of momentum chasing both on the upside and downside has been a disaster since May.

I've been seeing a lot of trader types getting creamed by this tape. There's a trader on youtube that I follow just for laughs and to gain contrary insights since he is a small notch above a compulisve gambler. He recently checked himself into some sort of mental rehab clinic. It's not just the amatuers. Even the seasoned veterans are getting hurt. When guys like Drunkenmiller fold out of frustation you know it's tough. I personally have been largely inactive since early May. Just recently I have been getting back into things but I've been keeping it small and tight. I've done well so far this year and it mainly occured in the first 4 months of the year thanks primarily to a couple of big winning stocks but since then I've done very little remaining mostly in cash since early May. I don't like to talk about performance because it's bad Karma and it smacks of ego stroking....I'm just trying to say that often times I find my gains happen in short bursts which is followed by long periods of nothingness. I can go through long periods of inactivity when market conditions for me are not to my liking.

Professional managers and those who trade full time feel pressured to make money everyday, week and month. In the book Reminiscences of a Stock Operator (my favorite stock market book and a must read) one of the many insights of the fictional character "Livingston" (who is really famous trader Jesse Livermore talking about himself) is that you shouldn't be trading the market all the time day in day out. Another lesson along the same line is that you will lose if you try to use the market to "pay" for some item you want to buy. The reason for saying this is that often times the market is unplayable i.e. edgeless and too random and more often than not you will end up losing if you try to forcefully extract money from it such as trying to make a quick $40,000 so that you can buy that car that you want so bad. If you force the market to meet your needs you will lose in this game.

There's times when the best thing to do is absoutely nothing or play small but that can be quite hard in the ultra competative landscape for money managers and for the full time trader/investor who makes a living from the market. But that's just the way it goes. In Ocean's 11 Danny Ocean says the following in regards to casinos:

the house always wins. Play long enough, you never change the stakes. The house takes you. Unless, when that perfect hand comes along, you bet and you bet big, then you take the house.

In trading it's similar. If you play every hand you'll probably lose in the long run. Wait for a signficant edge before betting and when the perfect hand comes bet big (but not so much wherby if you are wrong you get wiped out). If you have to wait weeks or even months so be it.

I believe to be successful as a speculator you need to do the following

1) Only bet on premium opportunities
2) Properly identify such premium opportunities
3) Adapt quickly to changing market conditions
4) Planning and executing an appropiate strategy (entry, exit)
5) Conquoring yourself (emotions and biases)

If you fail at any of the above 5 chances are you will lose in the long run.

Ok that's enough philosphy for 1 day, now on to the market. It got smacked pretty good today on weak housing data. The market is now well oversold but with it closing near the low of the day it suggests there is still lower lows ahead or a period of basebuilding will be required before a sustainable rally will be able to take shape. If we do the old gap up and run rountine I will stress this again for the hundreth time, don't trust it unless perhaps your time frame is 1 day or less. Such rallies, are not sustainable as we have seen several times this summer....they can sometimes last a few weeks, but like with this July rally, they eventually fall apart.

As it stands now if you want to play the market you need to use gueralla tacticts and babysit positions keeping a short leash untill there are some really solid intermediate term signals which can cause you to be a strong holder....I'm speaking for myself here. Downside should be fairly contained from here because sentiment conditions are already bullish from a contrary perspective and the market is well oversold (but not extreme oversold). One thing missing is a spike in the VIX. It's simply too low here given the damage and it's only just turning up....that suggests a downside flush out lies somewhere ahead still.