Good day all, if you have been watching the markets recently you might have noticed that things have not been as cut and dried from a directional perspective as perhaps they were a couple of months ago. We have had some changes in both magnitudes of price movement as well as the volatility of those same movements. To add to this we have had some serious divergences in the indexes as well. One day we could see the Dow up big, all the while the Russell is getting destroyed. The very next day we could have a complete reversal and the Nasdaq acting somewhat schizophrenic as well. This can give even the heartiest of traders challenges in determining what direction to take in their trading.
These conditions can persist and when they do it can cause fits for most traders. I have heard from many community members in recent weeks about their frustrations about being able to pick the trades that are right for this market type. This is a very common question and it is perfectly valid as almost everyone asks it at some point in their trading careers. So what are we to do about this particular issue?
This is where we need to go towards the light! No, I dont mean an out of body experience. I am referring to letting the market light the way for us. One of the best things I have ever learned when it comes to the markets is that letting the market work for us is always the path of least resistance and I can’t think of anybody that wants to swim upstream when it comes to trading.
The way the market lights the way for us is by focusing on our routines and specific steps within that routine. I am referring to step two of the daily routine. If we think about our routine and we are using a top-down approach to the markets then we would naturally look at the indexes first and we see the kind of conditions that I mentioned then we need to fast-forward to step two and that is checking out the sectors. The sectors can light our way. For example, when the Dow was running and the Russell was getting beat down, looking at the sectors would have pointed you to strength in the industrial, financial and energy sectors. This would have also shown a little weakness in the health care and utility sectors. Armed with this knowledge could point us towards trades in those specific sectors depending on our potential bias.
There is one thing that one of my great mentors told me about looking for trades in all market conditions and that was…”reward strength and punish weakness!” Taking a look at the individual sectors gave us a very concrete perspective for strength and weakness and therefore we could reward strength by looking for bullish trades in the strong sectors and look for bearish trades in those weaker sectors, One thing that needs to be mentioned is that weak sectors don’t always provide bearish trades but avoiding trades in those specific areas is the same as punishing weakness.
The key to trading in all market conditions is taking what we can get from the markets or as I like to call it walking towards the light of the market. When the markets get weird and they most definitely will then be sure to use all the tools we have available to us like the scanning of the sectors to help us find our way.
Trade well my friends,
Coach “Old Money” Holmes
