The Art of the Trade: Wait For Validation
One of the worst things a trader can say is, “the market's gone too far”. It's okay to have an opinion but without a valid reason it's strictly arrogance. The market since September has gone straight up. Is it due for a pullback, who knows. Too many traders have lost money, thinking a sell off is over due. Let's take a look at a few ideas:
• Fundamentals. It's easy to make a case either way. I've never been particularly good at assessing the strength or weakness of the economy, as it pertains to the market. Remember the market is never wrong. As of this writing the market is telling us things are fine. (Sic)
• Technicals. Every chart is in an uptrend, period. Traders can throw every study known to man but bottom line stocks are strong.
• Leadership. AAPL, AMZN, NFLX, you name it. Until the leaders start telling a different story, the trend is up. It's certainly not smart to fade.
• Breath. New highs every day, more up stocks than down, new money coming into the market or simply every sell off has been a buying opportunity. Not a scenario for being bearish.
So how best to play if you're not comfortable buying at these “lofty” levels? When is it time to reverse course and get short. The point I'm trying to make, wait for the market to give a signal. Here are a few:
• Wait for a top. Okay, how is it defined? Let the market sell off and then fail in an attempt to retrace back to new highs.
• It won't happen the way most traders think. They'll be false starts. The pundits will say it's a great buying opportunity. AAPL will actually go down .10 cents. Just kidding.
• Leaders. The group won't be hitting new highs. They may not be weak but not as strong. There could be a switch from Tech to another sector.
• Commodities, Dollar and Gold. Watch to see if the relationship is changing. (As stated: Strong Dollar weak market). (Gold losing its luster). (Oil as a proxy, to the strength of global economies}.
• Bonds. Interest rates, are often the key. Do you want to make 3% on your money or risk 20% being long stocks? Complacency can cost.
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Disclaimer: All comments are strictly the opinion of NewWave. They are not recommendations of any kind.
This article was originally published on Benzinga, and is republished here with permission.