Short Entries August 22, 2007

Some tips on picking short entry points from Deron Wagner this morning:

A firm closing price above the downtrend line of the S&P 500, especially on higher volume, would obviously cause us to relinquish our bearish near-term bias. But until that happens, we must assume the current intermediate-term downtrend will remain intact, just as it has for the past month. The longer a trend has been in place, the more difficult it is to break because more and more traders and investors act on tests of trendlines as time passes. For that reason, the current risk/reward scenario in the broad market favors the short side. Going into today, we are stalking a couple of the broad-based indexes for potential short sale, using the inversely correlated UltraShort ProShares ETFs. If you’re considering doing the same, we’ll share with you the two ideal ways to initiate new short positions into the current retracement off the lows.

The first is to wait for an intraday break below the previous day’s low, but being sure it’s not just a shakeout a few cents below the low. This manner of entering short sales is the less risky of the two methods because it requires waiting for confirmation of the current upward momentum to reverse before jumping in on the short side.

The second method of short entry requires waiting for further gains that would lead to a test of resistance of the intermediate-term downtrend lines that have formed in the major indices. The benefit of this method is a potentially greater risk/reward ratio because the stop can be kept tighter, while also providing for a potentially large drop if the trade moves back to test the lows. The disadvantage, however, is that selling short into strength is theoretically riskier. Rather than waiting for confirmation of momentum reversal, it requires a leap of faith that the market will reverse shortly after testing the downtrend line.

Both methods of short sale entry described above are valid, so the “better” method just depends on your personal comfort level with risk. One final possibility to consider is combining both methods by initiating partial share size into strength, on the test of trendline resistance, then adding the remaining shares upon confirmation of the downward reversal.

On Psychology August 19, 2007

Some good points on trading psychology from Dave Landry in his A/V presentation this week:

• Stop trying to outsmart the market. NO ONE knows exactly where it will go.
• With each decision you make comes stress:
  • The more decisions you make, the more likely you are to be wrong.
  • The more decisions you are used to making, the more pressure you’ll put on yourself to make even more decisions.
  • No one can be that right.
• Forget about the “whys’ of the market. After all is said and done, the reasons will be known.
• Don’t apply logic. Markets move on emotions — period!
• Plan your trade and trade your plan.
• Reduce the amount of decisions you make.
• Make decisions and live with them (also a life lesson!).
  • Good decisions come from experience.
  • Experience comes from bad decisions.

You can find links to Dave’s most recent presentations on the front page of his web site, and links to older presentations in the ‘Webcasts’ section.