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November 11, 2008

Blame it on Literature

Folks, I may have to take a couple days off, so don't be surprised if I don't post again until this weekend. I have been trading quite poorly this month. So far, I've coughed up about a sixth of what I made in October, and October was a spectacular month for me, so 1/6 of October is still a significant number. The primary fault in my trading has been impatience, which tends to occur when I get tired. My impatience has resulted in attempts to catch small swings during the day, also known as day trading... an activity at which I perform quite poorly.

Another symptom of fatigue has manifested itself in the form of my mental approach, which has been more academic of late. I have news for you: academics don't make good traders. Cynics do. So in order to nurture my cynicism, I think I'll peel myself away from my screens, watch some George Carlin clips, think about Libertarians winning the White House, go to bars and talk to beautiful women who think South Africa is a region. Things of that nature.

But while the academic mindset persists, let's look at where we stand on the S&P 500:

spx chart

It's ugly, but there is a head and shoulders pattern in there. If it is going to resolve, we pretty much need to go straight higher from here. I continue to believe the October low will hold and a mid-term rally will evolve. So what's taking it so long? I blame literature. No, not Moby Dick. Technical analysis books. Blogs. The ubiquitous availablility of historical charting tools. You see, the October action formed a classic panic bottom. A rapid, high-volume sell-off followed by an explosive rally and a lower-volume, grinding back-test of the low. This action sets the foundation for a more sustained rally. The problem is that everyone and his broker was looking for it. I have another rule of thumb: when technical analysis and psychology are at odds, psychology prevails. After all, TA is just one tool for coming to grips with underlying psychology. In the current case, the market simply cannot embark on a sustained rally until enough people are convinced it ain't gonna happen. Perhaps we reached that point today. I don't know.


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