TradingMarkets.com
Why I Don't Trade Breakouts
Monday May 15, 9:19 am ET
By Dave Landry
On Friday, the Nasdaq sold off in early trading and then chopped sideways throughout mid-day. Finally, it resumed its sell off going into the close. This action has it closing at fresh multi-month lows.
The S&P generally worked its way throughout the day.
I've taken a lot of heat lately for being bearish. As a trend follower (or as some say, a trend following moron), it was tough explaining to everyone why I wasn't buying a market hitting 5 year highs. In case this is your first column, here were my reasons: First, tech wasn't joining in for the ride. Second, the S&P was held up mostly by commodity related stocks--this is not what a bull market is made of. And finally, nothing has been following through for months--So, why should I have trusted the market to follow through?
Speaking of follow through, this week exemplifies why I do not trade breakouts. Everyone and their brother had to own stocks last Friday. However, there was NO follow through early in the week and you know what happened late in the week.
So what do we do? Tech remains a wreck. And now, the aforementioned commodity related areas are beginning to slide. If they continue to slide, this will help to sustain the S&Ps free fall. And if this happens, I think selling could beget more selling. Why? Well, as we approach new lows for the year, anyone who has invested in stocks in 2006 will be faced with a loss. Also, the more the market slides, the more overhead resistance is created (a place were investors may look to get out at breakeven). So should we short like it's 1999, er, I mean 2000? Well, if you're not already short, you might want to hold off--it's dangerous to sell into such an oversold market. No problem though! On the first bounce, we will see a plethora transitional setups (i.e. early trend). And if you are short, trail and scale.
No setups.
Best of luck with your trading on Monday! |
