A Trend Rule?

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Anton Chigurh:
And you know what's going to happen now. You should admit your situation. There would be more dignity in it.

Carson Wells:
You go to hell.

Anton Chigurh:
Let me ask you something. If the rule you followed brought you to this, of what use was the rule?

Well, I've been doing whatever the technical analysis equivalent of "soul-searching" is all weekend. And I've repeatedly pulled up the long-term index charts, and I've stared at them, and stared at them, and stared at them. Then I stared some more.

All this staring has brought me to (a) a conclusion; and (b) a hypothesis.

My conclusion is that it is completely within reason that the S&P could get up to 1,150, even as soon as September. All of this talk about the reality of the economy (unemployment, tens of trillions of dollars of unfunded obligations, etc.) should just be dismissed. Reality and the markets aren't on speaking terms right now, and this bull run we've seen might be just 2/3rds complete.

The irony is that if we did get to 1,150, the bearish case would be more solid than ever. I still see a big, life-changing fall in the markets coming, and I intend to make a lot of cash from it. But this Waiting for Godot bit is for the birds.

My hypothesis is that I need a new trading rule to keep me better in line with the intermediate-term trend. I think I'd actually chuck the "Advantage" rule on my current list and bring in a new "Trend" rule to keep it at a nice, neat seven. The Advantage rule isn't something I've ever had trouble following intuitively, so it's kind of useless, plus it's too mushy for a set of rules that I prefer to be somewhat concrete.

Let's pause for a moment and focus on what I consider my mega-flub from two Mondays ago. We all were hoping for the S&P to break 875. It didn't happen. What I should have done, having seen the failure of a major technical setup, was close all my big short positions (and even gone long). But I didn't, because my bearish bias is still way too strong. One glance at the "upside-down" ProphetChart lets me see better how important the failed pattern was, because if this were a bullish setup, I'd have been all over it.

0726-upside

So the big question for me is……..(a) should I have a trend rule? (b) what should that rule be? I think the answer to (a) is probably "yes", even though it's very, very uncomfortable for me. It's uncomfortable at the moment because it would probably mean chucking every single position I'm in right now. I actually would be able to live with that (unless the market suddenly plunged, in which case I'd be committed to an insane asylum). It's also uncomfortable since so much of my chart reading is based on trendlines, support/resistance, and patterns, and framing all of my tradings with a primary rule that says "All positions should be bullish" or "All positions should be bearish" would be a real big change of technique.

I also don't want the past two weeks to stipulate a core change in my trading which is simply a reaction to what most of us admit has been a very weird two weeks. The fact of the matter is that, even with the big rise from March 6 to what we saw two weeks ago, my overall portfolio was nearly at its high for the year. So it's not like the rise had caused me all kinds of hardship. I was actually doing pretty well. It's only the past two weeks that have been decimating.

While considering this, I asked myself what kind of trend rule I could follow. The first thing that sprang to mind was trendlines, so I concluded pretty swiftly that such a rule would be a very blunt instrument, and it would take months during major market turns before I could flop to bullish or bearish, whatever the case may be.

I considered a simple moving average crossover. The 50 day/100 day actually seemed pretty decent.

The point of all of this is that, were I to implement a rule like this, I would permit myself only bullish or bearish trades. So, right now, my trend would be Bullish, and thus I would be confined strictly to Bullish trades, no matter how alluring any individual patterns may appear to be on the short side. You can imagine what kind of agony that would be for your beloved Tim. But I need to make an improvement.

I would feel pretty hemmed-in by such a rule, but being hemmed-in is what rules are all about – – to protect us from hurting ourselves! So my question to Slopers is twofold:

  1. Do you think the implementation of such a rule is wise?
  2. What would the specific, concrete, easy-to-define basis of such a rule be?

Plenty of people have been saying things like "there's no bull side, or bear side, only the right side." Or "trade what you see." I view statements like this are pablum. I need something specific and solid, not silly aphorisms. I look forward to the discussion.

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