Be Reasonable

By -

I feel compelled to write something for a number of reasons:

+ You are, like it or not, my therapy;

+ My brain has been in trade-psycho-overdrive for the past 30 hours;

+ It is only proper that I disclose any "big feelings" I am having with the group

Of the many complimentary emails I've received over the years with respect to this blog, by far the most common reason people cite for their love of Slope is my honesty. I freely admit screw-ups, fears, concerns, problems, and any other bad or embarassing stuff that 99% of other blogs would hide or outright lie about. Some clowns take advantage of this openness by hatefully mocking me, but Karma has a way of catching up with such souls. It always has. I'm not going to let emotionally-unstable sociopaths keep me from being open and honest.

I thus took a great risk with my post on Friday morning about why I covered all my short positions. Ya see, the way this works is:

(a) if the market keeps plunging, my reward is to look like a complete asshole, particularly since I am the King Of The Bears, so the irony would be terribly poignant;

(b) if the market pushes higher, no one will care. If things were balanced, I'd look like a genius, but that ain't the way it works. If you make a bad call, everyone raises hell about it; if you make a good call, no one even mentions it.

My pointing out of the triangle pattern (on the ES) and diamond pattern (on the NQ) would, in a just world, put my face on the cover of Business Week, but nobody seems to have noticed. On the other hand, make a bad call now and then, and trolls like the Hun will assert (with some degree of perceived credibility) that I've been steadily shorting the S&P non-stop since 666.

But, again, I have to be honest, and the stone-cold truth is that my NQ and ES targets were achieved, and it would have been irrational to simply have hung on, hoping for an even greater drop. It feels great to make money when the market is going down – – – there is nothing on this planet that I love more – – – but one of the many awful things about trading the bear side is that markets don't fall forever, and the party always ends (usually way too soon). Even the monstrous bear market of autumn 2008 that people still talk about really only lasted a few weeks. The "meat" of the drop was probably confined to a mere twenty trading days.

On Monday, when the market opens, there is one thing I can guarantee 100%: the market will either go up or down. Trading is 99% psychological, and that's why a circumstance like this is so risky:

+ If the market is UP, validating my actions on Friday, I will add to my modest long positions and continue to ride the tide of events, awaiting the moment when prices are at attractive levels again for shorting. Obviously, this is what I'm hoping happens.

+ If the market is DOWN, that's when one's psychology can play complete hell with you. I might be tempted to dump my longs at a loss (which, please remember, are a mere 12% of my portfolio – the rest is cash), short stocks like mad to try to get back in position…….only to risk watching things turn around at that point. And that, of course, is when one wants to jump off the nearest radio tower.

That second scenario is where the real risk is. Let's just assume that, over the past couple of weeks, the  market is going to fall another 20% (I am being facetious here to make a point). When does one get back in? The fact is that if indeed the market was going to fall 20%, getting back in to all my shorts wouldn't be particularly "expensive", because the price difference between what I covered at on Friday and my entry prices Monday wouldn't be that significant in the context of a big drop.

But, of course, no such drop is guaranteed at all. Indeed, the ES and NQ are both calling for a bounce. Therefore, the decision boils down to whether one should be strictly rational and risk foresaking precisely the kind of market action that one craves or if one should jump right in and follow the crowd.

Even just reading that choice, it's obvious the right thing to do is remain rational, even if it's utterly agonizing. We have to be rational in the face of uncertain outcomes, but rationality is the only thing we can trust. If you are truly going to use technical analysis as the basis for decision-making, then that should be your basis, because the possibility that the market might keep going in "your" direction isn't reason enough to dismiss the charts and simply hold on, hoping.

I'll close with one last thought – – I'm starting to understand the bullish mindset, because a little voice in my head has been whining – – "why don't the leaders DO something? They are SUPPOSED to help the markets. What's wrong with them? Why don't they announce something HELPFUL?" (Try to read these words in the grating voice of a five-year old).

This is how bulls think in a bear market, because they want someone Big and Strong to help bail them out. It's somewhat shameful for me to have such thoughts in my head, but my ulterior motive, of course, is that I want another chunk of Big News in order to get prices to shortable levels once more. The reason I bring it up is that I never hear the voice the rest of the time – – it's wholly novel to me – – because bears don't HAVE any government heroes ready to leap to their aid. We are, and always will be, completely self-reliant, trading in opposition to every other entity on the planet.

But, for once, I wouldn't mind such a confederation making yet another effort to save the bulls from their own flawed view of the world. There's not an iota of doubt in my mind that we're in a bear market. Let's just say I don't want to be the one to miss it. That would just hurt too much, especially after the living hell of June 2009 through June 2011.