In this last day of reflection prior to the resumption of trading tomorrow, I thought I would share this with you. Here are the top lessons the market handed out to us in the year just passed. Most are old lessons that just need to be reinforced. In the heat of the "battle" some are difficult to keep foremost in our thinking.
Lesson #1: Price patterns work.
I, personally, have difficulty trading classical chart patterns as I note they tend to fail to deliver the next technical expectation as often as they deliver. That being said, there is no denying that, for the broad markets in 2011, they did deliver on two notable occasions. 1) The summer of 2011 with the head and shoulders off the May high and 2) The double bottom off the August and October lows. One of my personal goals this year is to attempt to do better in this area. To that end, I will be using Tim Knight's and Tom Bulkowski's works predominately.
Lesson #2: Markets tend to do the exact opposite of what most expect.
This goes hand-in-glove with Lesson #1 and why these patterns tend to work. At the May top, sentiment was overwhelmingly bullish as most expected the market to continue to advance. At the October low it was overwhelmingly bearish as most expected the market to continue to drop. Notice that the October low undercut the August low which sucked in the late to the party bears. The rapid advance then lead to a pennant formation. Bulkowski states that 81% of the time, this is resolved in the same direction as the initial price move. Since this was a very widely followed and commented upon formation, it did not break to the upside but the downside. Again, the very opposite of what most expected.
Lesson #3: Contraction leads to expansion.
Markets do this continuously. Rapid directional price moves tend to consolidate. This consolidation is choppy price action. As traders continue to get chopped out of trades, complacency sets in as they leave the market, exhausted from the chop. Then you see the next large directional move.
Lesson #4: Markets will go much further than most expect and then reverse and go as far as possible in the opposite direction.
Early last year we saw this to the upside as the mantra was Just Buy The Dips (JBTD). That worked just fine until support failed to hold and then we went much further to the downside than most expected as "retracement" turned into correction. At the market low in early October, August support basically held and the market quickly and very rapidly reversed to the upside. Again, catching most by surprise. Be prepared for similar in 2012.
Lesson #5: Your mindset will determine your performance.
In early May, if you expected the market to continue to advance, surprise! Conversely, in early October if you expected the market to continue to decline, surprise! Self control when markets are putting in highs and lows will keep you in the game. Apply some objectivity to what you are seeing. Do not get locked into a directional mindset.
Lesson #6: What worked in 2011 will not necessarily work in 2012.
The market is ever evolving and we must evolve with it as traders. For basically 2.5 years, just buy the dip, buy the dip and keep buying the dip worked rather well. We even witnessed this on an inter day basis as price would pull back for 60-90 minutes and then popped again to the upside. That changed this year. Do not get swept away by the herd.
A final quick note! Get those SPY Guesstimates in! Potentially a lot at stake and some people are going to win some good stuff! The email address now works. If this link does not, just copy and paste. [email protected] Here is the link to the post so you can see the rules and prizes! And please! This is the SPY, not the SPX! If you submit a four digit number before the decimal point, I will just move the decimal point for you! Here is the link to the post: http://slopeofhope.com/2011/12/slopefest-iv-v-and-spy-guessing-contest-by-market-sniper.html
Happy New Year to all! Yours in the ever widening search for the trading edge. The Market Sniper