Saturday, May 2, 2009

Lack of Pattern Clarity Says "Get Back to Basics"

It is probably a truism of trading that bad trades follow great trades or at least that periods of great success are often followed by periods of sub par success. I think that probably applies both to individuals and to systems, because some systems perform better under certain market conditions and not as good under others, and individuals naturally experience periods of bias or emotional attachment to behaviors that have been rewarding in the past, even if they are not now. I'm sure the more real live trading experience one has and the more refined his or her methodology, the more ablility to overcome these tendencies.

I feel that I personally had a period of rather good trading and pattern recognition clarity since the beginning of January this year through the middle of March. However, the last few weeks things have become considerably less clear, particularly after this week from my perspective. This leads me to believe that the market is forming a somewhat complex price pattern since the March lows and that it still has some time to go before completeing it.

It is the nature of pattern recogntion that things are only relatively clear at the beginning and end of a pattern, but have much greater flexibility toward the middle. As a brief may be like someone driving from New York to LA. By looking at a map, we could probably have a large degree of certainty as to what routes they are, or should be, taking to leave New York and get headed west. Also as they approach LA, we once again would likely be able to limit the possible routes that they will be using to make the final approach to enter the city. However, there may be significant variability of the routes taken through the greater portion of the trip through the middle of the country. So for people who have followed this blog for some time, that's why it was possible to rather narrowly outline the bottoming range (end of a pattern) in March and to aggressively trade the expected initial strong thrust off the low (beginning of new pattern).

As relates to the current market, I feel that maybe I am in eastern Colorado somewhere where it is nice and flat, but things are obviously changing on the landscape ahead. Once I get through the Rockies, I think things will be considerably clearer, but right now I could see almost complete opposite scenarios as being about equally likely, which doesn't do much (if any) good.....or maybe that means I should make a straddle trade..........

So for the record, until I feel some legitimate level of certainty regarding the market pattern is returning, I am just going back to the basic (more mechanical) methodology of this blog which is to trade in the direction of the 20 and 50 day moving averages (with greater preference for the 50 day MA if they don't agree) at short-term extremes counter to that trend. Then when the next big turn is VERY close or already just underway, I think I should be able to quickly recognize it as this pattern nears completion.

So the safest bet at this point from that mechanical perspective is to assume the trend is "up" for now. Then if we see either a significantly larger decline than has occurred since the March lows, OR if we see an acceleration up into a potential climax type top, I think we could make a reasonable bet that the highs for this rally are in or close at hand.

Enjoy the weekend!

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