Sunday, May 18, 2008

Trading System

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In the last "Technical Analysis" post I have mentioned that I’m not going to be surprised of early exit from the correction. Starting from Monday the stock market is moving up.

Again we saw that the strong overbought indicators were needed to push the market in the correction while weaker oversold indicators have reversed the market back into the up-trend. As I said in my previous posts - this is one of the characteristics of the general up-trend. So far, I have not seen even closely so strong overbought indicators that could be compared to the oversold indicators in January and March 2008. Yes, we may face corrections down, yet I believe there is still some time before the market release the energy collected during the recent market crash.

Yes, my mood is bullish in the long run. You may ask why it’s so important for those who play on the short trades to spend time on the longer-term technical analysis. The answer is simple – one of the trading strategies that could use long- and mid-term analysis in the short-term trading system is do not place a short term trade against general market trend. Many traders consider it as a golden rule – DO NOT PLAY AGAINST THE TREND. Some traders interpret this rule as a short-term trader does not have to play against the short-term trend, however, this is not my understanding.

In my understanding the example of the implementing this rule into the trading system could be:

  1.  If a short-term trader is bullish in the longer-term trend then
    1. A traders uses any correction down to open a long position
    2. A  trader does not trade short no matter how strong overbought indicators are. He/she uses overbought technical indicators to close the long position but not to open a short trade
  2.  The opposite for a trader in the bearish longer-term mood.

This is my understanding of "DO NOT PLAY AGAINST THE TREND", That is why I spend time to analyze the general market trend even if I do not use it to invest for a long-term…

Ok, no back to the market. Sorry, I do not post the chart today, yet I may say that my technical indicators tells me that again we may see some correction, yet, I would consider that it’s a little bit early to talk about it. Yes I may see the short-term indication of the overbought market, however the S&P 500 and the NASDAQ 100 indexes in the up move (DJI Index is exception – it stuck on the same level over the last 3 sessions) and as a rule very often we see some flat market before any serious correction. I would monitor closely the indicators over the next sessions to see if there is any indication on the correction…


Kevin said...

I do agree with your analysis that the market is on the rise. I am a personal fan of the McClellan Summation index, which I have decided will be an official bull market once it holds 250-300 or more for three straight months. However, I do not believe market conditions are bullish at the moment. We saw the Dow rise to 5-month highs in the past week, only to drop like a lead balloon. Although rising gas prices are not helping, I do believe the transition into this bull market has been a bit sluggish. Good read.

TraderJoe said...

Yes, I like McClellan Oscillator, yet there is not a lot of sources of this indicator for the S&P 500 and other indexes. I’m not sure if somebody provide McClellan Summation index other then for NYSE. When it comes to the technical indicators based on the advances declines there is luck of intraday data, unless you calculate it by yourself…