Trading Strategy

On July 31, 2010 in my "Volatility" post I mentioned "Overall, I would say that you may find a number of technical indicators that suggest possibility of up move. My technical analysis tells me that this possibility exists as well, yet, so far, I do not see the indexes gonging higher their June 21st and July 27th highs." Taking look back at the past week, we had relatively quiet and side-way trading with exception of strong up move on Monday's morning and strong swing down and up on Friday. The S&P 500 index stuck in side-way action exactly at its high seen on June 21st, 2010; the Nasdaq 100 index - a little bit below and the DJI index a little bit about.

Now, by analyzing indexes I would say that the situation is mixed at this point. From one side on the longer-term charts we have decrease in volatility which would suggest the possibility of up-move. From other side we started to see negative divergence on many technical indicators - when price moves up and makes new high, yet an indicator either moves side-way or moves in opposite direction.

If I would analyze all technical indicators I would say that, because of the side-way trading over the last 5 days, 50% of technical indicators are neutral and could be interpreted either as bullish or bearish, 25% of indicators are bullish and the rest 25% are bearish. The one may ask how a trader can make a decision in such situation. The main challenge of technical analysis that the stock market never gives you 100% clear signals. There are always some technical indicators that favor up-move and some technical indicators that favor bearish trading. The challenge is to define what indication is more important at given period of time.

In the current situation, even I more bearish (because of negative divergence I see on many charts), I would say that (as in most cases of side-way trading) a simple strategy could be used. Every side-way trading defines upper and lower lines of side-way corridor. If upper line of side-way corridor (high on August 4) is broken - odds would favor bullish trading. If lower line of side-way corridor (low on August 6) is broken - odds would favor the bears. Until then conservative approach on my opinion would be to remain in cash.