Strategy Session: Dip Your Toe to Feel the Water

I’ve talked at length here over the past few weeks about how I’ve been largely paralyzed at my desk, unable to pull the trigger on the long side.  I had a great  Febrary-May, just about as good as I could have expected myself to trade.  I put on risk when it was appropriate, took it off when it was warranted.  I even made a few bucks on the downside.

But the past two weeks have been tough watching the market ratchet straight up without me.  Friday was the worst, I felt some real fear that the train was about to leave the station for good and I was left behind.  Today obviously made me feel a whole lot better.

I want to quickly discuss something that I talked about this afternoon with someone I trust, someone who is sort of a mentor to me (yes no matter how good a trader you are, you should always have a mentor, or mentors).  It’s about testing the waters.

It’s not our job to pick bottoms, there’s really no point.  But as the market stabilizes it’s a good idea to look for those stocks which have held up, and dip your toe, just to get a feel.  I’m talking 15-20% exposure.   On June 10th, as the market gapped up big, the prudent thing for me to have done was step in with a few small positions.  The market had held support at SPX 1,040 twice and a slew of relative strength names were showing good risk reward entries to the long side.

It’s important to establish these small positions to give you a foot in the door, so that if the market continues upward, as it has, you don’t feel as if you are jumping in late.  As your positions show you a profit, you add to them, and as the market gets way overbought, as it was this morning at the open, you peel back.

Back in February I played this game perfectly, establishing small positions right off the bottom, and loading the boat on the pullback  Feb 25.  By the time the market was off to the races I was almost 100% long.  More importantly though, I wasn’t afraid of chasing the train down the tracks on foot, I already had a horse, or a few of them to be precise.  This mental aspect of swing trading is so important, and I obviously failed this time around to execute properly, for whatever reason.

Today’s action was ugly and I believe we now see a short term pull back.  The question is, will we consolidate in a bullish fashion and then surge or do we just roll over and continue in the the intermediate term downtrend?  I have no clue, but if the action is decent over the next week or so, I’ll dip my toes into this market.  I bought some Whirlpool $WHR today, but also took a short position in $BKS.  We will see.

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