Tuesday, May 04, 2010

Shoulda, woulda, coulda

There's 3 words that I keep thinking I've managed to eliminate from my trading vocabulary. . but then days like today pop up. Watching Monday's close on the Strategy Matrix I noticed an unusual situation . . the VIX and VXN were both 27:9 bullish = market -, and the SPY, Qs and IWM were also flashing bearish 13:23 readings. At the time, of course, the markets were up big time and although the NYAD was running lateral, it was still delivering a strongly bullish reading in the 3s. After rapping my knuckles against the monitor a few times to make sure I was getting live readings I had to conclude that the technicals were clearly indicating impeding weakness.
Meanwhile, the Currency Rotator was flashing a confirmed UUP BUY signal (see previous post), but my feeble ole brain was suspicious of that signal, opting instead to stand back and wait for some additional technical confirmations. Bad move.
My point? Technical traders like myself are occasionally faced with a dilemma . . to follow or ignore an active trading signal. In this case my decision to ignore signals on the Matrix and the Rotator resulted in a significant opportunity cost and a bit of drawdown on open Longs that I should have exited at yesterday's close. Despite the many limitations of technical analysis sometimes it works superbly, while over-analyzing a trading situation can have costly consequences. Shoulda, woulda, coulda.
Three hours into today's session and the NYAD is tracking along at .14, having hit an earlier low of .13. Event days like today where the markets open at S2 or lower offer limited opportunity for high probability entries IMHO since the conditions setting up a bounce or follow through scenario are difficult to evaluate out of the gate. Best to stand back and wait.
With the VIX and VXN making 25% jumps today and the QQV up almost 32% we may see NYAD values down to .10 or lower . . a strong indication of exhaustive selling momentum.

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