How many times in the last 3 years have you tried to pick a top?
I can tell you from personal experience it is a fruitless endeavor. Having started my career at the end of the dot-com era most active traders at the time were only making money shorting the market. The volatility was incredible and swift. You got paid quickly.
Until March of 2003.
Price action changed and new lows were not so violent and crisp. Those of us who made money shorting were starting to get frustrated because the follow through wasn’t as orderly. Short-selling new lows was starting to lose money so we started to short-sell the bounces off the lows.
Risk/reward started to get close to 1-1 on the short side. Shorting the pullbacks made money but we weren’t pushing cleanly to new lows. We would hit the low and stall, or worse, bounce back to a flat.
How You can Benefit From this Trading Lesson
Nobody gets rich picking a top or a bottom. Anyone who tells you they can do it with accuracy is full of beans.
However to be a complete trader you need to recognize when it is time to stop trading aggressively. The most money you will ever lose is when you don’t have a system for interpreting when the trend is changing. This chop zone is an area when you are consistently buying the high (and losing money) or shoring the low (and losing money).
You continue to grind out trades as your account bleeds from the paper cuts. You don’t notice but all of a sudden you need a transfusion. It’s time to put more capital in your account.
The signal the market was turning was the lack of new sellers at new lows. This was followed by stronger bounces. We are starting to see similar price action in the SPY right now. Price action can only be described as “whippy” without a clear side in charge. The bulls and the bears are waiting to see who tips their hand.
Another sign to be cautious with aggressive long positions is the head and shoulders top we have forming. The right shoulder hasn’t formed yet but you should be aware of the $190 level. If it breaks this is significant.
SPY Head and Shoulders Top?
(Click to view)
Learn more about how to trade the “short side” if the SPY breaks trend.by