Buy And Hold Seldom Works Nowadays

This recent market rout is the perfect example of why a passive buy and hold strategy often does not work in today's trading environment! Anyone who bought maximum oversold Tuesday would now be meaningfully underwater. In fact, anyone who bought the market just as it was rebounding off its lows last week would be barely breaking even. All the volatility and risk but none of the reward or profit!

The Fake-Out Shake-Out (FOSO) market

The fade off key resistance levels yesterday has turned into a full-scale rout. I capitulated on my long and quickly yet short. Fortunately, my about-turn paid off and I managed to reduce my losses somewhat. But the damage has been done.

The point of maximum oversoldness is not necessarily a good buying opportunity. It all depends on what has happened before that point. Unfortunately, the market bottomed one week before the point of maximum oversoldness and rallied into, and past, that point. The skews the risk/reward ratio of any swing trade on the long side increases the probability of being FOSO'ed.

The 1183-1186 gap in the S&P is now being filled.

See-saw action

The market continues its see-saw action. Up then down; down then up.

Such action is good for the intermediate term as it continually allows positions to be accumulated by the strong hands. But in the near term I am worried about the gap in the S&P stretching from 1183 to 1186. If this gap does fill, it would be a very strong buying opportunity.

Pain and Profit exist side by side

It is true that pain and profit exist side by side. What begins in great pain often ends up in great pleasure. What begins in great pleasure often ends up in great pain.

It is true that trading the RUT brings great profits, but one must endure great risk to achieve those profits.

Thus I have decided that for swing trades, it is better for me to use the NDX rather than the RUT. To be sure, the profit potential is less, but the lesser volatility of the NDX compared to the RUT and the ability to use a smaller notional exposure allow me to control the risk much better. Trading is all about risk management. At the end of the day, your trades must be commensurate with your risk profile, account size and emotional makeup in order for you to be in full control.

Risk first, then reward.

I have gone long the RUT after the selloff today. All indicators still point to an upturn in the market. Even the short term oscillator is not yet overbought. In addition, my proprietary indicator crossed into bullish territory as of yesterday's close.

Turnaround Tuesday

The market is now maximum oversold based on the 30-day A/D line. Both last Friday and Monday were rally days, with Monday being the more powerful one. I refused to hold my long RUT position going into Tuesday because I feared that the market would do a "turnaround Tuesday". This is part of the basing pattern I saw in April 2005 when the market would be up one day and then down another. Also, maximum oversold does not mean we go up in a straight line. It is the business of the market to continually shake the weak hands out. Indeed, now as of 11.32, the market is correcting.