[dc]W[/dc]hen faced with a strong uptrend with no pullbacks, as we’ve recently had in major domestic stock indexes (S&P 500 futures pictured in this chart), traders have a difficult decision: One, this contracting volatility makes the market vulnerable to a sharp selloff as there are likely many complacent longs. Any weakness will hit stops, which will trigger more selling, and a feedback loop can develop. On the other hand, it is hard to position in a trend like this because sometimes there simply will be no pullback. The question of the day is, “was this the pullback?” It’s worth pursuing longs aggressively here, but be alert to the classic signs of pullback failure as there may be higher-than-usual danger on any decline.
Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.