One of the things that has surprised me over the years (in a good way!) is that macro shocks align with technical, more often than not, when technical patterns are strong. For instance: it’s extremely unusual to see a very bullish pattern in a market torpedoed by bad news. “Bad things” happen in stock indexes after a decline is already underway. Sharp, snapback recoveries from cratering declines are rare (excluding the usual mean-reverting bounces).
However, one of the other key rules to keep in mind is that nothing is near 100% in markets–everything exists in a band of probability, and sometimes patterns resolve unexpectedly. In the case of the bank stocks, many of which had declines greater than 5 times their average daily move on Friday (to say nothing of SILV, whose decline is 29 times an average day!)), most of these declines were not very well telegraphed by technical patterns. This happens sometimes. Your goal, as a working trader, is not to catch or to foresee every move; your goal is to make profitable trades, over a large sample size.
And the way we do that is adapting to new information as the market gives it to us.
In this email last week, we laid out a fairly bullish scenario for stock indexes. The second day of the week showed us that the bulls were losing control of the market, and we were forced to update our bias and to focus on shorts. As of Friday’s close, our MarketLife published recommendations included no long stocks “underway”, and five shorts. This was not how we expected the week to go!
Of course, this type of flexibility flies in the face of conviction. Television and social media are filled with commentators who speak with complete confidence. When they’re right, they will remind you for weeks; when they’re wrong, well, the public has a short memory… but your trading account doesn’t!
If you’re struggling as a trader, one of the keys can be to develop flexibility. Find that sweet spot where you adapt to incoming information, act on your signals without hesitation, and move to the sidelines easily when wrong.
The week ahead (potentially market-moving datapoints)
- Monday: None
- Tuesday: 8:30 CPI
- Wednesday: 8:30 PPI, Retail Sales
- Thursday: 830 Housing Starts, Jobless Numbers, Import & Export Prices
- Friday: 9:15 Industrial Production