Happy New Years to everyone! 2008 was an interesting year to say the least and while there were certainly plenty of opportunities it was also a very difficult environment at times. I ended up having my best year to date and one of the keys was acknowledging what the markets were telling me and altering my approach as an adjustment. For instance it was quite apparent early in the year that volatility was coming back and that it was important to account for that with my position sizing. Also, the second half of the year often saw daily gaps in the indexes of over 1% in either direction, and made for a difficult swing trading environment.
I didn't change my setups for the most part, I just focused on using the ones that were still working. Also, towards the last quarter of the year, I dramatically shortened my holding periods to intraday only and small position overnight trades. Even the overnight trades were typically bought late in the afternoon and sold the next day. This allowed me to keep my exposure to a minimum and still be exposed to the increased volatility.
This year promises to be pretty interesting as well, as there is no doubt that the markets are not past the volatility and fear that has been prevalent. The markets kicked off the New Year with a bang on the opening day, and there is optimism that it will carry over. While I am neutral on the near term, the markets are starting to get overbought. While it doesn't "feel" like the recent rally has been that strong, I was surprised to see that most of the indexes are up 20% from the November lows to Fridays close. Also, T2108 (Wordens Indicator measuring Stocks above their 40 day MA) is shockingly over 80%. This really caught me by surprise as it wasn't that long ago (October) that I wrote about this indicator hitting the 1% level. Here is a chart showing T2108.
Notice how it rarely stays over 80% for long. While this isn't necessarily a predictor for a market correction, it does provide a pretty reliable indication that the markets are getting a little unsustainable. What could and often does happen is that the markets continue to rise a little more on decreased participation until it eventually corrects. In this case, it could very well signal the resumption of the overall down trend.
This really is an interesting time, as there is conflicting evidence on the longer timeframes. While the markets have shown fear levels and other technical watermarks that have coincided with previous Bear market bottoms, there is also the threat (and evidence) that this Bear market has only just begun. While I won't pretend to know what is ultimately coming, I feel quite certain that we will have at least one sharp pullback in the next month. We may rally into the Obama inauguration, or we may sell off tomorrow, but I don't think that the fear that has been prevalent over the past year can be washed away with a one month rally. Maybe it can, but I won't gamble with it which is why I trail my stops.
Good Luck and Trading in 2009,
Joey
