Breaking The Big Bad Bull’s Back

Every once in a while it’s a good idea to detach yourself from your daily trading activities and take stock of the big picture. Although I do not trade weekly or monthly charts they do however serve one very important purpose – which is as a measure of strength given the prevailing trend. So let’s forget about playing the daily bounces for a moment and let’s simply revisit at the tape of the past six months:

I don’t know about you but to me this looks pretty ugly. Since late December of last year we have suffered through two massive high volatility sideways periods, only interrupted once by a nice straight run higher during February. The rest hasn’t been fun, to say the least, and I’m sure it has blown up retail accounts left and right. However hitherto the bears remain unable to break the big bad bull’s back. Nevertheless the price action clearly tells us that the ongoing trend is weakening. This is not the same bull market we have come to enjoy (or to hate at particular trading blog which shall remain unnamed) and the implication for us, as traders, is that we need to respond in kind and adjust our trading activities.

Now what I am not suggesting is that we immediately start to look to the downside. Long term tops take quite a long time to form (clearly) and shorting the market without confirmation is a pretty bad idea. Bear in mind that we have yet to break any long term bearish inflection points – be this the 25-week SMA, the 100-week SMA, the 100-month SMA for that matter. So boy – do we have a lot of time to change our minds about this market – more time than most of us would care for. Going forward however what we do need to adjust are our expectations. The long straight runs to the upside are most likely over.

Although we are stuck in sideways mode we are seeing the VIX bounce around between 13 and 16. Which I consider a very casual risk pricing model at best – and most likely rabid complacency after six years of effervescent bull market exuberance. What happens from this low base will most likely not been six months of the same – I really don’t think we are going to see the VIX drop to 10 or lower and paint a range there. If that happens after all I won’t be caught with my pants down however as I’m not shorting the market here. What I am however doing is to adjust my trading to accommodate the possibility of:

• Fake out breaches – like the one we recently saw near the top.
• A sudden rise in volatility if one of the major support levels give way.
• In general more and prolonged sideways corrections going forward.

I think these three points really summarize some very realistic assumptions going forward. Perhaps we’ll be positively surprised  as I wouldn’t mind another extended run higher. But until I see a major breach to the upside, and even then probably, I’ll be extra picky with my setups, take profits a bit earlier, especially on the equities side, take smaller position sizes and wider stops. The overall goal for the coming quarter is survival and to keep one’s powder dry.

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