Last week, I closed out a few swing trades and shifted to cash. I’m glad. I’ve day traded and it’s been a good week, and I didn’t need to roll the dice overnight in order to turn a profit.
Heading into Friday, I think there are 4 good reasons to remain in cash over the weekend:
1. Busted Patterns. Simply put, right now for most stocks it’s too late to short (for the initial selloff anyway), and it’s too early to go long. For me, the smaller the pattern, the shorter the timeframe for the trade I’ll take from that pattern. With this week’s sudden shift of direction and the intensity of this initial pullback, whatever had been looking bullish (sans energy) now isn’t, and whatever had been looking bearish has cracked like the Liberty bell. Most patterns out there are 3-bar setups, which means I’ll day trade them if they confirm but otherwise will allow them to mature further (read: sit on your hands and wait).
2. Added Uncertainty. Heading into a 3-night, 2-day stay in the heart of Uncertaintyville isn’t great for capital preservation. Holding overnight always involves uncertainty, but when we’re in an environment which is so sensitive to geopolitical events in the Middle East, it has more of an earnings announcement feel to it. One of my trading rules [1] dictates that I avoid holding positions into earnings since I have no edge, and because it makes risk management so difficult impossible. Right now, gap risk is running higher, so when the setups aren’t there (see #1 above), why hold overnight?
3. Change of Character. Every dip has been bought…until this week, which is to say the landscape has shifted a bit. That’s not bad, and it doesn’t mean the bull market is over. What it means is that the multi-hour pullback has been stretched into at least 1 multi-day pullback. We’re getting more back-and-forth, which is more commonly associated with a trading range than a trend. The market’s taking a much-deserved breather here at the very least, and we need to respect that.
4. Better potential ahead. There are a few setups I’m watching for Friday’s session, but the truth is that I expect much better opportunity to surface next week when it comes to swing trading [2]. A couple of bars go a long way when patterns are developing, and right now that’s just what many stocks need. I expect we’ll see that take place next week, so I’d rather have the peace of mind and lack of risk than to fret over the weekend about what a potentially hurtful gap would mean.
Once the dust settles ‘over there,’ we’ll have some better patterns and spots to pick and choose from. And the good news is that volatility is increasing, which means more movement anyway – always a great thing for short-term traders like you and me. So enjoy your weekend and rest up, next week is sure to be another interesting one and we’re going to need to show up ready!
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast [3]
Are you following me on Twitter [4] yet?