Perspective is a function of time and distance from events. It is much more difficult to think clearly and execute a long-term plan the closer you are to the market action. The stock market volatility last week had extreme moves in both directions with the net essentially unchanged.
The rally back to 11,400 in the Dow and 1198 in the S&P brought stocks full circle back to pre Standard and Poor’s downgrade levels.
But, the road to get there was treacherous and emotionally upsetting… especially for short-term traders.
I feel the best approach to this market has a couple of main keys to success:
- Buy limited risk high probability option plays that have enough time to be right.
- Manage the position by watching the weekly price charts for new relative highs and lows. Make exit decisions based on trend evaluation.
One key to my evaluation of the markets is by using the most appropriate data set.
In this case I’m talking about weekly analysis.
By using weekly analysis we can diminish outlier events. This in turn helps to evaluate trends. The goal is to look at investments using a marathon view game plan unlike the short-term focus of the 100-yard dash.
A quick scan of thirty commodity markets – the ones that have enough liquidity for option strategy execution – identifies the overall trend. Up, down or sideways are the only possibilities. When looking for new opportunities either a pullback or breakout on the weekly price charts can trigger a trade decision for entry or exit.
Overall, respecting long-term established trends has treated my Resource Trader Alert members very well over the years.
Let me show you what I mean…
Here’s an example that compares daily action in gold versus the three-month data, take a look:
With such a short-term snapshot the above chart doesn’t give us much help in determining a profitable trend.
Now, notice the consistent new highs each week to support the overall uptrend. That’s the power of keeping your eye on the broad picture through weekly data.
So… what now?
Volatility may very well continue. Indeed, it may be technology and information driven – there’s a lot to be said about the psychological difficulties processing the newfound abundance of financial data.
But it is important to keep an eye on the weekly trend.
The extreme lows last week put stock indexes at 20% off the recent highs. The recent buying recovery has placed prices a reasonable 12% from the peak. One week does not change the trend, not yet anyway.
This market action isn’t so crazy after all. Keep your eyes on the major trends – this philosophy has treated my elite readers well so far and looks to continue.
Sincerely,
Collect Consistent Gains in Any Market was originally featured in the Tomorrow In Review.
