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Sticking To Disciplined Approach

Trendline Helped Us Stay Long In 2012

On Friday, December 28, 2012 fears related to the “fiscal cliff” were running high. We were long and it was very uncomfortable as stocks were dropping that week. We drew a line in the sand and said “we are holding our positions as long as this trendline holds”. The trendline did hold at 1402 on the S&P 500. Staying disciplined allowed us to capture some nice gains between 1402 and 1500.

Need To See Break Above Trend Channel

We drew another line in the sand last Wednesday in the form of a trend channel. If the S&P 500 can close (emphasis on close) above the downward-sloping trend channel below, we will be open to redeploying some of our cash. The trend channel is part of our disciplined approach to make the market prove to us that it can move higher, rather than just bounce. Look how impressive the three candlesticks look in mid-October below; just before stocks tanked.

We typically do not buy markets that have an established downtrend on a daily chart. The look of the trend channel above calls for some additional patience from investors, who have a much different time frame and approach vs. active traders. Bounces with a “bullish” look and feel often occur as markets peak (see September-October in the chart above). A breakout this week above the trend channel would negate the “similar look” concerns. It has not happened yet. It may, but we are not in the business of assuming what markets will do in the future; right now the channel is still in play.

Filed in: Trading

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