Are you nimble like a ninja? Your trading profits depend on it!

In steadily trending markets (either up or down), traders can simply enter new stock and ETF trades, set their initial protective stops, then sit back and let the trades play out. However, in the current stock market environment, which is becoming increasingly volatile and indecisive, being nimble like a ninja is crucial in order to prevent churning one’s trading account. Most importantly, one must never fall in love with their personal bias or opinion of which direction they expect the stock market to trend. Rather, it is critical to remain highly objective of stock market conditions at all times, emotionless, and willing to mentally switch from one side of the market to the other without contemplation or fanfare. Short-term traders who learn to master this challenging psychological skill have already completed one of the key elements of becoming a consistently profitable trader over the long-term.

In the recent June 18 issue of our Wagner Daily swing trading newsletter (and on this blog post), we said our rule-based market timing system had suddenly switched from a “sell” signal to “buy signal for the first time in more than two months. As such, we carefully began re-entering the long side of the market, selectively buying stocks and ETFs with relative strength to the broad market. However, in that same commentary, we also said, “Nevertheless, it is important to note our new ‘buy’ signal is not yet confirmed, as we still need to see more confirmation in the form of leading stocks breaking out to new highs and holding. We should also see a significant pick up in the number of stocks hitting new 52-week highs versus stocks falling to new 52-week lows…If anything, the only point of concern we have with the current buy signal is that the major averages (S&P 500, Nasdaq, and Dow) are still trading below their 50-day moving averages.” As such, because our buy signal was not yet confirmed, all new long trades were entered with reduced share size and tighter stops in order to reduce capital risk. Then, just three days later (on June 21), the main stock market indexes plunged sharply lower and on higher volume, thereby negating our new June 18 “buy” signal that was recently generated (click here to learn about the 4 different modes of our proven market timing system).

When our market timing system suddenly shifts into a new “buy” mode after several months of preceding selling action (as was the case throughout April and May of this year), our goal is simply to “dip a toe in the water” by entering a few positions and closely monitoring the feedback from the broad market. Are there enough breakouts to buy? Are new breakouts holding up or failing? Are stocks breaking out in large quantities? If the answer to most of these questions is “no,” our focus quickly shifts from being offensive to defensive if a sudden bout of “distribution” (institutional selling) hits the market. For example, if last Thursday’s (June 21) selloff did not occur until a few weeks from now, after we had already booked several substantial winners on the long side, the one-day selloff would have not been a big deal because it is normal to see occasional distribution during a confirmed rally. Had this been the case, we would have continued to focus on offense, rather than defense. However, an ugly day of heavy volume selling just 3 days after a new “buy” signal, combined with poor price action in recent breakouts, forced us into capital preservation mode and caused our market timing model to revert back to unconfirmed “sell.”

For those who are new to the swing trading strategy of The Wagner Daily stock newsletter, we typically seek to hold stocks and ETFs an average of 2 to 4 weeks to capture capital gains in the 15-25% range (about 10 to 15% for most ETF trades). Yet, over the past week, we’ve held on to our swing trades for just a few days instead. This is because our market timing model had just generated the unconfirmed buy signal and we were playing it “close to the vest.” As previously mentioned, an unconfirmed buy signal means it is okay to begin buying stocks and ETF, but only with reduced share size and tight stops.

So far, our greater than usual trading activity of the past week has been working out well. Immediately after our market timing model reverted back to a sell signal after the June 21 close, we closed our existing long positions in our model trading portfolio (on the June 22 open). We scratched on one position ($AMLN), and locked in small gains on the other two long positions ($IBB and $LF). So, despite the swift switch from a “buy” back to a “sell” signal, we still managed to eek out some profit from our open positions. Then, later that day, 3 new short positions (2 inversely correlated “short ETFs” and 1 individual stock) triggered for swing trade entry. As of the time is writing, all 3 of these bearish positions ($MZZ, $FXP, and $GOOG) are showing solid unrealized gains as the stock market declines sharply today. Our fourth open position in the model trading account, PowerShares U.S. Dollar Bull Index ($UUP) long, is also showing an unrealized gain, but has a low correlation to the direction of the equities markets either way.

The importance of staying nimble in the current market environment may best be summarized by the following feedback which we recently received from a new subscriber of The Wagner Daily. In an online trading forum, he stated, “I especially like what happened a few days ago. The S&P 500 Index ($SPX) broke through its 50-day moving average and they said the market was a buy. Then, when it tore through the 50-day MA downhill on Thursday, they just reversed their call on Friday, and started giving short setups. No apology, no fuss, just – its another day, and now we’re looking to go short. And the attitude is like an ‘Anti-Kramer,’ where things are friendly, but nobody’s pulse ever goes above resting.” Ha ha! For what it’s worth, we especially appreciate the last sentence, and consider it a big compliment to be told our style is “Anti-Kramer.” What do you think?

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