Containing the Slide

It should not come as much of a surprise after Thursday’s upside reversal and Friday’s follow-through rally to the upside that some giveback would occur early this week. The key for bulls is containing the damage and not allowing the bears to reverse the progress made late last week. While the good news is that this morning that damage is relatively minor, the bad news for longs is that there remains considerable progress yet to be made. With the 50 day moving average on the major indices still clearly sloping downward, as well as the highly defensive utilities clearly outperforming and leading the market back higher last week, we probably are going to have to exude another round of patience and playing it safe, meaning smaller than-usual-position sizes and a still-heavy portfolio cash position.

I know that I can be repetitive at times in corrective markets on the subject of patience, discipline, defense, and a heavy cash portfolio position. If you are wondering why so many traders either blow their accounts up and out of this business or take such damaging losses that they cannot trade anywhere close to full-time, it is largely because they feel compelled to seek action at virtually all times. The reality is that swing trading should not be viewed as a game of blackjack where you have to play every hand, or anywhere close to it. Just like a long baseball season, there is a natural ebb and flow to the action.

When the market is in a slump, even if it is valiantly striving to come out of it, we do not have to be in a slump with it getting our accounts chopped to pieces.