…but first, we have to actually be in a trend. Mr. Market has not been very kind, and in fact has been downright nasty, to both bullish and bearish traders who have presumed a sustained trend in their favor over the past three or four months. As I note in the video below, I have no interest in being a hero going into next week. I would most certainly welcome a fresh bull leg higher, as they tend to be relatively easier markets. If we are, indeed, poised to break above this multi-month trading range and begin a true sustained uptrend, then by definition there will be time to get on the momentum train.

Until that happens, however, I will respect the range. In addition to the price action, other indicators have been flagging overbought conditions, namely The PPT.

NOTE: If the video is too small for you to see the charts, you can double-click on the screen and watch it on YouTube.

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[youtube:http://www.youtube.com/watch?v=j1QvCQtUV5g 450 300]r

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I have a 62% cash position, four longs acting well ($CMG, $CTXS, $ROVI, $TQNT), as well as some hedge to the downside (long $SRS). The way this market is acting, we could be setting up for a “don’t short a boring market” type of rally, or we could be topping out before a sharp leg down next week. I do not claim to be smart enough to determine which of those scenarios will play out. If anyone does, step forward and ye shall be judged.

I believe that the most profitable traders are selectively aggressive. Many traders are very selective, while others are extremely aggressive. However, combining the two is often difficult. There are times when acting boldly is correct. I think this is one of those times where it is correct to take some weight off of the accelerator. Should the market explode higher next week, well, I still have some skin in the game. Obviously, I will not reap the full reward in either direction.

Given that we are consolidating near the top of a multi-month trading range, I am willing to accept less of a potential reward in the face of increased risk.

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[youtube:http://www.youtube.com/watch?v=kn481KcjvMo 450 300]r

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As an individual trader, the discipline it takes to be nimble is by far your most powerful weapon. Take my previous $LULU short position, for example. I wrote several blog posts over the past few weeks detailing how bearish I believed the chart to be. There had been a significant breakdown from multi-month support on heavy volume, and I entered my short just as the stock was retracting on light volume up to the primary breakdown point.

Despite the enticing setup, the stock had no interest in selling off further in front of its earnings this morning. Therefore, the Yoga apparel maker drifted up slowly the past few days. I made the decision to cover my position yesterday, as I did not want to gamble on earnings. Today, $LULU is up nearly 13% on heavy volume after a terrific earnings report. Not only has the breakdown point been recaptured, but so have all major moving averages! Would I short $LULU now? I suppose for a very short term scalp it could work, but I was looking for more a swing setup.

The lesson is this: Technical analysis works very well for everything that is presently known and knowable to the market. However, no chartist is omniscient. Do not fall into that trap. As an individual trader, you are trying to minimize as many external variables as you can. Earnings reports are classic examples of information that is not yet known or (legally) knowable to the market in advance. Thus, with respect to trading, as often as possible you should be looking to reduce your trade size on a given issue in front of earnings and/or big announcements. Unlike big mutual funds, you have the ability to be nimble in situations like that. Use it to your advantage.

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Why, yes. As a matter of fact, I am.

I bought a full position in $SRS, which is an ultrashort real estate ETF. Rather than chart the ultra (which I basically never do), I will show you a chart of the $IYR, which is the long real estate ETF. As you can see below, the real estate ETF is at a prior resistance level and is printing an ugly red reversal candle today. A retest of the moving averages lined up below could easily happen, and it would not mean the end of the world for this chart. Thus, I am in for a quick trade.

All trades are timestamped in The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 38%

• LONG: 30% ($ROVI $TQNT $CTXS $CMG)
• SHORT: 8% (long $SRS)

CASH: 62%

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When the market was struggling at the 1040 level on the S&P 500 in late August, many traders argued that, unless we had a catalyst, we would continue to chop at that level before breaking lower. I disagreed, and wrote this post where I submitted that the market was simply looking for any old excuse to rally due to oversold conditions, combined with widespread negative sentiment. At that point, some mixed economic data came out, and the market did, indeed, use it as an excuse to scorch higher to just above 1100.

In the past few days, the market has become short term overbought at the upper end of the multi-month trading range on the S&P. This time, we are seeing bulls argue that, unless the bears can find a catalyst to send us lower, we are going to consolidate around 1100 before we move much higher. Perhaps they are correct. However, as we are seeing today, breadth is mixed and volume remains light. Moreover, many charts of key stocks are very extended and in need of healthy pullbacks. In my view, unless we are looking at a March or July of 2009 scenario, the risk/reward profile is simply not favorable to allocating capital on the long side right now.

The risk of the market looking for an excuse to go lower is now too menacing to not be respected.

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I am raising some more cash here. I sold my 1/2 long position in $RINO as the ascending triangle is breaking down. This shows the power of layering into a position, where the pattern has not yet fully resolved. I had bought a 1/2 starter, but if things went awry then I was out of there. That is exactly what happened.

I also sold out of my $LULU short in front of their earnings tomorrow. The stock has drifted higher the past few days, and I want to be clear that I remain bearish on the name. However, earnings are earnings, and I have no interest in adding more external variables to my trades. I hope to revisit the name as a short after earnings.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 30%

• LONG: 30% ($ROVI $TQNT $CTXS $CMG)

CASH: 70%

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