Time To Play A Little Defense

As many of you already know, I play close attention to the McClellan Oscillator as a benchmark for when the market is becoming overbought or oversold. While there are varying degrees of being overbought and oversold at varying time frames, the McClellan Oscillator is a great one for me to watch for short term fluctuations in the markets. Other indicators like the Put/Call Ratio’s, Investor Sentiment Survey’s and Stocks Trading Above their 40 or 50 day moving average indicator’s are also invaluable to my tool box, but definitely used differently. While I will even abstain from trading during certain extremes in these other indicator’s, I use the McClellan more as a warning that balance in the markets is starting to swing too far in a direction. Because it’s more of short term indicator, there will often be times when the markets will ignore the indicator (like any indicator, really), but the risk for taking a trade definitely increase as it swings to an extreme. Below is a current chart of the indicator (click to see full size):

Notice the indicator spends most of its time between +150 and -150. Anytime it gets above or below these levels I will start to either get more defensive or more aggressive. I typically won’t stop taking trades unless multiple indicators are aligned in one direction. What I will do though, is reduce my risk by adjusting my position sizing or shortening my time frames. I will also adjust where I place my stops or even which types of trades I will take as I recognize the type of risk that is present. A good example would be how I am treating this environment.

The easy money has been made when you think of the past two weeks. With the McClellan above +150 and $SPY up basically 7 days in a row, I am getting much more aggressive in taking profits on any position that moves in my favor. There are still plenty of good looking setups, but rather than skipping them, I have been taking smaller positions. I am also paying close attention to any correlations to other markets (or earnings momentum) that may shelter them from a typical move. The markets can easily continue to push higher as they did December through March, but managing risk is my number one priority and I can get more aggressive after a couple of weak days within the larger up trend. The important thing is to never put yourself in a position of weakness by not realizing the risk.

 

Good Trading,

 

Joey

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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