And Now We Shall Take Their Spirits!

by Ryan Mallory

The famous words of Lord Cornwallis in the movie "The Patriot" where, fed  up with the militia and the damage that they had done to his credibility and progression to winning the war, Cornwallis decided once and for all to end the Revolutionary War. Despite, having "taken the field" as his general pointed out, Cornwallis want to proceed by "taking their spirits and crushing them" by sending in additional infantry. While he ended up losing that battle, one can't help but think whether the bulls are now at that point, where it isn't just enough to take the field from the bears, that they are now going to "crush their spirits" also.

My string of losses over the last months, and the unexpected and, frankly, unexplainable mega-rally off of the March lows has caused me to do a lot of soul-searching pertaining to my approach to the market. On the surface it would appear that an unbiased approach in respect to going Long or Short in this market is the way to go. But is it really? Going back to 2002, the number of legitimate long-term downtrends are only a handful. Now there were minor pullbacks along the way that could be capitalized on, but does it really present itself a solid risk/reward setup to try to swing-trade those opportunities? These are the questions that I have been wrestling with of late. Or could it be that the best approach is to take advantage of being long primarily while being short only selectively?

Here are some quick observations to think about...

• Only a handful of legitimate, long-term, bearish trends have presented themselves since 2002. While there has been a ton of bullish long-term trends
• Duration of the bullish trends tend to be much longer than bearish trends
• Often times signals from the market that would lead me or others to believe a bearish trend reversal is taking place becomes nothing more than a minor pullback, that eventually results in the resumption of the long-term trend or sideways action/channeling.

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While you may or may not agree with those three observation points above, you should ask yourself, that if you are using a system of trading that relies on a bullish/bearish indicator to determine market direction, whether it be moving averages, average true range, relative strength, etc, and you get those bearish readings, are you better off to scale back your portfolio positions, and pick and choose, selectively, re-entry in to new long positions, or are you better off going totally short in your portfolio. The more I think about it, the more I believe the former may be correct as opposed to the latter.

Now I'm not saying that if you don't get a market like we had in 2008, where there is a major market problem was unfolding right before our eyes, that you don't short the pig out of the stocks - I'm not saying that at all, but I think I have to realize those types of downtrends don't happen every day or every year for that matter, and furthermore, those types of shorting opportunities present themselves in a very obvious and profitable manner.

Another strategy that I have considered implementing is more of a swing-trade the bull markets,and day-trade the bear markets, but quite honestly I don't think that really gives me an edge - just a brain-storming idea.

Hopefully I made some sense in the midst of all my babbling - but a key to being a good trader, is always critiquing one's methods and making sure that as the market is ever changing, you consistently must give your trading system a close eye to insure that the ideas and assumptions that it is based on, are still relevant..

I've included the video from "The Patriot" below - fast forward to 3:08 for the Cornwallis remarks - Great Movie.