Best laid plans

I lost my nerve. It was that fall on the Japanese market that really got to me. A 7% drop in one day. It just shows you what can happen when an overheated market hits the buffers. I was there when the tech market bubble burst and I will never forget what true panic felt like. I had pulled out before the real trouble started but I saw friends desperate as they struggled to get hold of their brokers. That candle big red candle reminded me of those frantic times

There was follow through in the rise in interest rates on US Treasury bond that I mentioned in the last posting too.

The Wall Street, spooked by Bernanke’s comments that QE was to be “tapered”, did not react nearly so badly but it was enough to frighten me. Everyone knows the adage “Don’t play with more than you can afford to lose.” Well I do that all the time. All the money I have left in the world, apart from my investment in my home, is exposed to the stock market. So when I find myself staring into a pit I have to act. I have a big appetite for risk but only when the odds are in my favour. And that’s why I had to abandon my beautifully laid plans to wait for a fall of x% after the break of support before I exited the market. I could not afford the loss it would entail.

One reader described how he allowed tightened trailing stops to take individual shares out of the market leaving him with very decent profits. Well done! I followed a similar path selling off my weaker shares and the ones which were losing money fastest on the day following that big market drop. My pain was in the loss of paper profits. I pulled out over two days reducing my investment from 75% to 33%. This was a more measured exit from the market than the one in mid-April. And that is partly because I now know that a break of support +x% is a good signal for exit, and that point had not been reached.

A friend asked me why I used the DJI as my signal rather than the S&P. There is no good answer to that question. I just happened to choose the DOW. It is the index that everyone talks about. What is important is that it worked when backtested. It is a signal just like any one of those favoured by technical traders. It’s like “buy or sell when there is a moving average crossover” or “when the MACD reaches a certain point do this” or “when price action creates a flag chart pattern consider this action.” What my S&R signal says is that when support or resistance on the DJI is broken plus a certain percentage, that is a sell or a buy signal. It has the virtue, compared with the technical analysis signals, that backtests show that over a long period of time S&R works exceptionally well. You will make money.

So here I sit, partially invested and with a decent pile of cash, waiting to see what the market will do next

. We are in uncharted territory. Without a map we just have to feel our way forward. It is only Elliott wave aficionados who dare to predict where the market will turn. I am not a believer in their approach which seems to me to spend much of its effort on self-justification as the market sails past their predicted turning points.

I have plenty to do. I need to extend my backtests of S&R and I need to refine the system so it is not so vulnerable to periods of loss through drawdown. That should keep me busy. 

At last the sun is shining and there is blossom on the apple tree outside my window. Long may it last.