Short Bias Comes Under Siege

Wednesday's session lowered the probability for profitable short exposure out of this base in the coming days. Price action on Wednesday tested the former highs on an afternoon spike and did not offer any retracement back into the former range. So any break of Wednesday's highs will officially negate the bias for failure out of the current base and I will have to go back to exploring intraday trading ideas.

After the Nasdaq 100's (NDX) move of more than 70 points from 1565 to below 1500 in May that offered plenty of profit potential, I missed the pivot off of the 1475 level after the London bombings. Since then, July has been a real tough environment for me for two reasons. First, I'm a baby and if I don't get what I want, I don't play. Missing the best entry off of 1475 didn't allow me to participate with a strong run to 1565 again with long exposure. Second, one swing entry failure near 1580 on the euphoric principle failed and the second entry into 1600 has not produced the retracement out of this base.

Since I began this wonderful game back in 1997, I was always fixated on analysis of my personal "drawdown" periods based on day-to-day results. The analysis has revealed that my drawdown periods typically last from four to seven days and that they happen three times a year on average.

However, since April when I stopped participating in trading chat rooms, having more flexibility in trading strategies -- i.e. not "having" to trade every day - I've found myself looking at more short-term swing trading entry points that allowed me a little more flexibility in my personal life. Since then I'd enjoyed reasonably good success until this month. So while my normal drawdown period lasts four to seven days on an intraday basis, I have to reassess my definition of drawdown in this case to include an analysis of the last three weeks of missing entries and failing entries.

Just when I feel there is not much else to learn in this game, the market becomes my teacher once again. Therefore, I have to take a step back from the swing trade bias if Wednesday's highs fail to hold as resistance. In this case, I will just have to concede that I'm fighting a market that is not giving me results based on normal entry strategy and decide whether to focus on the intraday 3 to 5 points or just back off altogether.

This is actually something I look forward to, knowing that as I change my trading time frames to include more swing trade entries, that I will have a whole new set of trade analysis to delve into for drawdowns.

As far as Thursday's session goes, I will look for Wednesday's resistance to hold. Otherwise, I will just concede I'm fighting a market that continues to punish aggressive short-bias entries on the swing time frame. If for some reason Wednesday's highs hold, I need 1590 to break on the NDX before I could call this a confirmation of a retracement.

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Chris Schumacher serves as managing partner of GST Capital Group. He is a financial trader, speaker, writer and author of Techniques of Tape Reading (2003, McGraw Hill). He has delivered seminars throughout the U.S., is a featured speaker at trading expos and a guest contributor to CNBC's "Bullseye" program. At the time of publication, Schumacher had no position in any securities mentioned in this column, although holdings can change at any time. He is a graduate of The Ohio State University and has served as a guest lecturer at The Ohio State University's Fisher College of Business as well as the Center for Entrepreneurship. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback; click here to send him an email.