2008: A Postmortem

Unless we get a miraculous three-day rally that takes the Dow back to 10,200, I am looking at a losing year. My last loss in my investment portfolio was in 2001. While it stings the pocketbook, it enhances the trading journal with more lessons learned and with better plans moving forward.

I know most of us don't talk about our returns -- good or bad -- in specifics, but my hope is that you get a realistic look at a trading book with all its wins and losses rather than a table-pounder on only those things that have gone right in 2008. What I will outline in the next several paragraphs is what went well and what went awfully, and what I will be doing for the first quarter of 2009 as we start anew.

In the first quarter of the year, I did well enough in playing the range between Dow 11,800 and 13,500 that I believed I had room to play with some bigger-capital bets. The second quarter started off great when the top on May 2 at Dow 13,100 yielded a double top that really sent the market lower to 11,000. As I scaled out of short positions in the indices, I began reversing my positions back to the long side with expectations that the markets would remain locked in a range between 10,600 and 13,200 for the remainder of the year. I clearly did not see the implosion due to the financial crisis for what it was, and I remained too bullish through the third quarter.

At levels in the Dow at 11,200, 9,200 and 8,100, bullish exposure to the tune of 60% yielded absolutely zilch in return. Each time the Dow tried to press above 9,800 and into the 10,000s again, distribution pressure quickly faded all strength. Each new failure had me stuck at the 60% investment level without any chance of getting out with a gain or even at break-even. At this point, all technical norms, chart patterns, common historical wisdoms and patterns were broken and failing.

While I survived 1998 and 2000-2002, what I was seeing in the third quarter had me dumbfounded with the lack of anything resembling normalcy. After all, price/volume relationships in combination with repeatable patterns were my bread and butter. I am sure that sometime between 2010 and 2020, I will look back to 2008 and say, "While I survived 1998, 2000-2002 and 2008-2010, this is different," what we just saw in the latter half of 2008 was something I don't think many of us have ever been through before. I almost hope I never have to see it again, but I know I will. At any rate, I'll be better prepared for it next time.

So while the latter half of 2008 wiped out the first half's gains and then some, I still have 40% of the powder dry for the first quarter of 2009 if some of those patterns begin to repeat again. The first thing I'll be looking for is the combination of the 50-day exponential moving average and the downtrend resistance line. Now that these are basically converging, a move above this level could generate gains for trend traders in the first quarter.

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At the time of publication, Schumacher was long SSO, QLD and DIA, although holdings can change at any time.

Chris Schumacher is a financial trader, speaker, writer and co-author of Techniques of Tape Reading. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback; click here to send him an email.