Observe, Adapt, Learn and Fix

Author:
Publish date:

I just looked at my calendar for this past Sept. 24. Let's see:

    6:30: Trade prep
    8:30: Enter orders
    10: Write
    3:30: Take Katherine to theater rehearsal (Note: My 11-year-old has snared the role of Dorothy in the Wilton Children's Theater production of Wizard of Oz. Dad is working hard at being a stage mother.)
    4: Take Diana to swim practice
    5: Fix dinner
    6: Pick up Katherine and take her to swim practice
    6:30: Pick up Diana from swim practice and give her dinner
    8:15: Pick up Katherine from swim practice

Pretty routine, right? Wrong!

You see, there should have been an entry somewhere that read: "Make seven dreadful trades; ensure September will be a lousy month and cause a nice size hemorrhage in account; as bonus, also damage confidence and morale."

Yep, that's nowhere to be found, but that was the crux of Sept. 24 -- my worst day of the year.

To rewind a bit, up until that day I had been hitting on all cylinders. My equity was at a yearly high, and I was clobbering every index around. I wasn't bulletproof, but essentially I was zigging and zagging when the market was doing the same.

Going into the 24th, then, I was feeling good, and that morning I thought my candidates were the Murderers Row of longs. Sure, they were called

(EMC)

EMC,

(JDEC)

JDEC,

(CPWR)

CPWR,

(IM)

IM,

(SWY)

SWY,

(PRGN)

PRGN and

(CEFT)

CEFT, but in my mind, they were

Knoblauch

,

Jeter

,

Martinez

,

O'Neill

,

Williams

,

Davis

and

Brosius

. These '98

Yankees

were going to give me my World Series ring.

The only problem was, I didn't have the '98 Yankees. I had the '98

Marlins

: yesterday's champs, today's bums.

OK, you can see my lineup card below. All had high-volume breakouts taking out the former 52-week high. All had high EPS and RS, per

IBD

. All were quintessential GBS Classics. All should have been perfect. And every one was a loser.

Now maybe a few of you had these same trades and were wondering what went wrong. Sure, I chalk up part of the blame to overall market conditions. In that stretch, let's face it, nothing on the long side was working.

Still, if I had to do it over again, I'd probably only take SWY, CEFT and CPWR. They stunk too, but at least they weren't infected with the same pox as the others. And what pox was that?

The pox of the huge run-up!

Yep, I tip my hat to

Wesson

and his bag of computing tricks. I just sat and licked my wounds, but he went over every trade with a fine-tooth comb looking for fatal flaws. And he found them.

I'll paraphrase an email he sent me about a week ago: "Do you realize nearly every loser from Sept. 24, and the majority of our losers this year, had huge gains just

prior

to our going long?"

And sure enough, take another look at the price moves these stocks made only a few days before we took these trades: EMC, up 20%; JDEC, up 16%: IM, up 17%. And the grand-slam winner, PRGN, up almost 85% from only a few weeks back!

In Wesson's immortal words: "What in God's name were we thinking?!"

Uh ... well ... yes, indeed. We weren't thinking. Or at least we weren't aware of what was going on.

Still, I'm not specifically changing how I trade, but I am looking for a few more things in my longs. And while I wouldn't call them rules, they're certainly signs to watch for. Or watch out for, as the case may be. Specifically:

  • Avoid the big V formations. Or, if you want to take a positive approach, look for the resistance line to have at least a few tests before the breakout. IM is a perfect example of the V I now despise. On the other hand, CEFT, as I mentioned earlier, still looks fine, although just barely.
  • Watch what happened in the days right before the trade. Essentially, I'd prefer not to take a trade where the stock is going straight up. EMC is a good example. Planning on a fourth or fifth up day in a row was asking for trouble.
  • Look where the chart came from a few weeks back. PRGN nearly doubled. Enough said.

I'm putting all these ideas into the fine-tuning category, and I'll leave you with a few thoughts. If you trade like I do, then great, these are some things to think about. If you have your own method, then my point is more global: Continue to observe, adapt, learn and fix. You want your trading to be well-grounded but also fluid enough to be profitable in a variety of environments.

Finally, I think all these ideas are applicable to the way the market's been acting lately. I've thoroughly enjoyed the huge run-up in stocks the past few weeks. But that's exactly what it is, a huge run-up. I got stung by the

V

last month; I won't make the same mistake again. Hopefully, the market will pause and congest a little. And if not, then it'll have to head straight up without me.

OK, that ends my Monday brain dump, my Yankees rooting (for now) and my September catharsis. Oh, and I've already made plans for Sept. 24, 1999: 8-6 -- vacation day.

Gary B. Smith is a freelance writer who trades for his own account from his Connecticut home using technical analysis. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. This column, Technician's Take, appears every Monday. Smith also writes Charted Territory, which appears every Wednesday, and TSC

Technical Forum, which runs Saturdays.