The Technician With 2 Brains, Part 1

The first of two introspective Q&As about last Wednesday and Thursday.
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How'd you fare the past few days? Up? Down? Ride those Nets? Or, stay on the sidelines?

Well, no matter what, it had to be tricky going for you -- no matter how much experience you had. I know it was for me. In fact, it wasn't only tricky, it was difficult. But, there's one saving grace: It's times like these when I learn the most. Sometimes about how terrible I am, and sometimes that I'm doing just fine.

So, as a further learning exercise -- for both you and me -- I'd thought I'd call in an old pro to ask me a few questions, and put down the give-and-take in an interview format. The old pro? Well, a smart-alecky kind of guy who knows me well. The type who isn't afraid to ask the tough questions. The type who will expose a wound and then throw salt in it. The old pro? Me.

ME

: Gary, long time, no hear from, partner. Finally manage to beat the averages last year?

G.B.S.

: Yep, had a good year. Made a few bucks.

ME

: Yes, I read: up 86%. Boy, you couldn't wait to slide that into your column, could you?

G.B.S.

: Well, folks always ask, so I thought I'd get it out of the way.

ME

: Yeah, I'll bet. But, boy, why do I think you'd have buried your results if you had ended up the year at, say, 16%?

G.B.S.

: No, I'm pretty forthcoming, but sure, I have an ego too.

ME

: Anyway, I'm not here to talk about '98. I want to talk about the past few days, specifically last Wednesday and Thursday.

G.B.S.

: Fire away. But be nice. I'm still a bit tarred from the experience.

ME

: I promise, no barbs until they're absolutely necessary. Okay, tell me what your thoughts were and how you were positioned coming into Wednesday.

G.B.S.

: As I mentioned earlier, I had a pretty good '98, and started out '99 with a bang. I mean, I was hitting on all cylinders, nailing longs left and right.

ME

: About how many wins on the long side did you have at that point?

G.B.S.

: I had about 10 wins or so, and maybe two losses.

ME

: Some examples?

G.B.S.

: Let's see. I had

Gillette

(G) - Get Report

and

Eastman Kodak

(EK)

just the day before for two wins. Prior to that, I had

Citigroup

(C) - Get Report

,

Comverse Technology

(CMVT)

,

Apex PC Solutions

(APEX) - Get Report

,

Motorola

(MOT)

and a few others.

ME

: Interesting, but nothing Net?

G.B.S.

: No, not a thing. In fact, none of the Net stocks even showed up on my scans.

ME

: Wow, you really missed some opportunities there, didn't you?

G.B.S.

: Yes, and no. I agree those stocks really flew, but they're so volatile I just can't trade them with my existing methodology.

ME

: Yes, we've heard you whine about that before. Tell me, though, anything on the short side?

G.B.S.

: Oh, some piddly stuff. I tried to short

Halliburton

(HAL) - Get Report

, but got stopped out. But, I did win with

Raychem

(RYC)

. And that was about it. Nothing much happening in that area.

ME

: So, you thought the bull was alive and well, at that point?

G.B.S.

: Let's put it this way: I was conflicted. I wasn't getting many short candidates, and I always do when the market starts to turn south. On the other hand, I could start to feel the air going out of my existing longs.

ME

: "Feel the air going out?" How about in English, now?

G.B.S.

: Actually, it's tough to describe. After you've traded for awhile, you can just tell by the price action, that the stocks aren't moving like they should.

ME

: Okay, so coming into the 13th, what wasn't working?

G.B.S.

: It's interesting, because just the prior day, I had remarked to Wesson that we had a lot of financial/brokerage/insurance stuff. And when you have those kind of longs, it's a good sign the market is headed higher. So, there I was with stuff like

Paine Webber

(PWJ)

,

Bear Stearns

(BSC)

, and

American International Group

(AIG) - Get Report

.

ME

: AIG? That's an expensive stock to be carrying.

G.B.S.

: Yeah, but after the first day or so, I thought I had a winner. Was in at 105 and change, and it had already hit 108.

ME

: But, subsequent to that, it dropped back.

G.B.S.

: Right, all my longs were fading. BSC, PWJ, they all were pulling back after moving up. That's what I meant about a bad feeling.

ME

: So, if you had this bad feeling, why didn't you just move all your longs off the table?

G.B.S.

: I guess that was my conflict. Many times I've felt queasy before, and did close everything, only to discover I sold out exactly at a temporary low, with the market turning right around and trending back up.

ME

: Any recent examples, then, of your emotions being out of sync with the market?

G.B.S.

: Sure, in fact, just in December. All month, I felt terrible about the rise in stocks. I just

knew

they were going to get flattened. But, I did nothing, and kept playing the long side. And as usual, just sticking to my game plan turned out to be the best course of action because December turned out to be a great month.

ME

: Yes, I remember you writing about your reluctance to be long, so for once we can verify your murky view of history! But, that was December; let's get back to last week. As I have the scenario, your longs were dogging it, you felt queasy about the market, and you didn't have much working on the short side.

G.B.S.

: Exactly.

ME

: Great, then let's take it down one level and give me a more detailed look at Wednesday and Thursday.

G.B.S.

: On Wednesday, I woke up about 5:30 and the first thing I heard was the futures were already down about 14. I knew it was going to be bad day.

ME

: You knew about Brazil?

G.B.S.

: No, I had no idea. In fact, if it wasn't Brazil, it would have been something else. The market wanted to go down, so whatever the reason du jour, it was going down.

ME

: What next?

G.B.S.

: I went through my normal procedure, but literally came up with nothing: no new longs; no new shorts.

ME

: All right, the market opens up Wednesday on the nasty side. What then?

G.B.S.

: There was really nothing to do, but sit and take it. Unfortunately, everything I had long gapped down and I was stopped out immediately. It was brutal.

ME

: When you see a gap opening, though, aren't you tempted to take away your stops, because you just know the market's going to come back?

G.B.S.

: Oh, of course. That was my very first thought. But, the problem is you never really do know. The market could have gapped down, and then kept going down. Then I'd be outside my methodology, having to chase the stocks down, and be faced with even bigger losses. This way, I suffered, but everything was containable.

ME

: But don't openings like this throw a monkey wrench into your money management parameters?

G.B.S.

: Sure. But, those kind of limit down openings only occur maybe two or three times a year. They're costly when they happen, but I'd rather err on the side of safety. Besides, over time, I probably break even with openings that gap up.

ME

: So, you got stopped out across the board. What then?

What, indeed, did Gary do? Start buying at the lows? Wring his own neck? Ignore everything? The exciting conclusion to Wednesday and Thursday's action in his next column!

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.