If we enter a prolonged period (6 to 9 months) of volatility switching daily from up to down momentum and back, what is the wisest trading strategy to pursue? Should we become position traders on a few select stocks? Should we focus only on day trading? What will work best? (March 31, 2001)
If we do enter a sideways pattern we will more likely have swings up and down that we will be able to measure on a weekly basis, i.e., 2 to 4 weeks up and down. Those are actually very good times to trade as stocks set up more or less predictable rolling patterns. The idea is not to hit the exact high or the exact low, but to skim 50% to 70% of the move out of the middle. In other words, see the move start, take the position, and then sell when it appears the move may be ending. At some point the stocks will break out. Do we say 'darn it, should have hung on and not sold on this rotation? No, we recognize the breakout and jump on it again! In short, that means we won't be day trading, but playing the up and down movement that occurs over a few weeks. We really like that.
What we anticipate may happen, however, is that the Nasdaq tries to make a move sometime during or right after this earnings season. Why? The Nasdaq has made a third leg down in this bear market. While there are not guarantees from one bear market to the next, this resembles 1973-1974 where the indexes made a longer, three leg drop. The Nasdaq tapped close to 1750 and is trying to put in a bottom which would make this leg roughly equal to the previous two legs down. Just as in 1974, it did not take the indexes long to recover after the lows on that last leg were tested after a sharp 5-week rally off of the low. In other words, once the last rally attempt failed and the low was re-tested thus scaring everyone who thought it was over one more time, the indexes started their climb without a trading range. This is what we are watching for; may not happen as planned, but we will be ready when it does.
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