Sign of Weakness

Our outlook for this index at I is now bearish enough that we have liquidated our long position. There have been consistent indications of distribution by strong hands; our point & figure targets have all been achieved; price-volume at I hints that the index may be moving into a period of liquidation. However, by the beginning of September, the upward trend of the index is still intact.

Until and unless we see clear evidence that the trend is broken, we will remain wary of the short side.In order to commit to a strong short position, we must first let the index show us that the path of least resistance is down.

From the top registered at the end of August, price declines over the next two weeks to 152 – 153.This area was a first level of important resistance as the index advanced, and now provides support. The uptrend line anchored at A and F provides additional support as traders buy on weakness.

We are not motivated to buy based on support from trendline buyers. Anyone with a ruler can draw a straight line from A through F. Buyers who rely solely or mostly on such reasoning are too lightly equipped to succeed for long.We remain skeptical.

Volume declines as the price crabs sideways in narrow trading. It is possible that supply is being absorbed, and that a rally to test the highs is in the making. But at J, the index closes below the trendline, a sign that buyers are not strong enough to hold the line. Volume picks up on this break, action we recognize as consistent with liquidation. Taken together, trading activity from I to J adds up to a sign of weakness. We are now ready for an opportunity to sell short.

Unfortunately, the market is not accommodating. We hope to be able to short on a small rally of even one or two days, but there is none. As the price of the index declines to K, our frustration grows. Perhaps we were too timid. However, our discipline is to short the first rally following a clear sign of weakness.

The inside game of trading is a process of constantly dealing with the frustration of loss and missed opportunity. Trading, like every other human activity, is imperfect, and frustration over trading errors and omissions, while understandable, is a sign of unrealistic expectations. Expectations of any sort hold the trader hostage, and unrealistic expectations are fatal. If there is a traders’ motto, it is “Get over it!”

The index’s failure to provide us with a clear shorting opportunity is more evidence of underlying weakness.If and when there is another opportunity to short, we will be ready.

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