Editor's Note: This article was originally written on Tuesday, April 7th, 2020.
Bill Dunn, or possibly Stanley Kroll before him (see below), equated trend following to riding a bucking bronco. I think they left out the fact that trend following on the short side is like riding a psychotic bronco.
Image: The Professional Commodity Trader, by Stanley Kroll
Retrace rallies are brutal. We take partial profits, trail stops lower, and yet the retrace rallies are still brutal.
Let's take a look at the S&P 500. The easy part of shorting might be over. Notice we had a nice downtrend followed by a somewhat textbook pullback and trend resumption. We're now in retrace mode. As a trend follower, my job is to err on the side of the big blue arrow. And, so far, it continues to point lower.
I often quote Linda Raschke (who said she didn't remember saying that): "Markets will do what they have to do to frustrate the most (cause the most amount of pain)" and "Markets will do the most obvious thing in the most un-obvious manner."
The most obvious thing for the market to do would be to re-test the old lows. As I've been preaching (and feared!), this would not likely be a nice rout lower. There's going to be shakeouts and fake-outs along the way. Said alternatively, the psychotic bronco will buck. Shorts will be punished (got the T-shirt!-ouch!), value players will be sucked in, and the "buy and hope" crown will continue drinking and serving their Koolaid: "Ya see, you can't get shaken out! We're in for the long haul!" Well, that'll work until it don't (e.g., 2000, 2009, 2020?.....), but I digress.
So What Do We Do?
I think the short side remains the logical side to play, but the bronco has become really psychotic - I shorted a REIT with a 50-day historical volatility reading nearing triple digits, which is something I've never seen in my lifetime! (Normally, REITS volatility readings are in the low single digits). The easy part is done. It's going to be a bumpy ride - that's about all I can guarantee! For the bottom pickers, wait. You're still trying to catch a falling knife. You're still fighting the big blue arrow. Wait for some upside follow through. Wait for transitional setups, such as Bowties.
Stay safe and sane!
May the trend be with you!
Dave Landry
