Morning Market Thoughts — Don’t Think Outside the Box

by DAN Good morning. We’re looking at yet another weak open, and I remain confident that the “box” I drew in last night’s Strategy Session will remain intact for quite some time. As I was laying in bed this morning negotiating with my body, trying to convince it that the benefit of getting these sore bones out of bed outweighed the comfort of remaining supine for just a while more, I started thinking about “Expect the expected” vs. “expect the unexpected.” It’s a critical issue in trading.

Those “out of the box” thinkers are seen as creative, super smart, brave, cutting edge, intellectual renegades, etc. They see what others don’t. They find opportunities everywhere. Of course, most (though not all) of them also don’t really have much to show for their OTB thinking — but they’ve got a LOT of possibilities. Note: Some very wealthy individuals made their money by thinking outside the box. Who invented email? (I don’t think that’s an Al Gore thing — he just built the path of delivery) That guy thought outside the box. Who thought of the Pet Rock? Ironically, it took thinking outside the box to come up with a product where you put a rock inside a box and locked the door. Strange business.

In the box thinkers tend to get no real respect. They aren’t creative. They are rule followers (how boring!). They just plod along.

Well, in trading, I’ll take the rule following plodder every time. (This should resonate with many of you because I see some real OTB trading going on).

When you’re thinking inside the box, you are “expecting the expected”. That’s what pattern trading is all about. You expect that what’s happened before will happen again…until that one strange time when it does something different.

Applying this to today’s market: The S&P is in a box. Don’t assume that it’ll break out of the box. That’s OTB thinking. The box exists because pockets of supply and demand lie above and below. They define the box. When you’re trading, it’s important to respect the box because you will know what to do in making your trading decisions. If it’s a box, you are trading it on tests of the box — buy the bottom, and sell the top. Don’t expect the box to break. Ultimately it will break — but you don’t know when that will happen. If you trade a box like it is an inevitable breakout in the making, you’ll lose money most of the time…because there are many tests of the box, and only one true breakout.

If the pattern is a trend, you expect that the trend will continue…because that’s what trends do. Don’t trade against the trend. That’s what renegade traders do. Trade with the trend. That’s what profitable traders do. Buy the pullbacks and sell (or stand aside) the rallies. But stay long and strong.

If the pattern is a bunch of yuck — just a bunch of garbage that makes the rowing lakes in Rio de Janeiro look like pristine drinking water tanks — then just avoid it. Don’t look at it twice. Just move on to something more interesting.

Right now, the S&P is in a box. Gold is in a trend. You trade them differently, but your trading actions should almost always be inside the box ( i.e., expect the expected).

See you in the forum.

Dan

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