So How Do You Use this Information?                                                                                          

Many ways. But first let’s remember that these are just statistical results that don’t take into account trading costs, slippage, etc. And there is no way of knowing whether these results will do better or worse in the future. With that said, here is what the past 11 years’ data tells us:

You don’t blindly buy breakouts in the stock market. Yes, the world looks great, yes the news is wonderful, yes all the excitement is out there. But unless you have some superior exit strategy, you will likely have a very tough time making money buying the highs over the long run. If you didn’t make money buying highs in the move since 1993, it’s going to be awful tough to do it in the future.

As the markets are making these highs, the odds are increasing that a short-term reversal is near. You should be looking to lock in your trading gains as markets make new highs, not add new positions.

Buying markets which pull back (is this case, to 10-day lows) is a superior strategy. I strongly believe that. And the statistics prove this out.

Don’t get caught up in the hype when markets make highs. The press and the investment community is jumping up and down telling us just how great things are during these times. They’re right… EXCEPT THAT PRICES ALREADY REFLECT THIS! That’s why prices are at new highs. And on the opposite end, there is nothing but negative near the lows. A few days of incidental negative news is not a formula for the market crashing. The “world-is-coming-to-an-end, doom-and-gloom crowd” use these few days to tell you why the market is going to zero and the end of mankind is near. Don’t get caught up in this! They’re always wrong.

And the most important thing to take from this week’s column is the same as the theme from one of Apple’s commercials …think differently. Because at the end of the day, when everyone is thinking the same way, they’re usually wrong. And, as you can see from this week’s BattlePlan, this is especially true when it comes to the financial markets.

Have a great week trading (and feel free to email me at larryconnors@tradingmarkets.com if you need any help on the above)!

Larry Connors