I know it sounds insane and yes it is a darned aggressive stance to take.  But last week closed with a sell setup on the weekly timeframe, the first sell signal since January.  That is what the system says, so who am I to argue.  The system is right around 8 times out of 10 and if I traded based on emotion I certainly wouldn’t be.  That’s why we use a model in the first place after all, to prevent our human shortcomings getting in the way of success.

There have been a few sells on the daily chart in recent months which have led to retracements only.  This weekly setup might be just the same, there is just no way of telling if we will get a retracement only or a more significant turn back down.  It might not even work at all.

Here’s the catch:  We have a sell setup, but at the moment no entry trigger.  In my book a trade can only be taken if there is a valid setup and then an independent trigger to execute the entry.  Using a trigger prevents a trader from jumping the gun and that leads to significant improvements in performance.  What we really need is one more week for this to properly “ripen”.  A down close next week would probably be sufficient to have the system pulling the trigger.

So if its important not to jump the gun, why am I?  Well actually I am not as I don’t actually trade on such a big timeframe.  But I am putting both of us on notice that there is a sell setup in place now, so this is a time to be very cautious with long trades and to be open to taking short setups on smaller timeframes if they occur.  My fear is that this could kick in early and waiting for next weeks close means we could be entering way lower.  Instinct tells me that there are going to be a whole heap of sell stops in the 1060-1070 region.  If a few big ones get elected they could easily trigger more and result in rapid escalation as everyone heads for the exit ramp all at the same time.

I could be totally and utterly wrong of course and the sell signal itself might not get formally triggered at all.  My gut says we are reaching a significant inflection point in many of these markets.  But I have to ignore that and go with the system and that says wait for next Friday and see if we trigger.  Darn it so what should I do?

I have concluded that last weeks and high and low should be used as key reference points.  If we trade above the high, the sell signal would be invalidated anyway and the market should then continue with more of the same low volatility crawl that recent weeks have seen.  If we slice through last weeks lows with good momentum on an intra-day timeframe and accompanied by high volume, then we could well be off to the races and short-term bounces will become short entries.  I would then look to build a longer term position by following my usual short-term scalping signals and rather than exiting each trade completely, leaving just a tiny piece on each time in case this thing finally cracks hard.

At least that’s how I will be playing it, whilst my system will be waiting to make its mind up on Friday night.  Of course if I’m right I’ll be telling myself “well this is a thinking persons game” and if I’m wrong I’ll be saying “follow the damn system!”  Choices, choices!  There are so many ways to skin a cat (as the rather ugly saying goes).  Anyway I hope this internal debate I have been having with myself today might give you a few ideas to think about yourself.

Disclaimer, risk warning and copyright notice apply to all articles published on this site.

Copyright © Simon Townshend Ltd 2009, all rights reserved