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PSYCHOLOGY


Psychology Of A Short-Term Trade

11/29/11 10:28:53 AM
by Alan R. Northam

Had I taken a short-term position in GE, now would be the time to close out the trade. Why?

Security:   GE
Position:   N/A

On November 17, 2011, my article "GE On My Radar" was published, stating that General Electric was in a long-term downtrend but had been undergoing a market correction since early October. That article also stated that GE had just recently reversed back down, but the 20-day R-squared indicator had not moved above its critical level to give the all-clear signal that the short-term trend would continue downward. Thus, the article represented a short trade setup.

Since the article was published, the R-squared indicator did move above its critical level, signaling that the new short-term trend would most likely continue downward. A red vertical line is drawn on Figure 1 to signify the day in which the R-squared indicator moved above its critical level. Had a short position been taken on the open of the following day, a trader might have been able to get into the market at $15.98. A blue horizontal line is also drawn on the chart to show this opening price level.

FIGURE 1: GE, DAILY. This chart shows the daily price chart of General Electric in the lower panel along with its downsloping 20-day linear regression trendline, and the upper and lower 1 sigma linear regression channel line. The top panel shows the 20-day linear regression slope indicator followed by the R-squared indicator. This figure shows GE is ready to reverse its short-term trend upward.
Graphic provided by: MetaStock.
 
Over the next five trading sessions, GE continued to move lower until it reached the $14.70 level. This price level is now acting as support. A green horizontal line is drawn on the chart to show this level of support. Note that the last two trading sessions were not able to break below this level. In addition, note that the last price bar has turned green. The green price bar indicates a one-day reversal signal. The problem with one-day reversal bars is that they require a second bar to confirm their signal. Without these confirming price bars, one-day reversal bars are receptors and the short-term trend could continue lower.

Looking at the linear regression slope indicator in the top panel of Figure 1 shows that it is no longer moving down. This is an indication that price is no longer accelerating downward. This further suggests that this indicator will start moving upward, which, when it occurs, will indicate price deceleration, which normally happens just before a reversal in trend back upward.

Looking at the R-squared indicator in the middle panel of Figure 1, note that it has reached a level of 0.78, indicating a strong short-term downtrend. The only problem with strong trends is that they don't last very long.

Here's how I see the current situation. As long as the price bars continue to stay within the confines of the upper and lower 1 sigma channel lines, the downtrend will remain strong and the short-term downtrend will continue. However, short-term trends are just that, short term, and this trend looks to have run into support, which could mean that the short-term downtrend is over. If we wait until price moves above its 1 sigma channel line to give an indication that the downtrend has lost its strength and then the short-term downtrend starts to reverse upward, most of the profit from the short trade will have been lost. Therefore, if I had actually taken a short position at $15.98, I would most likely close out my short position at the next opening bell and wait for another shorting opportunity in GE.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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