It’s the Price Action Stupid!

Borrowing phraseology from the Ragin Cajun and former advisor to President Clinton, James Carville: it’s the price action stupid! Why is the market going up with unemployment so high, consumer debt outrageous, an environment where taxes must go higher, energy 5xs the norm, housing still depressed, access to credit stunted, expensive war expenditures, the Greece failure, a weak dollar, and slow economic growth? One could retort because of an aggressive monetary policy, a natural rebound from a historic downmove, the inevitable new creation from the explosion of wireless technology, the stimulus, etc. As a trader I find these arguments all very interesting. You should be aware of them and form biases as to how they relate to markets. But positions based on theory unconfirmed from the price action is just plain arrogant.

Personally I have found over the years as a trader the intellectual banter about this will happen or that will happen to be near useless as it relates to making money. One of our best traders commented how a good friend of his, who is also a trader, made fun of him for his lack of knowledge about market fundamentals and for that matter worldly matters. This one of our better traders makes 4xs what the other supposedly informed trader does.

I hold a law degree. My partner does as well, first graduating from Wharton. We are intellectually curious. We form biases. But then if our biases are not confirmed by the tape we deemphasize our biases and follow the price action. It’s called trading not your narcissistic need to be right.

And this tape is still heading higher. Perhaps this rally will end poorly. There are strong arguments to be made favoring this scenario. But when AAPL got above 260 there was nothing for us to do as traders but get long and play the momentum. When NFLX showed strength on the tape, the short term trade was a momentum long. When BAX gapped down on the open and traded quickly lower on low volume, the trade was to play for an intraday bounce. When GS touched the important 155 support level after the SEC suit announcement, the short term shorts should have covered. When OIH got above 131.60 on Friday, it was a momentum intraday buy.

Watch for the market to top. Be aware that we could head lower. But as long as the price action is rewarding buying breakouts, buying into pullbacks, playing the upside momentum then this is more important than any of your theories.

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