Yes, I am still patiently waiting for an entry. Over the past week or so I have stated that several short-term technical and indicators have moved into bearish territory, yet our proprietary indicators are still telling us to patiently sit on our hands. Of course, I would love to be participating on the long side of things right now, but conventional wisdom (and my style of trading) will not allow me to move into long positions when the market is “overbought” to “very overbought”. I did expect to see a move lower by now which is why I always stick to what my indicators are telling me. If the bulls continue to reign supreme throughout October it could be advantageous to be aware of the set-up that I mentioned a few days ago. I stated the following:

“Another interesting (and not often mentioned) statistic that I came across was that when the market had a strong September and October during the mid-term elections (4 year cycle) every single time the market experienced a dramatic sell-off during the middle of November. The scary thing was that the sell-off averaged 5% to 10%. This is certainly something that we will be watching as we move closer to the mid-term elections.”

The major indices have once again moved into “very overbought” territory on today’s move that broke the six day, range-bound market. Could today’s move be a fake breakout? Oftentimes, when the market trades in a tight range for several days the initial spike outside of the range is met with a sharp reversal a few days later. Just remember that “oftentimes” doesn’t mean that it is a certainty. As we all know, over the long-haul not every trade is going to be a winner (and you have to be prepared for losing streaks), but by minimizing your losses by staying disciplined to established capital preservation techniques you will never reach the “hope” (and sometimes pray) situation that many novice traders go through. The novice trader who hasn’t gone through this is definitely the exception and believe me I am not the exception. Like most experienced traders I learned the hard way, which is why I always stress the importance of establishing money management techniques, and more importantly sticking with them, before you decide to invest/trade. Always know your limitations.  Let the market guide you, not your emotions.

Trading solely off “overbought” and “oversold” measures can be tricky, especially when the market is “overbought”.  ”Overbought” measures are not nearly as reliable as “oversold” measures which is why I am always somewhat hesitant to blindly sell rallies. All of my indicators have to line up before I take the plunge which is why I have remained on the sidelines while the S&P and Dow have been in an “overbought” position for 7 straight trading days. Our ETF Extremes strategy has managed to reap a 35.7% gain YTD by remaining patient and disciplined and we have no intentions to place a trade strictly to place a trade. In most cases, the less you trade the better.

I can’t say it enough but patience is the key to long-term financial success. If I happen to miss a move here, well, I will obviously be disappointed, but I also know that more opportunites will present themselves in the near future. Let the trades come to you. Don’t force the issue. Let probability be your friend.

RSI Wilder (5) for October 12, 2006

• SPY - 85.2 (very overbought)
• DIA - 90.1 (very overbought)
• IWM - 78.8 (overbought)
• QQQQ - 83.7 (very overbought)

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Andrew Crowder, Chief Investment Strategist, Crowder Investment Research, LLC