These days, perceptions can change in a heartbeat. In the current environment, the market is never more than one surprise headline away from switching from being bullish to bearish, or vice-versa. A quick examination of the recent trendless volatility in the markets drives home this point.
It is during such periods that more false signals in the Market Direction Model will result. Keeping that in mind, pyramiding into a position on a buy or a sell signal issued by the Market Direction Model in such an environment can be a viable strategy. The upside is that you will lose less on a false signal. The downside is that you will make less on a true signal. Also, if the trend is short-lived, you may only break even since you average cost will be higher. Understanding your risk tolerances is important so you can position size and if you so choose, pyramid, at a level that is suitable to your trading psychology.
Currently, we are seeing some strong names act properly including FIO, TIBX, and other actionable stocks we have mentioned recently in our reports. Of course, one can profit on the long or the short side in specific stocks regardless of the model's signal especially in trendless environments. In other words, just because the general market is not trending does not mean all stocks will remain trendless.
The recent strength in certain stocks moves the Market Direction Model closer to a buy signal. That said, headline gap down news is frequent in this environment, thus the risk/reward must tilt toward something slightly more favorable based on price/volume action to put the model into a buy signal. This can occur either if the general market and leading stocks pull back constructively, or if more pronounced upside strength is demonstrated.
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