What next? Dow 5000?

As always, what comes next is the focus. I can glance back and see that I got out of my IBM near the lows for the day on Friday. Still, it was the plan when I bought and I followed that plan. This wasn't the first time I covered near the low, and it won't be the last. It is what happens if a trader uses stops. Traders that don't use stops will usually hedge in other ways. Those that don't use stops or hedge, tend to trade very small. If they do none of the above, they will usually go broke sooner rather than later.

I like baseball analogies, so for traders the relief pitcher mentality is a good one. After a bad outing, shake it off, forget about last night's game, and look at what is up next. After a good outing, don't get too high, because odds are you will be humbled soon enough. Position traders incur losses, just as most relief pitchers will sometimes blow saves and give up hits and runs. It happens to the best. This is not to say to forget everything, and repeating the same mistakes over and over. Keeping a blog, or a trading journal, gives it a memory boost, and the lessons sink in better.

I often will take a break from trading after a bad streak, and this month has certainly been a bad time.

As for the topic heading, the market is at extreme oversold readings, but oversold has become oversold-er time and time again. I expect a rally, but I expected that Thursday morning too and took two of my worst losses for the year. Just a few blog entries ago, I wrote about 110 and then 95 as support for SPY. SPY went to 85! Slicing through in just a few trading sessions.

About a year ago, I wrote to a friend that the stock market might be in for a "big one" like the 1973/74 bear market when the indexes fell 70%. The parallel was the withdrawal from Vietnam, and what looks like will be a similar withdrawal from Iraq. Those kind of events have a big effect on national confidence and psychology. At the end of the day, confidence and perception play a large role in pricing of stocks.

This isn't a time to be aggressive. As my profile states, "live to trade another day." If we are down 40% and headed for 70% that means it will get a lot nastier. 70% off the Dow high translates into ~5000. I'm not predicting 5000, but I wouldn't rule it out. Of course, it will be easy to call the bottom in hindsight. A million paper-traders will claim they bought the bottom, in hindsight months after it occurs. However, as my foray to the long side on Thursday morning demonstrates, it is not so easy in real time. In hindsight those trades were on the foolish side, even though in real time the stock market was at support, and the news and sentiment back drop seemed ripe for a big rally.

Flat (no trading positions)