Context Check: Watching The Trading Range, Managing Risk

The market appears to be holding the lows, but there's certainly not much confidence out there. Most traders I follow are expecting a rally of some kind. Selling seems to be reaching the exhaustion point, and the technical setup (holding the lows) is favorable. The closing low this year was 848.92, and the intraday low was 818.69. Here's the chart of the S&P 500. Note the fairly obvious trading range.

Being near the bottom of the range is not pleasant, and although a bounce would make sense, I can't say anything is looking very good right now. Therefore, it's important to plan for both scenarios. If we bounce, I will hold my current longs and probably add to them. If we break the lows, I will raise cash and live to fight another day.

The worst looking indicators in my book, other than the car crash known as the auto industry, are the real estate and financial sectors. Unlike the overall market, they are at new lows. The Ultrashort ETFs (SRS and SKF) continue to work, but I am out of them for now (regrettably).

The only relative strength on my screen is in large cap biotech. I am long Celgene (CELG) and Amgen (AMGN). My other longs, in the video game sector and smaller biotech, are acting terribly and the price action must be respected. I have no position in Electronic Arts (ERTS), but I mentioned that I'd be interested under $20. I didn't buy any, but I notice today that it has a 17-handle. Yuck! This is why stops are important, and one should have an exit strategy for every trade.

Along those lines, I received a very thoughtful comment regarding a post from the beginning of June where I wrote about trying to use predetermined buy points on certain stocks for a trade. Obviously, most of those stocks are much lower now than they were then. The commenter, who is just now reading that post for some reason, ridiculed the Gartman trading rules and suggested I "go down to the circus and ask the other clowns" what stocks to buy. Insightful.

This goes to the point I was making in Buy And Hold: Beware The Devil You Don't Know. There are many viable trading strategies out there, and buy and hold (in some version) is one of them. My problem with it in its conventional wisdom form is that it's sold as a relatively safe strategy. In my view, the only safe strategy is one that includes selling as part of the plan. Regarding any previous trade idea espoused on this blog, none of them should be regarded as ideas for anyone other than me, and even for me they are not ideas for the long haul with no exit strategy. I know I will be wrong sometimes, perhaps frequently, and that is why I believe so strongly in risk management. If there's one think this market has taught us, it's that we ignore risk management at our own peril.

Disclosure: Long Celgene (CELG) and Amgen (AMGN)