IYZ
Wednesday,
December 3rd, 2008
The broad market has turned into a tug-o-war between buyers and sellers. The volatility index is back in full bloom as investors fight out which direction we are heading short term. I stated yesterday that both the charts (technical analysis) and the fundamentals are not helping determine anything at this point. That makes this a tough market to trade and as a result it becomes very frustrating. As investors, by nature we want to be invested and it goes against our psyche to be in cash. So, the bulls and bears fight over direction we fight with ourselves over being invested versus holding cash. When there is nothing to trade sit it out. Take a vacation, have a party do something other than frustrate yourself trying to force yourself to buy something. Follow your discipline not your emotions.That said, it is hard to find charts today that make much sense, but there are few. One I have been watching the last couple of months is telecom. The last nine weeks the sector has been trying to create a bottom. There is what some would call a potential double bottom developing and others would see a descending triangle in play. Either way there is consolidation taking place with support near the $13.15 mark on the iShares DJ US Telecom ETF (IYZ). As you know my discipline is to scan the market looking for ideas based on a specific strategy. This is one of those ideas and therefore it goes onto my watch list. Now I define what I would like to see happen in order for me to put the sector into play. Thus, IYZ is on my watch list for a potential break to the upside through the downtrend line. That would be approximately $16.89. I would expect some resistance at this point and or the 50 day moving average. I would like to see an increase in volume above the trailing 50 day average volume. I would also take the time to scan through the stocks which make up this index and determine where the leadership is coming from and if that leadership makes since relative to the broad market.
The important issue is to develop a strategy for entry. That is what the above research and more will do. If I determine to enter a position I will determine the target and exit point first prior to entering. Thus, the discipline is to know the entry point based on a specific strategy. Define the exit or stop based on that strategy failing to materialize and setting a target based on the strategy succeeding. This is a chart worth watching to see how it plays out or breaks out of the current consolidation. A break to the downside is a possibility to for this chart as well. If selling picked up and the index broke below the support line of $13.15 it could create an opportunity to be short the sector. Keep your options open and look at a strategy that would work to create a short position based your specific criteria.
The key is to have a specific strategy and discipline to put any position in your portfolio and then a specific strategy to manage each position in your portfolio. This is commonly called money management, I like to call it risk management. Stay focused, this market remains very volatile and directionless.
Jim Farrish, founder and editor of Melbourne,
Florida-based
SectorExchange.com,
writes regularly about sectors and speaks widely about investing and
money management.
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