Following The Crowd After A One-Day Correction by A. Trongone, PhD, CFP, CTA
All is not lost after a meltdown in the markets. Here’s
how you can find profitable opportunities.
IN the days following a nasty single-day
correction, if the overnight session advances,
are daytraders more receptive
to taking a long position during the regular trading session? The trading days following
a painful meltdown can offer a profitable opportunity
by simply tagging along with the current direction of
the morning market.
After experiencing an extreme loss during the
regular trading session, if there is an overnight run to
the upside, a daytrader’s psychological response is to
take a long position. Apparently the prospect of
missing the opportunity to get their portfolio back to
precorrection days is incentive enough to dismiss the
concerns of doomsayers. Conversely, the fear of
exacerbating yesterday’s loss can keep you on the
sidelines until the dust settles.
This phenomenon is more compelling with the
new country funds, especially those funds enjoying
lofty returns. The attraction of trading these indexes
stems from the perception that the countries will
generate sustainable economic growth.
China, which has been dominating the financial
papers, has been a lucrative play. A good way to
position yourself in this market is to play the iShares
FTSE/Xinhua China 25 Index. In its 786 trading days,
this country fund has gone from a starting price of
$53.60 (October 12, 2004) to $172.29 (November
23, 2007). Despite this excellent performance, a
$128.50 profit was during the overnight trading
session, whereas the regular trading session was unprofitable, losing $9.81.
Here is a system that maximizes profits by either
refraining from trading or entering into a long position
after a meltdown — that is, in the days following
a regular trading session loss of a full percentage
point or more.