Trading Strategy for 2004

Briefings.com today has a good description of the recent market:

“The current action is reminiscent of 2004.  That year, recession fears hit in March.  They proved totally unfounded, of course, but the S&P dropped over 6% in March. The market then recovered most of its losses only to drop another 6% in  late April-early May.  The market again rallied to regain those losses before a summer sell-off of over 7%.  The S&P 500 index was still down on the year in October, but had a classic year-end rally that resulted in a 9% gain for 2004.

The point is that the unsubstantiated concerns about the fundamentals proved completely wrong in 2004, but held the market down for months.  The concerns about the fundamentals are overblown again now, but may not go away soon either.”

So, what would be the trading strategy for 2004, if 2007 is going to look like 2004?

#1. Although as a trader/investor, you need to have a view of fundamentals, but don’t become over obsessed with your view, because market may decide to change its view anytime, and market’s  view is always more important,  the fundamental being “recession”, “inflation”, “USD”, “bubble”, etc.

Incidentally, I think 2004 was the year when the economy just came out of recession, and 2007, as well debated about, is kind of at the end of growth cycle. So, when at turning points, market tends to reflect and inflect.

#2 is more technical: catching the head of the momentum, whether is down or up, and at the beginning. The momentum, by definition is easier to ride at its start, whether you are a swing or day trader. The tail of the momentum is always tricky, because it could be beginning of something completely opposite. 

Today Dow’s momentum started at about 11:00ET, when 12100 support was tested. After that, Dow is in a pretty clear upward channel of “higher highs and higher lows”.