What Next?

Friday's whipsaw across the markets left my Watchlist in shambles, and the whole method of technical analysis that built it without credibility.

I'm fact-based trader. My definition of insanity is doing the same thing over and over expecting it will produce a different result.

The title of this posting asks, "What next?"

At this point, the only possible answer is a shrug. However, it is possible to draw some sort of matrix to guide analysis of Friday's wholesale negation of the week's bull signals.

Any analysis must depend upon this week's market behavior.

If prices pop back to the upside, negating the whipsaw, the error was in the exit rules. The problem here is how to write rules that moderate an overwhelming reversal. After all, not only did the parabolic sar -- my bull entry signal -- whipsaw back into bear phase. The price also fell, by more than most short-term traders will allow. My standard stop-loss, when I use that tool, is 3% below the entry price.

It may well be, in fact, that the Friday Whipsaws were a Black Swan Event, and there are no rational rules that could handle the exit.

If prices stay down this week, then the problem was with the entry signals. Recall that as I wrote them up, I expressed some doubt about their validity, because the trend measures were ambiguous. A more prudent entry, that demanded an unambiguous trend signal, would have kept those bull signals off of the Watchlist.

It should also be remembered that prior to the broader decline that began in April, the parabolic sar switched to bear phase (Looking at SPY, on April 22, for two days, then back to bull phase, and again to bear phase on April 27.)

Had I headed that phase switch in April, and then also demanded a clear trend signal before re-entering, I would have avoided the entire market decline.

So "What next" really asks the wrong question. The correct question is, "How can my trading rules be improved?"

That will be my main project the next few weeks.