When it is OK to chase the market.

There was a tweet after the AAPL earnings saying “do not chase it”.  In all fairness to the tweeter I am not sure if they were speaking of AAPL or not.  After a little probing to find out exactly what was meant by the tweet, at last the trail went cold.  It is hard to convey a complex thought like that in 140 characters but apparently not so hard that people won’t continue to attempt it.

First, I do not like advice like that because well blanket advice does not work.  And although I appreciate and understand the sentiment, to blanket reject a setup is a bit naive.  But what is even worse is not following your trading plan and accepting the risk.   So above all do that.

A few things to consider in the case of APPL:

  • It was near an all time highs
  • It had a blow out quarter
  • Broad index trend is bullish
  • The theme of this market is momentum
  • GOOG blew out its earnings and rallied
If you ask most professional trader they will tell you that they make a majority of there money on the tops and bottoms.  There of course are several ways to do that but the tops and bottoms guarantee liquidity.  Nothing is more comfortable than knowing there is someone there to get you out.

They beat estimates, we are in a bull market, and momentum rules today’s trading.  When the market is in this mode there are two thoughts, do nothing or buy more.  Buying has worked better than selling and people are always slow to change.

So let me be crystal clear, I am not saying chasing the market is always a good idea.  I am also saying that it is not always a bad idea.  It is essential that you follow your trading plan.  What happens to a lot of traders is that they chase the market and get burnt but they chase because they feel as if they are “missing out”.  Chasing in the right situation can potentially lower the risk.  All chasing is not created equal.  No trade is risk free.

As for my words and the prophetic words of  the 140 characters set, think about it critically and act at your own peril.

For the record, the tweeter was right as AAPL is coming off of its highs but the premise is still intact. 

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