Seeking Alpha
Long/short equity, special situations, momentum, short only
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I hope everyone had a great holiday and New Year!

It’s time to reset our profit counter to zero and start looking for new profitable trades along with managing our current open positions on our small cap stocks, which we continue to hold with gains of 66%, 35% and 10%.

Last year was a tough one as the stock market chopped around in a very large range giving off buy and sell signals every week and some times every other day. If you understand how to trade options then these conditions can make you a boat load of money.

Those who follow me or trade with me through my trading newsletter know how conservative I am when looking for low-risk setups in both ETFs and stocks. And no doubt, I agree there were some extended periods of time when we did not have any trades because the volatility on a daily basis was making the risk higher than what I wanted us to take, thus, we waited for setups instead of chasing prices. We still locked in some solid gains with eight winning trades, but feel we can do better this year especially if we get less chop and more of a trending market.

It’s safe to say some people just do not like being in cash, hence, the reason so many want stock picks and trades all the time. But to be flat out honest, I love being in cash or at least holding a good chunk in cash waiting for a high probability opportunity to pop up on my charts before committing to it. It’s better to be wishing you were in a trade than to have all your money tied up in losing positions just because you wanted to be active.

Because I give you only the trades I am making with my own money, things are slower paced, unlike some other newsletters in this industry which fire off new trades each day or week just to keep those addicted (wanting stocks picks all the time) happy.

Anyways, 2011 should be a great year for trading, investing and education. Last year's fast-paced market either took your money and got you really frustrated, or you made money and were able to use the difficult conditions to fine tune your trading and money management stills like I did. This year feels like it’s going to start out similar to 2010 where we get a move up into mid January, but once earning season starts the market sells off on the good news for an 8-10% correction.

The good news is that after last year's fast paced market and my constant refining of my strategy and money management rules, we should be able to catch the majority of the trends this year both up and down using stocks, regular ETFs and Inverse ETFs.

As much as I would like to forecast what I think will happen this year, I have decided to take the market one quarter at a time to keep everyone more in tune with what’s happening now and a glance forward up to two-to-three months.

Take a look my SP500 charts for the next 3-8 weeks below.

SP500 Index – Daily Chart
On this chart, you can see that the overall trend right now is still clearly up. But, with this current situation, I feel one should be on the sidelines waiting for the market to tip its hand telling us it's headed higher or lower. If prices start to fall, we will look to short the market in order to profit from the correction as long as the market provides an optimal opportunity.

Currently, the market sentiment levels are at extreme highs, which is the same as last January's and April’s highs. With extreme sentiment, light volume (lack of buyers) and the earning season just about to start, I can't help but think a nice correction is about to take place, which will cleanse the market before the next big leg higher.

If all goes according to plan, we should see an 8-10% correction. A piece of the November low is what I am looking for as that would trigger a lot of protective stop orders and create panic selling in the market. It is panic selling which creates a market bottom. That being said, we may not get that large of a correction, which is why we must continue to monitor the market closely as my analysis will change with the market.

(Click to enlarge)

Jan 2010 SP500 Correction
This time last year, the market was in a very similar situation with market sentiment, light volume, and earnings season just around the corner.

It's difficult to pick tops because they can stay overbought for an extended period of time. Bottoms are a little different simply because fear is more powerful than greed and shows itself on the charts once you know what to look for and how to trade it. My point here is that you should not jump the gun and start shorting just because you think one is around the corner. I prefer to wait for more of a clear signal that sellers are in control, then ride the short term down trend and hope it blows up into the correction I think we are about to see.

During bottoms there are new low washouts, and the same goes for tops - we get several small new highs just before the price rolls over, and that has yet to happen.

(Click to enlarge)

Weekend Market Trend Conclusion:
In short, 2011 should have several great plays as I am looking at the SP500, precious metals, oil, U.S. dollar, bonds and emerging markets for some big moves.

Source: I Can't Help but Think a Correction Is About to Happen