DEAD CAT S3 - 8/2/2007

These are some meditations on S3s.

The S3 yields meaning depending on whether it is in a BULL regime or a BEAR regime.

BULL: buy signal.

BEAR: sell signal.

We are in a BEAR phase which means that this S3 is indeed a DEAD CAT BOUNCE.

Playing the Dead Cat is tricky. The first Dead Cat in a bear cycle is almost inevitably a short. I should play with with larger size. The 2nd and 3rd are much more tricky as they can turn into BUYS pretty quickly. I would just ignore those or trade in small size, and wait for the following day's signal for a set-up to possibly buy.

Today's Dead Cat is tough because it is the 3rd in the series.

During the BEAR MARKET is 2002, it was a good trade to short the Dead Cat with a stop above the highs. However, recently that trade hasn't worked out too good. I was stopped out today on a trade that eventually I could've made money with.

I have also noticed that with S3s, you get these little breakages early in the morning, but they don't lead to further buying.

Basically, the information gained from the behavior of an S3 is more useful than trading the signal itself.

LESSON: trade the S3 lightly, unless it is the 1st in a series. Then, up your trade from the information gathered.

STRATEGY: Wait till the morning to place you short. If the highs hold after 1hr, you can short and wait one day. If the highs are slightly broken, you can short in the breakage, and wait to cover on a mid-day retracement.