Brief Look at the Current Market State

Jan 22, 2008: 6:45 PM CST

Investors breathed a temporary sigh of relief because the markets closed down 1%, rather than the 4% that they had originally reached at the beginning of today’s market action.

The intraday chart tells the story:

Traders woke up to a 400 point drop in the Dow Jones index, only to see the market recover a large percent of that amount before closing off 128 points. It’s almost as if traders breathed a sigh of relief by saying “The Dow was only down 128 points today” but that does not change the fundamental reality of the inherent dangers and volatility that is likely ahead.

Let’s take a top-down look at the S&P 500 average:

On the Monthly chart, price is simply supporting at the 50 period monthly moving average, which could serve as temporary support. Keep in mind that this chart does not represent a monthly close, and so we will need to wait until the end of the month for that piece of the puzzle.

The weekly chart shows price having successfully tested the rising 200 period moving average:

From a high of 1,575, price tested the index level of 1,275 today, successfully rejecting further downside. Again, we will need a Friday close for actual data, but right now, it appears that the 200 period MA will provide temporary support.

I, along with other analysts, hinted that this level was likely to be tested after price violated the rising 50 period moving average. I’m sure we had no idea that it would happen so swiftly and so suddenly.

Notice the ‘death cross’ of the 20 period MA crossing beneath the 50 on the weekly chart.

Finally, let’s see the carnage on the daily chart:

Price might not look so horrible on the daily chart, but realize that this chart only represents six months.

The moving averages on the daily chart are now in the most bearish orientation possible, with the 20 beneath the 50 which is also beneath the (flat) 200 period.

Momentum precedes price (as well as structure) from the lower time frame to the higher time frames, and the fact that this orientation has developed here does not bode well for the higher time frames. It could very well be that the primary trend (approximately four years) is now turning down.

It’s tempting to believe that a bounce is long overdue, and it may very well be, but realize that – at the moment – any bounce would be a counter trend reaction, and that the trend on the daily chart and weekly chart is now down.

If today was particularly horrible for you – and it was for some traders – please realize that there is more to life than the markets and don’t give up.

Safe trading.

3 Comments

3 Responses to “Brief Look at the Current Market State”

  1. Stock Market » Brief Look at the Current Market State Says:

    […] Here’s another interesting post I read today by Afraid to Trade.com Blog – Overcoming Stock Market Fears […]

  2. anatrader Says:

    Corey

    Here is a cross ref to your posts re market volatility at:

    http://tradingsuccess.com/blog/

    Ana

  3. Connecting News, Commentaries and Blogs at NineReports.com Says:

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