Daily Market Analysis – Mar 13, 2007

Mar 13, 2007: 9:10 PM CST

I am trying to keep this site educational in nature, and not inject too much analysis into the blog, but it has been requested that I provide a little more updates on market action. As a disclaimer, please keep in mind I do not offer trading advice – all charts are posted for educational purposes to highlight strategies and areas of possible price movement.

That said, I pray that today’s market action did not shock or surprise you. I hope you did well today shorting the market, or at least had removed most of your long positions prior to today’s action and weren’t tricked by our “ghost rally” on low volume.

Dow Mar 13

I am attaching my Swing Chart to accompany the Candle Chart. Please refer back to my post “Anticipating a New Swing Lower“for a bit more analysis and charts from last year to supplement the market action.

Dow Swing Chart

For reference:

  • Green Line: 20 Period Exponential MA
  • Blue Line: 50 Period EMA
  • Red Line: 200 period Simple MA
  • MACD 3/10 Oscillator (bottom pane)

It is still not safe to invest in the markets (the S&P 500 and Nasdaq are showing similar patterns – I am most familiar with the Dow for analysis).

The momentum is still strongly with the bears and the sellers, and the rally attempt by the bulls on anemic volume was quickly vanquished. The only “magnet” for price on the chart is the rising 200 period moving average which should not only act as support, but will end the “Equal Swing” down which typically occurs after a large standard deviation swing.

Individual charts are showing busted support levels, and before that, they were showing momentum divergences (some for a lengthy period), and leading stocks are rolling over into lower territory.

I have heard some say “we are in a new downtrend.” We are not. We are VERY close to the trend confirmation zone, or the “Sweet Spot” in the Data. It is possible that a “Sweet Spot” trend entry may occur should price take out the most recently formed lower low at Dow 12,030. We would definately entertain the thought of a new downtrend birth should the Dow take out 12,000. Downtrends are much more risky to play than uptrends, and it is generally unwise to establish long-term position trades short an equity index.

Realize that – after the most recent “rally,” – the highest probability trade would have been to enter short after a counter-swing rally (which occurred today) and play for the most recent swing-low for a small target, which formed at Dow 12,030. We achieved most of that high-probability position today. There is a difference between playing for a large target and a small target.

This helps illustrate why playing the market short is so difficult: Fear is a much stronger motivator than greed and prices will fall (and achieve short profit targets) much earlier than their greed counterparts (which gradually grind prices higher). A price swing that may have taken days to unfold in an up-market is achieved almost instantly (within a day) in down market. It has been said “Price takes the escalator up and the elevator down.”

There is danger for shorts if you enter now. Bulls might attempt to test the most recent swing low by entering new long positions. Odds are against them, but they may try to make one last stand at this recent “possible” support area. Realize that the path lower will not be clean and efficient, as people find a hard time believing prices are headed lower and are attempting to find value at these areas. Unfortunately, those attempting to find value here will most likely be more fuel to the fire of continued price declines.

Regardless of how you trade, utilize caution ahead still. Odds favor success at shorting, and the most likely outcome is a continuation of the new swing low we are experiencing currently.

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