March 26 Brief Analysis

Mar 26, 2007: 10:12 PM CST

I often try to mark-up the “perfect trade zones” based on my system each evening looking back at the day’s action, and today offered very little in terms of trades I identify and am comfortable taking. Today, I was chopped around as I tried to play the short side because of the strongly negative breadth readings (which improved through the day) and took the afternoon off because of the slowly creeping trend which later became evident after the fact. It is very difficult to scalp or day-trade in a market that starts out negative and creeps higher, especially when your bias (because the market was overextended upwards) is to the downside.

Nevertheless, here are the 15-min and 30-min charts for the DIA (Dow Jones ETF the “Diamonds”):

I have added the Breadth (Advances and Decline lines) as a bonus, which shows the root of my frustration trading today. When the breadth is so negative, typically short sales tend to work out with satisfaction. Today, it didn’t.

Notice on the 15 minute chart how the market defied an “Impulse Sell” set-up (indicated by the red arrow). Although the trade gave 20c of satisfaction, the actual target was the most recent swing low which was not achieved. When an Impulse Sell or an Impulse Buy fails (remember these are set-up by New Momentum Lows or Highs), odds then switch strongly in favor of continuation in the direction of the failure.

Often, creeper trends sneak up on traders and catch both sides of the market leaning the wrong way, as was likely the case today. Markets can creep higher because short sellers are forced to cover at higher prices, which attract new buyers, and the cycle repeats. Creeping trends are difficult to predict and much more insidious to trade.

Here is a swing chart of the DIA on the Daily Frame.

My hat is now off to the bulls (buyers). They have managed to overcome immense technical adversity and now have proven themselves with a bounce off the daily 50 period moving average (to the penny). Although a lot of news is bad (with a possible recession on the horizon, as some economists and analysts predict), the charts and price are king.

Notice the momentum divergence with the two recent swing lows (red bars) and the new momentum high on the oscillator. Also, notice price has now crossed above the key moving averages. The techincal picture is much better than it was early last week, to say the least.

As such, we must respect the courage and strength of the bulls and recognize that – at extended technical price levels AND in the face of a sharp morning drop – the buyers have yet again pushed this market higher.

I still must remind readers that the market is overextended to the upside in the short-time frame (daily chart) and caution is warranted before committing new capital into the market, or getting overly aggressive now with initiating new long positions.

Stay safe out there.

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