Market Surrenders in Last Hour

Jul 31, 2007: 7:29 PM CST

I’ll be honest – the ferocity of today’s last hour decline took me by surprise and took me out of a few positions.  From the top of today’s range (13,498) to the bottom (13,199), the Dow ‘lost’ 300 points today in steady decline.

The opening hour above yesterday’s close lured in new buyers hoping everything was ok – myself included – only to have those prices flounder and then ‘roll over’ violently by today’s close.

Today’s action should be a case study of what could go wrong with expectations so high.

Below is the 5-minute chart:

dow-intraday-july-31.jpg

Isn’t everything great in hindsight?  Just after 1:00pm, a “Bollinger Band Squeeze Play” trade could have been entered.  Remember to identify this condition of low volatility and play for the break of the range of consolidation – you can often play for large targets this way.  When the range was broken to the downside, a trade could have been entered to play for subsequent swings which occurred quicker than anticipated by many traders.

The first pullback occurred and served for entry, a break of the 200 MA allowed for a late entry, and finally a pullback retest of the convergence between the declining 20 period moving average and the 200 period moving average served as a ‘picture perfect’ trade entry for a swing lower.  Of course, you would be trading an index EFT such as the DIA, or looking for stocks as ‘vehicles’ to play out the overall market’s posture for the day.

I wanted to post the 30 minute chart of the Dow because I find it interesting from a momentum condition standpoint:

dow-intraday-30m-july-31.jpg

Notice the developing momentum divergence that led to an upside break and a higher high… yet price swung back a bit too far to create a retest of prior lows.  The 50 period moving average capped the upswing and led to the further pressure created during the downswing.  Price is now retesting prior lows, which have a decent chance of holding.  I think without the last hour action, we would have created a type of “Sweet Spot in the Data” trade which would have signaled a change in trend (which is down on the 30 minute charts).  We ideally want to see a higher high AND a higher low… price is not testing and backtesting prior levels.

Pulling the camera back further reveals slightly broken support on the Dow Jones Average:

dow-july-31.jpg

Should price not hold at this level, odds will then shift to favor a test of the rising 200 period moving average, which is currently just below 12,800.  This will certainly shock people who bought in the day(s) following the major headline “Dow Closes Above 14,000!!!”.

As stated previously, the overall market is at a critical juncture and buyers and sellers appear to be nervous, unsure of who exactly is in control or who can push prices in their favor.  A tipping point seems near – you can feel it in the air almost.

I also wanted to highlight the recent action in Apple (AAPL), which served as a further drag on the market and the Nasdaq especially:

aapl-july31.jpg

I wanted to show the increase in volatility, as evidenced through a 10 point drop in two days, a 15 point range in one day (which closed the same as the open), and the recent (almost) 20 point decline in three days.

The Average True Range (ATR – 14 period) for Apple has increased 150% since April, when it was approximately $2.00 per day, to the current value at just above $5.00.

Also note the Apex Buy trade, as well as the Bollinger Band Squeeze Play entry, both of which could have allowed you to play for a large target in the stock.  I dare say that large target ($25) has been achieved, as evidenced by a “measured move” and a euphoria climax top pattern (rampant increase in interest and volatility… as well as volume).  Remember ‘Trends End in Euphoria’.

I think there are greener (and more profitable pastures elsewhere – it could be time to move away from this stock for most retail traders.

This is an increasingly difficult time to trade the markets (I refer to the last few weeks).  I admit that.  Use a little caution, trade smaller positions, and consider paper trading new ideas as time permits.

Do not increase your position size to get even with the current market – do not be angry at the market.  Step back, take a breather, and return calmly.

Be safe out there.

1 Comment

One Response to “Market Surrenders in Last Hour”

  1. Cherian Says:

    I’ve included your comments in my post on http://www.gaffairs.com/GlobalStock