Orderly Pullback or Something More Sinister?

May 10, 2007: 9:29 PM CST

The Nasdaq fell 1.7% and the Dow fell 1.1%. Not only is this by no means surprising, it is also not a huge decline given the rally we have experienced.

There is irony I discovered at least in the Nasdaq. Tuesday and Wednesday, the Nasdaq gapped lower, signaling a possible trend down day. Instead, price closed at the highs of the day both instances. The market reversed. Thursday, the Nasdaq gapped UP… but then fell through the rest of the day and closed on its lows. These fake-outs had many traders confused and positioned incorrectly.

Things are not always what they seem… but in the market, things are rarely (if ever) what they seem so it helps to be prepared. As Mark Douglas teaches, be prepared for anything (keep a truly open mind) because anything can happen. In fact, what happens is often what the overwhelming majority of participants least expect.

nas-may-10.png

  • Momentum is flattening and declined today.
  • Price tagged the rising 20 period Moving Average
  • Volume increased on today’s “trend down” day (relative to the past few days)
  • The market is still in a strong and powerful uptrend UNTIL proven otherwise

The reason I hint to the ‘sinister’ side is that the Nasdaq sits firmly at the 20 period moving average, a key turning point in the battle between the bulls and bears. If this is broken, odds favor a retest of the 50 period moving average around 2500 (a drop of 40 more points). Aggressive trend traders can initiate a new long position (especially in the QQQQ’s) with a tight stop and play for a retest of the most recent high. Note my usage of the word aggressive.

At the firm this afternoon, a trader popped his head in and informed us “This is it! This is the top of the market!” I don’t know that yet, and I don’t think anyone would be wise to try to nail the exact top. I do know that there is still a lot of bearishness and people are celebrating this snap decline. Let the market tip its hand and confirm before celebrating, I warned.

Remember, making money is not about being right and not about 100% accurate predictions or observations. It’s about playing the highest probability set-ups, taking small losses when wrong, and larger profits than losses within a system/structure of money management.

Be safe!

2 Comments

2 Responses to “Orderly Pullback or Something More Sinister?”

  1. Humble1 Says:

    That looks like a rising wedge breakdown. These are shortable [for short termers] on the snap back after the breakdown. Normally they move very quickly and retrace at least 50% in a bull market.

  2. Corey Says:

    That is another way to view the market action – through patterns. TraderMike recently addressed this issue regarding a possible wedge forming in the Nasdaq (which would lead to the downside).

    I have trouble spotting wedges personally, so I am appreciative of your insights.

    Today’s action was interesting, in terms of the pattern formation.