Market View So Far – Upswing in Progress

Jan 10, 2008: 9:42 PM CST

Despite all the bad press and media in terms of “recession” and “bankruptcies” as well as technical analysis pattern breakdowns, the market has shrugged off all this news and rallied strongly the last two days.

Here’s a look at a “Swing Chart” I view in TradeStation:

Despite being in a confirmed downtrend, and making new momentum lows, and breaking from a descending triangle pattern, the market (Dow Jones) is in the middle of a proposed up-swing (counter-swing) in price that should terminate around 13,100, which corresponds with recent support (now potential resistance) and overhead resistance from key moving averages (specifically, the declining 20 period).

I know quite a few people who have moved into cash or bonds, particularly this week, who are temporarily upset at their decision.

“I just moved into a defensive position out of the market! Why is the darn thing going up?” they’ve asked me.

I’m not a long-term analyst, nor am I qualified to provide long-term investment advice, but I tend to follow market patterns and prices one swing at a time. Currently, we are experiencing an upswing which is no surprise at all to many market participants.

Price moves in a wave-like motion of reaction/counter-reaction or swing/counter-swing or impulse/counter-impulse which “trends” price higher or lower. Lower prices either attract new sellers or they don’t, but they do so in a swing-like motion where prior levels are tested for new buyers and the cycle continues. Price rarely jerks from one level to the next without some sort of counter-measure or counter-test.

That’s what’s happening right now and it’s totally natural. In fact, aggressive traders can be playing to the upside and making profits on the daily chart which is even in a nice and potentially fresh downtrend.

Recall that downtrends are – at their core – a series of lower lows and lower highs in terms of price swings.

Let it also be written that the fabled “Plunge Protection Team” may be working their influence as much as possible at these levels, which have held as support two times prior.

Make no mistake at the timing of the Bernake/Bush/Congress reports/headlines/stimuluses that are being announced. Something ’strange’ always seems to happen when the Dow hits about 12,500 or the S&P 500 hits 1380.

A rate cut is announced, a new string of economic stimuli including tax breaks are announced, etc etc. It’s fun watching how the charts react to such pronouncements by government officials.

Anyway, be safe and best of luck. It’s dangerous out there for both longs AND shorts.

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Apple Shocks the Shorts

Jan 9, 2008: 5:57 PM CST

Apple Inc (AAPL) dealt some pain to traders who were short Apple stock or options today with a rambunctious end-of-day rally that took price where the proper ’short-entry’ occurred.

Typically, you want to short moving average (or support) breakdowns at the point of confirmation, or break-point, which would have been just above $180.

My guess is – if you’re like me – that you wait a day or so before entering just to make sure that this break isn’t just another whipsaw that will steal potential profits and play out as another loss.

Maybe yesterday’s action and market weakness was enough confirmation that it was time to start shoring stocks and you chose Apple, with its nice breakdown beneath a key trendline and moving average. You shorted near yesterday’s close around $170.

You felt great this morning, but took heat throughout the day and by the close, you were down $8.00. Yikes! Did Apple take a bite out of you?

These things happen. That’s why trading is more akin to a game of probabilities, rather than certainties.

Not every trade works out. Not every break above resistance or below support works in a major trend that you’re afraid you’ll miss out on. Sometimes you have to take your stops and move on.

Other times, you’ll enter, then the market will ratchet against your position, teeter very close to where you placed your stop, and then take off in the direction that you expected. Unfortunately, this seems to be more common than people would like to admit.

Nevertheless, if you are short Apple, your stop should be somewhere between $180 and $185 and – I hope – you didn’t “load up the boat” with puts.

Treat each trade separately and try not to play for the elusive “big win.” Stick to your plan, take heat when it comes, and don’t panic out.

Oh, and try to have fun!

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Up Down Up

Jan 9, 2008: 5:43 PM CST

Today’s intraday action was quite nauseating, I thought, in terms of the early swing up, mid-day swing down, and then strong rally into the close. It made for an interesting chart, but also made many traders nautious.

First, let’s pull the perspective back to the daily chart and then drill down:

  • New Momentum Low
  • New Closing Price Low
  • Extended swing down (ready for retracement swing up)
  • Supposed break of descending triangle
  • Daily chart in confirmed Downtrend

I’ve heard so much about the Descending Triangle break that I was beginning to get suspicious if it would “work” or not, especially provided the extreme over-sold nature of the market right now and the fact that “all eyes” were on the break of key support.

Usually the market will behave in the way to confuse and hurt the most people, and to do so it would have to go up to throw all those sellers and “new shorts” off.

From what I see, I think a counterswing up is due to retest the declining moving averages near $130 (Dow 13,000) before potentially continuing lower, if that is indeed the market’s chosen course. But folks, right here right now is NOT the most ideal or opportune place to “get short” the market.

If you just have to get short, wait for a retest or upswing and short-sell into strength, rather than weakness.

Anyway, let’s look at the fun but confusing intra-day price action that led me to take a couple of unnecessary losses today:

I’ve circled the areas that penetrated natural resistance zones and most likely triggered some stops.

Typically, we can expect the market to respect its key moving averages more, and not exhibit multiple patterns of “rinse and wash” tactics above known resistance (or support).

Traders – like myself – who place stops a bit too close to entry are nipped away when this even occurs. Stops honestly should have been placed above the declining 50 period moving average on each subsequent upward ‘test’ of the declining 20 period 5-minute moving average (I like to short-sell retracements to this key moving average when a downtrend is in effect).

What really ripped the lips off intraday traders was the “woosh” rally into the close, where the market exhibited strength and swung 200+ Dow Points ($2.00 of DIA).

Needless to say, today was fun, but frustrating.

Oh, well. There’s always tomorrow, right?

Comments

Market Performance in 2008

Jan 8, 2008: 11:30 PM CST

The market has behaved extremely poorly in 2008, but do you know how dramatic the decline has been for 2008?

Let’s compare major US Markets on a percentage basis:

Both the NASDAQ and Russell 2000, which are more volatile and have higher beta, often lead the market both up and down. If that is true again this time, we are in for a rough patch.

Both have declined 8% for 2008.

The Dow Jones and S&P 500, which share similar characteristics, have both declined 5% in ‘08.

Keep in mind that a “correction” in a bull market is often defined as a 10% decline. The market has already declined greater than 10% from its October/November 2007 highs.

There is the so called “January Effect,” which partially states that “As January goes, so goes the market” meaning that if January is negative, then the whole year will be negative (or vice versa).

We’ve not yet completed two weeks into the New Year, and already, investors are wishing it was 2007 again.

Time will tell as to what happens next, but let’s hope for the sake of investors that the rest of 2008 is not like the start of 2008.

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Divergence Resolved … but So What?

Jan 8, 2008: 7:36 PM CST

Earlier, I highlighted a momentum divergence in the DIA (Dow Jones ETF) which resolved as expected to the upside. However, shortly after completing that divergence pattern and achieving its target, the market sold off extremely hard and beyond any technical analysis predictions.

Notice that as price made lower lows on the intraday chart (which later formed a base), the momentum indicator began developing a clear divergence upwards, indicating odds favoring potential upside.

The pattern is even clearer on the 15-minute chart:

You can almost “feel” the momentum building on the side of the buyers and weakening on the side of the sellers.

However, problems with AT&T, Countrywide Financial, and others caused a late afternoon sell-off.

With price breaking below recent support, the divergence is complete and price appears to be painting a much different picture than earlier.

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