Dow STILL Trapped!

Mar 30, 2007: 11:56 PM CST

The Dow rose 5 points today, but that headline eliminates all the price action that occurred today.

As mention yesterday, we are still trapped between the 20 and 50 period moving averages as defined support and resistance on the daily charts.

The Nasdaq is also trapped:

The S&P 500 sits comfortably on its moving averages (now support zones):

Now, today was an interesting day from a price perspective. Yesterday, I mentioned that moving averages can be used to generate trade ideas on lower time frames. Today was proof positive of that statement.

However, instead of behaving ‘nicely,’ price penetrated the moving averages slightly in both directions before reversing – in essence, a semi-trap occurred today.

The market is clearly trapped between the buyers and sellers, and both sides today fought a convincing battle, yet neither side won. I personally give victory to the bulls, because analysts keep listing so many reasons why our economy is headed towards a recession, housing is collapsing, oil is rising, yet through it all, the bull market – as of yet – has climbed this wall of worry quite nicely, even despite the recent ’suprise’ correction.

We are still in a technical uptrend, especially on the weekly charts, and therefore odds do favor trend continuation until proven wrong. Regardless of the news or how you feel, more money tends to be made in the direction of the trend rather than fighting it.

Until proven wrong, and despite how negative other bloggers or the media get, we are still in a technical confirmed (long) uptrend in the Dow and other major market indices.

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Link: Time is on the Trader’s Side

Mar 30, 2007: 11:46 PM CST

Michelle, guest author at TraderMike’s site, posted an excellent observation regarding three different applications of “Time” in her post Time is on the Trader’s Side.

A major quote:

“Regard time, instead, as a wonderful and gracious friend, accommodating your need to focus and execute successful trades.”

She notes that we get so stressed out because there is so much information and so many opportunities, but rather we should focus on what we see and learn and thoroughly immerse ourself in the moment and really enjoy it!

Definately worth a read.

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Dow Trapped between Two Moving Averages

Mar 29, 2007: 11:16 PM CST

Believe in the power of Moving Averages!

While no technical indicator is perfect, or gives totally accurate signals, moving averages can provide reliable zones of support and resistance in trending markets.

Today is a unique day in the Dow Index, in that the market tested both the lower 2o period MA (for support) and the flat 50 period MA for resistance.


 As technicians, we say “the market is trapped between its moving averages” and imply that a breakout of the “trapped zone” must occur.  At the moment, this signals indecision and no clear direction (at least temporarily).  It is good for the market to pause after rapid mark-ups or mark-downs (recently).

If you don’t use moving averages, or don’t know how to optimize moving averages (which settings work best), then studying how price reacts when it approaches a key moving average can be a very valuable exercise for you.

I live by moving averages for various confirmation or trade entries (or stop placements) and have found the 20 period exponential, 50 period exponential (or simple, depending on preference) and the 200 period (daily) simple work the best.  Feel free to add your own comments if you find others to work.  Many people use shorter moving averages and also use them as signals of trend strength.

However you use them, always know key areas on chart time frames higher than the one on which you are trading.  Post (or interlay) higher time frame moving averages onto lower time frame charts and see how the market trades around these levels.  Often, key tests of moving averages in trending environments (view the left side of the chart) serve as entry points into a trend.

Nevertheless, it is odd that the market (Dow Jones Index) tested both moving averages to the penny today, and I wanted to bring this to your attention.


March 28 5min DIA chart

Mar 29, 2007: 12:02 AM CST

Today was an active day in the equity markets!  The news of the day was Chairman Bernake’s testimony which rattled investors early this morning.  Remember, news is difficult to predict, but the momentum action creates a predictable trade idea with high probabilities of success.  Today was no different.  We had a test of the most recent swing-low just after the retracement after the new momentum and price low made early which set up an “Impulse Sell” trade.

Also, note the divergence trades which could have been aggressively entered both on the long and the short side of the market.

Today’s plays were most profitable from a “Momentum Divergence” standpoint.  In other words, even though price looked grim, momentum that underlined the price showed a different story.


 The arrows indicate Impulse Buys or Impulse Sells which both would have achieved the objective (most recent swing high only).  I did not annotate the “divergence” plays which would have yielded more profit, actually.  Remember, divergence trades are entered when price makes a new low (or tests a recent low) yet momentum (compared to the price swing) makes a higher low.  The trade is entered when you view this divergence and you must keep a tight stop.  The target is just beyond the most recent swing high or low, and the trade is played for a scalp only, not a trend change.

Let it be noted that today’s play is working out from a newly initiated lower swing on the daily charts, and so the bias for the day should have been to the short side.  Swing traders should have already entered a short position when the market was recently overextended to the upside and ready for a corrective swing down to begin.

Always analyze higher time frames to determine market structure and swing patterns before entering the day-trading and scalping arena.  Let this ‘bias’ guide your trades for the day and manage risk.

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Link to TraderFeed: Why Traders Sabotage Themselves (Information Processing)

Mar 28, 2007: 9:23 AM CST

Dr. Brett Steenbarger posted a timely analysis entitled Traders and Information Processing:  Why Traders Sabotage Themselves.

This post is an absolute read.  His concluding post reads:

“Trading problems begin when we  enter trades by one information processing system, and manage them by another.”

To see what he means and learn his insights, visit the post or his blog at TraderFeed. 

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