Precarious Position

Aug 8, 2007: 6:34 PM CST

The markets are in a precarious position right now, from a basic level technical analysis overview. How so?

First, we have had a large volatility impulse down which has made new momentum lows. We are now experiencing a ‘counterswing’ up that is being met with potential resistance overhead, which must be overcome (or ignored) by buyers hoping to push prices higher.

On each of the major charts, the ominous Fibonacci retracement level of 62% hangs above each of the indexes, as does a confluence of the 20 period and 50 period moving averages above. These triple threats could bring out sellers who will be betting in force that these levels will thwart any further upside potential. The Russell 2000 (small cap stocks) has taken the hardest hit of the four major indexes.

I want to see price close above these levels before I can become a raging bull yet again – the markets still are not out of the ‘bear-filled woods’ yet. Let’s see some charts:

The Dow Jones is showing the strongest relative strength:

Of the major indexes, the Dow is the only one to have closed above the 50 and 20 period moving averages… yet price failed ‘magically’ at the 62% Fibonacci retracement.

The Nasdaq is showing “double” resistance:

The S&P must overcome “Triple Resistance”

To quote one of my friends: “The Russell looks like death right here”

Price has fallen below the 200 moving average, which is a level many market observers consider the “line in the sand” between the bulls and bears. Price has rallied up in a potential ‘counterwave,’ and the new momentum lows might signal lower prices to come. Let’s hope price can overcome the confluence of moving average resistance… none of the averages served as significant support recently.

I can guarantee that some traders will be initiating new short positions at these levels, but the bulls (buyers) must overcome the selling pressure that the sellers wish to inflict.

Neither side is safe, and the ‘fog of war’ clouds many traders’ judgment.

Be careful out there.

4 Comments

4 Responses to “Precarious Position”

  1. Joe Says:

    Cory,

    It looks like we get the turn in the markets today you were warning about yesterday. Good call!

    As for myself, I stopped trading about two weeks ago as the direction of the market is not clear to me at the moment. We may see some more decline before we resume the bull market. I mean we haven’t had a 10% retracement in five years – it’s like so overdue. Not a guarantee it will happen, though.

    Joe

  2. Corey Rosenbloom Says:

    Thank you Joe for your comment.

    Today’s action didn’t surprise me, but it was the magnitude of the action that did. Yesterday brought the indexes to what I consider ‘super resistance’ and I figured we may trickle down from there or even move suddenly, but we had a shock gap of over 1%! As of this writing during lunch, we’re down 1.5%.

    I’m trading smaller in my discretionary account right now and keeping my larger trades as scalps or quick day trades only. I’ve learned the last hour has been where the money is over the last two weeks so I’ve switched to that a bit – I used to trade the first three hours exclusively. I’ve also pared down my swing positions mercilessly.

    If you don’t feel comfortable, don’t trade. There’s no sense in trading just to do it. Don’t bleed edge. Sitting out conditions that you’re not used to is far better than watching your account dwindle – in this environment, that can happen quickly.

    Be safe!

  3. Auggie Says:

    Cory:

    You’re best advise it NOT to trade if one is not comfortable. I sat out last Thursday after being in the green on Mon-Wed and went back in of Friday with a clear head.
    Best week ever in trading. Decided to sit out today and watch. Very little to be
    earned in the current risk/reward senario.

    Auggie

  4. Corey Rosenbloom Says:

    Auggie,

    The climate indeed is one of the most difficult periods many traders can remember or have experienced. It’s the rampant up and down volatility and the speed at which percentage point moves occur. It’s very challenging. I have not stopped trading through it, but I have cut down my position sizing to very small levels, and am doing more strategy testing and scalping for quick profits than swing trading in this environment. I’ve tried swing trading about six positions throughout the last three weeks and all have been stopped out due to the speed of the market and the tightness to my entry where I place my stop (still working on optimal strategies).

    Sometimes we just need to step back a bit and get a larger picture which often isn’t possible ‘down in the daytrading trenches’ so to speak. So much of this ‘trading game’ is mental preparation and maintaining motivation through the inevitable difficult periods. It’s best to sit it out, or trade very, very lightly if your ‘mental game’ is totally off, either by market forces (unseen conditions) or personal forces (sleep deprived, sick, just ‘not feeling it’, etc).

    I’m glad you are doing well in this environment. As difficult as it is, it’s not likely to be this difficult for long… I hope. If you can succeed – or even at least stay above water – in these times, you are likely to do well in any environment!

    All the best,

    Corey