Today’s Market Decline and Implications

Jun 7, 2007: 6:06 PM CST

Normally, I like to post charts of the general indexes and do minimal annotations and speak from the perspective of my own swing charts and momentum readings, but I wanted to showcase a few excellent brief commentaries on today’s action.

TraderMike writes a very concise yet informative post with an excerpt from the Worden Report in his “Stock Market Recap”. TraderMike posts some of the best snap charts of the daily action of the major indexes and is always worth a study.

The Trading Goddess, another popular blog, offers a quick S&P chart in the article “The Overall Market Tone has Changed… For Now“.

I wanted also to highlight a newer blog – Active Trader Blog – who recently posted a quick chart and post about the action and I had to reference his concluding question: “The ball has fallen off the building…will it crash or bounce?”. The author uses similar techniques as I and similar chart set-ups and I wanted to highlight the remainder of his posts and blogs. The blog is also frequently updated.

I actually almost referenced his site last night when I read his post Markets Doing as Expected where I wanted to reference his index chart and note the clear momentum divergence in the MACD bottom pane indicator.

The market was experiencing a prolonged momentum divergence and extremely overbought (overextended) conditions and a snap-back like this (400 Dow points suddenly in 3 days) is absolutely an expected result of such conditions. It was not a question of ‘if’ but ‘when’ and as Active Trader says, we must wait and see if it is over.

From StockCharts, we see a rare picture – it’s a day where almost everything has turned red on the market summary page.

First, ALL major US Indexes were down over 1% each. Notice the 3% daily damage to the Utilities (sensitive to rate increases).

sc-indexes.jpg

All S&P Sector SPDRs were down as well. All 9 market sectors suffered.

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As if that wasn’t enough bad news, every major market industry suffered today.
Only disk drives, hardware, and hospitals escaped a full 1% or more decline.

sc-industries.jpg

As if the whole of the US market declining wasn’t enough, every single MSCI iShares (via StockCharts) international fund was down.

sc-international.jpg

And now it’s time to see green. What was green today? Hint: Most were green by greater than 2%

sc-bonds.jpg

That’s right – the Treasury Bonds Yields. Bond prices fell, stock prices fell as a result of bond yields increasing extremely rapidly.

What’s likely to be worse is that traders could set off a panic selling wave for any reason whatsoever, especially those who ‘fear’ losing large gains they have recently made in this rising market that defied seasonal patterns (‘sell in May’) and overbought conditions, as well as a wave of relatively negative economic news for so long.

Please be careful and don’t panic out of positions because of a day’s action. Also, don’t jump in short just because every thing’s red for the same reason. Have a plan for what you do and how you trade and do so within contained risk parameters. The traders with whom I spoke with today said they survived because of risk controls. Others made a large profit short. Do what you understand and know why you do it – and know how to objectively quantify your actions and results so that you can make corrections as necessary when you were wrong or the market moved unexpectedly against you.

Remember, if you feel frozen, take any action at all. Put a stop-order in or a bracket order (a bracket order is a simultaneous entry of an upside stop-market exit and a downside stop market exit so that you’re guaranteed to exit the stop either at a price better than the current price or a bit worse than the current price. Either way, you will be taken out of your position). See my post on “Deer in Headlights” if you linked directly to this page.

It goes without saying: Be safe and learn from what’s happening.

3 Comments

3 Responses to “Today’s Market Decline and Implications”

  1. Joe Says:

    There it was! The momentum divergencies you mentioned for some time now seem to have discharged themselves into the sudden and rapid decline. It’s been a nice ride up so far, though. We’ll see where it goes from here. And you were right after all with your warnings.

    Joe

  2. Corey Says:

    Thanks, Joe! I wish I could have made more money off it!

    Momentum divergences are extremely tricky to time – we know they exist and that’s a fact. Buying pressure is waning on each successive price swing, but when the ‘music’ will stop, it’s virtually impossible to know. When will the yellow light turn to red? We don’t know.

    What we do know from study and research is that momentum divergences that get extended tend to correct to the point where they were first observed or beyond. It is like a spring that, when pulled, will snap back at some point.

    I was actually about to post ‘yet another’ momentum divergence index chart last night but decided against it because my analysis and commentary has not changed and I felt readers were tiring of my ‘momentum divergence’ broken record.

    Divergence corrections are good in that they unwind the tension and allow possible further price appreciation from ‘bargain hunters’ and retracement traders. We’ll see which force takes the day in the “buy the pullback” vs “run for the hills” crowd!

  3. Active Trader Says:

    WOW, what a nice thing to find my thoughts benefiting others. I have 10 goals I write down each day and one is: “I sincerely try to help as many people as possible with investing and reaching their personal goals”. You’ve really made me feel that I’ve taken a small step toward that here. Thanks for reading my blog…I love your insight on this blog. Take care and have a great weekend.

    Sincerely,

    Rich