Use Extreme Caution in the Week Ahead

We could see a week ahead that will be discussed years later – as such, if you are a newer trader, it might be best to switch to simulation mode this week or use this week as a training experience, rather than risking real capital in an environment that could swing violently up and down due to market events scheduled to happen this week.

First of all, we start this Monday (as of 10:15 EST) with a 2.5% plunge in the S&P 500, Dow Jones, and in broader global indexes which suffered as well.  Today’s headlines are that Lehman Brothers (LEH) declared bankruptcy, with uncertain fall-out on other companies, and Bank of America (BAC) purchasing Merrill-Lynch (MER) for $50 billion.  Also, though a smaller headline, Industrial Production numbers were disappointing, declining 1.1% (with a drop of 11.9% in automobile output).  Also, AIG (Insurance Giant) is searching for a buyer and could be at risk.

Also, Crude Oil is plunging 5% ($5.00) today in early trading, which may come as a shock to many who expected significantly higher prices from the dual hurricanes in the Gulf.

Let’s look quickly at the Dow and the US Oil Fund:

US Oil Fund:

What’s ahead for this potentially dangerous week (both for longs and shorts)?  Briefing.com posts the list.

I wanted to show some highlights:

Tuesday is a FED DAY, meaning an extreme move could come either way.  If the Fed uses the today’s action as a reason to Cut interest rates, we could see a huge surge higher in the market. The rate decision will be announced at 2:15 EST.

In addition, Goldman Sachs (GS) reports earnings on Tuesday, which could move the market higher if Goldman reports better than expected earnings, or send it lower if it reports beneath expectations.  Many eyes will be focused on this stock on Tuesday.

As usual, Weekly Crude Oil Inventories will be reported early Wednesday, and with the recent drop in oil, the potential for oil to spike (or plunge) from this report exists.  More eyes than usual may be focused on this report and the direction oil takes as a result.

On Thursday, the Leading Economic Indicators will be reported, which could potentially move the market if there’s a major change or unexpected result.

Friday is Quadruple Witching!!! According to the Street Authority, “Quadruple witching days are usually accompanied by considerable volatility in stock and derivative prices, as well as increased trading volume. As a result, investors can anticipate and plan for the potential effects of these relatively turbulent trading days.”

Once we settle down and think we’ll be cruising into a peaceful weekend, extreme and random volatility could permeate the market as large institutions unwind and hedge (and re-hedge) major positions on expiration Friday.

I don’t necessarily recommend taking a total vacation, because there will be so much to learn in the week ahead – take lots of notes, screenshots, documentation, and observations for your educational and experiencial benefit… but by all means reduce trading activity if you need to if you’re newer or don’t particularly benefit from a volatile environment, particularly if you hold positions for days.  Day traders may love this heightened volatility, especially because they will be able to avoid these possible overnight gaps and can be able to profit from fast-moving markets.

The #1 goal this week might just be Preservation of Capital due to the number of market moving events ahead.  It would be one thing if all events moved the market in one direction or the other, but it’s likely to be more of the same in terms of a large day up, a large day down which can increase frustration and trading losses.

Do be careful above all this week.