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There may be many market participants that think the Dow Industrials are headed for 10,500. How could they get this idea? Perhaps from the very same tool that had them selling near 11,000. Once again, our retracement tool might hold the key to what takes place in the Dow Industrials short-term.

Dow Industrials Chart - weekly interval.

If somebody asked me "Where do you think the Dow is headed?" I'd have to say 10,500. I've overlaid a retracement bracket from the January 2000 high and anchored it to the March lows. See how the 61.8% retracement level at 10,980 "makes sense" for the Dow Industrials recent trouble near 11,000. Now that it's below the 50% level I'd have an educated guess that 10,500 is not out of the question. How can I make money from this type of scenario? One stock I'd be taking a very close eye on would be shares of Wal Mart Stores (NYSE:WMT). An upward trend has been broken and it looks technically weak. WMT is a component of the Dow Industrials!

Questions you may have, that other subscribers have asked

There's some good stuff here, but if you're busy trading, save it for later!

Q: Regarding retracement. When you draw the 100% line, do you go back in time to a recent high? How far back do you go? Is there a rule?

A: There are different ways to use a retracement bracket. Lately we've been using the retracement bracket to try and do some "investigating" and trying to figure out how the MARKET and market makers might be trading certain stocks and indexes. We've gone back to some recent highs and have been "fitting" the 61.8%, 50% and 38.2% to reflect ranges that "make sense." Much like a detective trying to solve a crime, we're using these "clues" to try and help us solve the trading puzzle. I can't say there is a "right" or "wrong" way to use retracement brackets. I can say that the zero retracement level can't go below zero! While this may seem obvious, I've actually seen some traders "predict" a lower trading level at 38.2% retracement, but didn't realize that their zero level was at -$10!

Q: Retracement levels. Using the example of the NASDAQ, you "picked" 2,618 as the starting point and made that the 50% level. How then are the other levels determined? My software (eSignal) doesn't calculate fib levels, and manually I can't figure out how you're coming up with the levels identified. I had the same problem with the JDSU example.

A: This is a great question! I can't speak for eSignal, but on q-charts, I simply select my retracement bracket tool (with the settings at 100%, 61.8%, 50%, 31.8% and 0%). Once I "click" on the level I want to establish as a high (4,252 in this morning's 09:00 update) I simply begin dragging down my mouse and began trying to "fit" the 61.8% and 50% retracement brackets where they "make sense" as it relates to the past. Notice the first chart at 09:00. This was my "starting point." Now if you were to go back to the JDSU example on Tuesday, and were just getting ready to make a market in JDSU you need a starting point to establish a trading range for your market making activities. Just remember: A market makers is less concerned with a stock price direction as he/she is with controlling his/her RISK! If every trader thought this way, they'd trade much more confidently and with a lot more conviction! If I'm "clicking" the retracement bracket at a top, and fitting the 50% level to 2,618, then by "default" the 0% level "extends itself" to a level in relation to 100% to 50%. If I look at the 0% level, it should be above the $0 price level! Again, go back and look at the first chart in this morning's 09:00 Update. The top of the retracement bracket was 4,252; we "fitted" the 50% retracement level at 2,618. Where do you think the bottom of the bracket is? You can't see it on the chart, but it has to be at 4,252-2,618 = 1,634 or 2,618-1,634= 984. Let's call it 1,000! Remember though, we're concentrating on the 61.8%, 50% and 38.2% retracement levels for a trading range.

Jeff Bailey
Staff Analyst

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