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Weakness in last hour after Dow break lower

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Stocks have picked up their downside pace in the last hour after many of the major market averages broke below their 50-pd SMAs on the 60-minute time interval, with the Dow Industrials giving up about 50-points and now showing a daily 200-point decline at 8,381. It's way to soon for bears to be overconfident as upward trend from the July 24th 52-week low is now in play.

Dow Industrials Chart - 60-minute interval

The Dow fell suddenly after a break below this morning's lows of 8,417 and a clear break below the 60-minute chart's 50-pd MA. As you can see, some hurdles still exist, with upward trend from the July 24 low, attached to the September 5th pullback near retracement at 8,262. While technically weak, these types of technicals should still have traders rather disciplined in their account management and not getting overly short/put in their accounts.

Often times, "younger" traders will watch a decline develop, then all of a sudden become convinced that a downward move is underway and try to put on 5 bearish trades in just one day. A better approach is to initiate just 1 trade or so a day, and only add to bearish positions as success is found. This is called "legging in" and a good strategy as it relates to account management.

Institutions don't build short/long positions all in a single day and individual investors can learn from such a strategy and implement it in their own account.

Bearish traders that find some of their holdings perhaps "exceeding" near-term target levels are often wise to "leg out" and take some profits off the table, build some cash, then look for rallies to short/put the same position, or move onto another stock/index that presents a new opportunity for near-term downside.

Earlier this morning, I profiled a bearish Day-trader's trade in shares of Alcan Aluminum (AL) with a target of $26.00. While not a Dow component, would look to close day-trade position at $26.01 with Dow Industrials near upward trend. Remember that "like stock" Alcoa (AA) is a Dow component, thus the correlation between like stocks and Dow Industrials.

Jeff Bailey
Senior Market Technician
Option Investor


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