The Trend Is Our Friend
We often hear analysts reporting market news with a bias. "It was a good day in the markets" usually follows a rally. "It was an ugly day in the markets" likewise follows most declines. Those are incomplete statements at best and pure fiscal poison for the most part.
Markets are never good or bad: they just are. The only thing that matters to option traders in a monetary sense is being on the proper side of any move. Which direction it happens to go is where non-monetary emotion comes into play. Describing market action as good when it goes up or bad when it goes down is the distinct mark of a rank beginner or substandard trader in the eyes of most professionals.
Allowing preferential bias to color one's market outlook is the fast track to broke in this profession, especially in a bear market!
Yes I know everyone expects the Fed to save us from recession as the economy turns around this fall and then full-bull ahead. I endure the same media pundit's drivel everyone else does. Plenty of readers still chastise me every single time I write a bearish Market Wrap no matter what I offer as proof of such conclusions. Should I write that which bias bulls are desperate to hear or what chart signals tell us is likely to happen next?
Please forgive me for doing the latter. It's the only thing I know how to do.
(60/30-Minute Chart: SPX)
The SPX (and all major indexes) saw their near-term stochastic values cycle from deep oversold up towards overbought without price action advancing hardly at all. When this happens while daily and weekly chart signals are very bearish it is a clear signal that upward pressure is light while downward pressure remains strong. Simple as that, without bias or emotion.
Clear bearish formations are seen in near-term charts and I will play the downside on the next failed rally near upper lines (green) or break below lower lines (red) when stochastic values begin their bearish reversal in unison.
(60/30-Minute Chart: Dow)
Same for the Dow. Barely off recent lows even though stochastic values cycled back up. See how far down price action plummeted when stochastic values cycled from overbought to oversold extreme? About 300 index points from the initial bearish cross. From the bottom of oversold until now they advanced about 75 index points or 25% of the previous move.
Where should we determine strength lies near-term... up or down from here? I would clearly say down has much higher odds with all evidence weighed. A close beneath 10,200 has several hundred index points to go lower from there.
(60/30-Minute Chart: QQQ)
The QQQs are forming a nice little neutral wedge on both charts and could theoretically break either way, but I only use patterns to key on ideal entry points. My trades are taken the direction stochastic values point and right now they look quite weak and ready to roll over from there.
Could go either way, but odds clearly favor the downside.
(Daily Fibanocci Chart: OEX)
This daily chart cutout of the OEX with Retracement bracket drawn from recent high to low shows the level of overhead congestion any rally would face. Moving averages near the 630 level along with frequent price action trading there would be tough to penetrate. Before that can even occur, 38% retrace near 621 must break and that failed to happen today.
Another test and rejection near 620 would have me in OEX puts in a nanosecond. Likewise, a break below today's low will probably test the 595-600 level after that.
Summer Rally Or Silver Platter Put-Play Service?
Not long ago, EMC and other storage companies were rated a "strong buy" as the worst was over according to several high- profile analysts. Music to bullish ears as buyers swooped in on high volume to catch the bottom. But once again it was not the bottom, once again these exalted analysts were dead wrong and once again more investors and traders were led to slaughter.
We can be sure that the next rally lasting longer than three sessions will be trumpeted as the real deal and CNBC will host a plethora of non-trading "expert" analysts who'll taunt us for not stepping in and buying the bottom once more.
We should all keep in mind just how many bottoms this band of market non-participants who mostly work for brokerage houses that underwrite stock as their primary income had the public buy. And now we hear that the individuals whose 401Ks are all down were at fault for holding too long without selling? When exactly did all of those famous and second-tier analysts tell the general public to sell? When did they issue warnings to dump overpriced tech stocks without a prayer of seeing those price levels again for years (if ever) immediately? I must have missed that part.
Can you believe the nerve & the gall it would take for a single living analyst to blame retail investors for getting hammered in the markets without sharing some responsibility for giving horrendous advice?
So much for touted Wall Street analysts... I'll stick to weekly and daily chart stochastic values to give direction and chart patterns to provide entry points as well. Right now they suggest further downside is ahead and I'm listening to the non-biased and unemotional guidance they offer. All I ask is that we place ourselves on the winning side of most trades and the downtrend remains our friend until proven otherwise.
Best Trading Wishes,