Relief Arrives For Bulls This Session
It was another "V-shaped" session. Big short squeeze rally from the open spurred by program buying to wash out jittery shorts. A deep trough in the middle to wash out jittery longs, and then the final hour surge into the close that washed out new shorts who switched from one side to the other.
Sounds to me like lots of traders trying to pick tops & bottoms today got washed clean from excess trading capital in the process.
Swing Trade model took S&P calls early on when resistance was broken, but crowded defensive stops later in the day near final lows before the late-day rally leg. Trading against prevailing trends makes me nervous, especially when it's predicated on a short squeeze that fizzles out right from the gate. I consider a normal pullback to -38% or -50% from the open to session highs as mere "noise", but when prices retrace -62% or greater from session highs it is usually a sign this the move is over.
The Dow dropped from +100 points above the open down to +25 points above when our advanced stops were hit. Almost every time one sees a -75% retracement of session highs the direction for that day has officially reversed. But not this time, as shorts & buyers rallied price action from deep in the trough to well above previous highs by the time closing bells rang.
Surviving Summer Turbulence
A partial solution to getting whipped out of high-odds plays is to use 100% risk-loss capital to buy trades with. A $20,000 account can simply take 5% or roughly $1,000 and buy all the contracts it affords. That entire purchase is our stop. The options either reach a profitable level or we might hold them into expiration for maximum opportunity, one or the other. Wins must accumulate aggregate higher percentages than each 100% loss when markets do move against us, so picking high odds directional plays is paramount.
Problem is new readers of our site do not grasp the 5% of account balance risked on each play concept. A $5,000 account trader buys $2,000 (or more) worth of contracts, holds on thru adverse action and gets wiped out. Whose fault is that? Doesn't matter if we're part of the equation.
Traders who don't use stops MUST limit capital risked to fractions of the overall balance, but small accounts cannot do this. A $4,000 account buying $200 worth of QQQ contracts is merely spinning wheels in a dead market trying to offset commission cost as well. This mandates under-capitalized traders to risk higher amounts of capital while using stops in very choppy conditions. Not easy to do.
The use of stops is a vastly inferior tactic than 100% risk loss capital during volatile times. Downside is a reduction of buying-power leverage that greater capital with stops has to offer. But would you rather have small gains or stopped-out plays just before markets finally run deep in the direction first chosen? An easy decision for me that cannot work within the website but is a powerful tactic for individual traders.
Looking Toward Thursday
(Daily Charts: Dow & NDX)
The Dow's descending channel served as support Tuesday and again on Wednesday. Multitudes of traders are eyeing the same points and a break AND CLOSE below 10,170 area would soon see 9500 in my opinion. Stochastic values remain bearish as well, but we'll see where the daily struggle takes us tomorrow.
The NDX remains in a virtual coma, currently trapped beneath the midline of its descending channel as well. 1500 is mid-term support while 1712 - 1750 look to thwart the next significant ascent. Bearish stochastic values here as well.
Speaking of which, from this weekend's report forward I'm making a switch to faster stochastic settings in daily & weekly chart templates. Current settings used have served me well in calling tops and bottoms but we might do better with 5(3)3 settings for the bigger charts right now. I used this setting long ago in futures markets and it works great in fast-moving, volatile times. That certainly describes current action so we'll make that subtle change in longer-term charts here Friday. 60/30 and 10/5 minute charts will remain unchanged.
Who knows, Buzz may beat me to it tomorrow night first! By the way, our beloved Fundamentals Guy turns 30-something Thursday, so feel free to drop him a birthday note at: Contact Support
(60/30-Minute Charts: Dow)
If the Dow is going to fail in this upside move and reverse back down from here, I expect it will do so near the Fibonacci values listed. All eyes will be on these levels tomorrow. Stochastic values still rising straight up with no signs of dying just yet.
The 30-minute chart shows one big spike from 3:30pm to the close as nothing more than short covering by nervous bears in a session that refused to die.
(60/30-Minute Charts: QQQ)
It's painful to watch the QQQs trade within a one-point range all day and close dead flat more often than not. The days of five to ten point ranges for this index still reside in the recesses of my memory but we are a long, long ways from then.
Meanwhile, price action coils in a wedge that may continue to narrow from here. Plenty of room above both stochastic values to run, but this index will go wherever the Dow leads it next. No need to concern ourselves which way next... we'll just watch the leaders on the Big Board instead.
(60/30-Minute Charts: SPX)
The SPX faked countless nervous traders out of their calls and puts today as it surged, pulled back deeply and flattened there before the late-session rally resumption. If it is destined to roll over ahead we should see that happen near 1198 - 1200 on the high side. Close above this would be quite bullish indeed.
(60/30-Minute Charts: OEX)
Back to 617 - 619 test for the OEX if we move higher Thursday. I leave these lines drawn on my trading charts and if prices bounce lower from there confirmed by bearish stochastic values it will be time to go short again.
In A Zone Or On The Verge?
I remain worried about going short to buy & hold over the medium term. It seems like the only thing to do, there are zero reasons for the markets to go up and signs point to further weakness ahead. Just like this time last year, and our weekend Market Wrap has August 2000 charts saved for posterity. The markets staged a creeping rally for several weeks in the face of total bearish sentiment as well.
The VIX spiking to July 11th highs yesterday coupled with rising put/call ratios and overwhelming bearish sentiment gives us concern for playing the downside with reckless abandon. I'll trade the direction charts tell us to, but don't be surprised if they suggest we begin eyeing the upside before long.
Best Trading Wishes,