Chop.. Chop.. Flat... Plunge!
Just when many traders (including me) thought we'd endure yet another dead session, we endured a bolt from the beige instead.
If indeed the Fed's beige book sparked this significant slide today it did so without one iota of breaking news to the market. If indeed the market was surprised by this it further strengthens my belief that "The Market" is a clueless entity at best.
That being said, we did see bond yields falling this morning and some modest activity in SPX put option contracts, but nothing out of the ordinary to speak of. For adept individual traders there were two clear put-play entry setups but each carried significant risk. Market action could have easily continued to bounce without direction. Care to sit in my chair for the afternoon ride?
(60/30 Minute Charts: SPX)
We'll use the SPX for this example but all major indexes look the same. When these stochastic values were making bearish reversals, note the chart patterns drawn connecting recent highs and lows. That gives us two different studies to measure the potential market action in fine-tuned charts we'll dial into next.
(10/5 Minute Charts: SPX)
Taking the same chart drawings and switching time frames to 10 and 5 minutes instead, note where stochastic put-play signals came: right after the top of that failed rally this morning. Near 11:30am aggressive traders could have wagered put plays as all 60/30 and 10/5 minute chart signals aligned. Is there a problem with that?
Well, maybe. Their 60/30 minute signals came within 20% oversold and 80% overbought which show the next move is not snapping back from extreme deviation. With recent sideways chop and lack of clear catalyst to push prices either direction, we've seen this setup emerge and fail several times.
The more conservative entry came near 1:45pm when price action broke below bullish triangles drawn in the 60/30 time frame. Now we had bearish stochastics AND failed bullish chart patterns which is bearish on its own. Some potential gains had been passed up but this one had higher odds to win.
Timing Is Everything
I strongly dislike days such as these. I'm forced to make decisions by a clock that does not march to the rhythm of market action. Watching entry points emerge from nowhere without possibility to plan for them is very frustrating indeed. There is no doubt that reactionary trading always offers the best chance for success with no exceptions of any kind, and that's what a trader must have done to profit from today.
IS cannot behave like a live trading room via SEC regulations and that dictates anticipating near-term market action. Days like this where sudden moves emerge from the blue leave us in a tough situation. Market action does not always cooperate with our educational approach and today is a prime example.
However, traders who have followed the teachings in our how-to articles archived for posterity can readily see potential moves like this. Such action is subjective at best, far from ideal today but tradable for those with experience who can read & react.
And where to from here? Let's guess together...
(Daily/Hourly Charts: SPX)
The SPX (and others) stopped dead on its lower Bollinger Band level of support. When prices broke below 1197 I looked for the next firm measure to stop and 1181 stood out, but -16 index points lower did not seem plausible today. That is a bigger move one way than most entire sessions have seen lately and only two hours remained to trade. Yet there we have it... a prime example of why to trust the charts.
Still have bearish stochastic values across all time frames with no suggestion of turning higher. The SPX and OEX (not shown) have both reached a perfect -62% pullback today from lows in early April to late May highs. The next stop lower would be at - 75% retracement from recent highs to previous lows, and that would be OEX 590 and 1155 SPX should further declines ensue.
(Daily/Hourly Charts: Dow)
Here we have a defined wedge in the daily chart to monitor. Still have bearish stochastic values tonight. If the Dow were to close below 10,200 level it could very well plunge much further from there. A retest of recent and yearly lows is not at all out of the question here, but a bounce back up to 10,500 area could happen as well.
(Daily/Hourly Charts: SOX)
The SOX broke above its bullish pennant in a big way and looked to be sprinting off from there. About the time CNBC was asking everyone including their janitor if the SOX had indeed found a bottom, it was already topped out. Reminds me of the guest analyst codger last week on CNBC who expounded about the chip sector being a train that already left the station. He said it with such pent-up, almost defiant exuberance I was afraid he might explode. One can only assume he's beside himself with glee now that the train has circled back to the station to let all aboard yet again.
I get emails every day from traders who are fed up with current market volatility and at the end of patience's rope. Wish there was an end to whipsaw markets in sight, but my guess is we'll see plenty more of the same well into 2002. I personally think new lows will be set once or twice again before broad markets bottom. Remember, this is only my opinion and flies in the face of most media pundits but we've heard them call a dozen bottoms since April 2000 with no success so far.
Meanwhile, market action is likely to jerk its way up and down the charts without trend or warning. Participants will still be subject to failed rallies, sudden selloffs and unexpected reversals all the time. That is my brush-stroke view of the next twelve to eighteen months. The next few sessions and weeks are much tougher to call.
We could see the Dow move 1,000 points either way by this time next month. I've been told numerous times by readers it is my job to give accurate guidance in here and that's what we try to do. I would venture that indexes go down a bit further and possibly bounce from there, but need to see how weekly chart signals look in the next day or two. If we reverse from higher lows than two weeks ago it will inspire bulls to buy. A break below those lows could send us spiraling towards April levels instead.
Volatility will likely increase over the next few sessions after today. We can be sure that bears will push the peddle early tomorrow and success on their part could create quite a dive. Bulls may step in and try to bargain hunt when everyone least expects them to. I would not trade either direction the first 30 minutes and all but high-risk gamblers should not be playing real money these days, either. It remains a perilous road ahead.
Many investors and traders have walked away from the markets and may not automatically return in September. A majority of bias bulls sick of being clawed will now wait longer to enter while being quicker to exit if things don't trend up this year. Brokerages are suffering and many will cease to exist. Advisory websites also struggle with some failing every week. I've had numerous spam emails to buy this or that flailing tech-bull advisory website, and two long-standing services I subscribed to for years shut down last month as well.
It's easy to spout winning plays when trending markets hide a lot of slop. Now the price turns are tight, crisp and seldom expected. Those of us who study the markets can readily see what will happen as it develops but foresight is murky. Traders spoiled by "boxed lunch" advisory sites still expect the same instant results but are currently being shocked into reality as proven with corresponding website failures. Those who demand pre-planned trades or nothing at all will continue to settle for the latter most of the time.
Education remains the key. Study the how-to content we archive and continue to offer. Hone your skills in virtual manner and get ready to use them in the months ahead. It may be quite some time before trading becomes "easy" again, but it is certainly viable on days like these for those who prepare themselves well.
Best Trading Wishes,