The Other Shoe Didn't Drop
Listening to overall sentiment on Thursday night had most traders convinced markets were headed straight south without pause. I was told by more than a few readers that long puts and hunker down was the only way to go. Hmmm... I'm too uncertain of near-term direction to be sure of anything right now and blanket statement like that is a bold one indeed.
It looked like that prophecy would actually happen early on. Not long after the open we saw the Dow and S&Ps dive south below Thursday session lows and seemed headed further from there. But true to recent form, markets dive early and bounce late these days and that's what repeated itself this afternoon.
Was it a simple session to trade? Hardly! Daily, hourly and thirty minute chart price patterns and stochastic values were a sordid mess. Stochastic values have been chopping their way around the charts most of this week in reflection of price action. Readers have asked me what else can be used to predict price direction now that stochastic values aren't working well. The answer is, "nothing".
Stochastics and oscillators are not behaving well to predict price direction because there isn't any defined direction. We see prices squirt up and down the charts willy-nilly on light to moderate volume several times a day. Nothing I know exists to predict defined price movement when definition does not exist.
Day traders who dialed down to short-term 10/5 minute charts had a few fine moments today but everyone else are at a disadvantage to current market whims. Can we expect directional trends to emerge? Let's look at some charts and see:
(Weekly/Daily Charts: SPX)
Well, The S&P 500 remains trapped with a descending bull pennant for sixteen straight weeks and counting. It'd take a weekly close above 1225 to confirm a solid breakout and we'll see in a moment how plausible that may be.
Daily chart stochastic values are just beginning to turn bullish in oversold extreme and posts bullish divergence between lower lows and respective price action higher lows. 1202 at the 20 DMA is next.
(Weekly/Daily Charts: Dow)
The Dow is moving towards a real inflection point. Let me blow the dust of some chart-pattern lessons learned back in the stone age B.C. (before computers) from a home-study course marketed by the commodity cowboy, Ken Roberts. Those unfamiliar with him can picture Wade Cook in the futures world. Those who don't know Wade Cook either needn't worry themselves about such things.
Anyway, we can use chart patterns to measure time and distance in future price action with eerie results. In this case we have the Dow moving in a defined downtrend from early April highs near 11,400. Three months later (April thru June) we began a new consolidation in July that centers near 10,400 or 1,000 index points lower. What does this suggest?
Consolidations often coil halfway into a significant market move measured by time and distance. With this in mind, further weakness by the Dow could see a target 1,000 points lower than midway at 10,400 or a bottom of 9,400 area. When might this happen? Three months after it breaks the 10,400 magnet, which hasn't occurred yet. What does it take to negate this? A rally back up above the wedge top near 10,600 would have it back in bull-confirmed mode.
Let's see how ol' Ken Roberts' stuff calls this one, twenty years later! File this one away for the fall.
Meanwhile we have daily-chart stochastic values turning bullish and weekly values still heading up. The magic number to break and remain above is 10,600 for more than a few technical measures as well. By all accounts it should stumble higher soon.
(Weekly/Daily Charts: QQQ)
Then we have the Nasdaq. It escapes me how any surviving traders could still possibly watch this index right now. It is currently a loved one fast asleep with no signs of rousing. Meanwhile, the Dow and S&Ps are flying all over the place. 1999 go-go traders who thrived on volatility must have turned their back on this stodgy old index in order to focus on the sexy young Dow!
Nothing I see in techland to even consider sending my working capital after right now or the medium-term horizon.
(Daily Chart: OEX)
The OEX has behaved quite well in its daily-chart Fibonacci range lately. We see a triple-bottom test of 600 area the past few weeks that held, but overhead clutter near 619 will not break easily.
(Daily Charts: SPX)
Likewise the SPX. 1182 is quite a floor with 1170 area holding ground after three successive tests. 1202 sees a convergence of two moving averages and Fib value right above that. A close higher than these values will deal with 1218 and 1231 before long.
Those who prayed this market would break either way or begin a new trend have not been granted such wishes. No signs of anything but more struggle seem clear to me right now, with a bias to the upside ahead. This remains a short-term, day trader's market whether anyone likes it or not. A sow's ear cannot be spun to silk: such remains coarse swine hair regardless of demands placed upon it.
And The Market Grinds On...
"I'm holding long(short) calls, puts, spreads, stocks and need your advice. I'm way down from where they were purchased and wonder if I should sell or stay. What should I do?"
If you sent me a note like this and think you're alone, think again. Countless traders are getting ground to pieces in a whipsaw market that sees no end in sight. This usually happens to everyone the same way. A trader takes one position and gets stopped out. Must mean the other direction is the way to trade, so a second play is taken and that gets stopped out as well. A third trade is taken, once again in the direction of the first play. And that gets stopped out.
Now our trader is frustrated. Just hanging in there on each of those three trades a little longer would have turned loss to profit. Now they're anxious to earn back small losses, so fear & greed push them to bet heavy on the fourth play and it better arrive soon to ease their pain of loss. The trader knows what to do next time by gosh... pick a direction and dig those heels in! Which is about the time market action finally breaks a whipsaw pattern and runs away against our friend's long position. No more small losses on this one: it will be huge.
Sound familiar? Feel familiar? Heck, I've been that trader enough times in the past to make up for both of us. Actual dollar losses sustained for that lesson alone add up to far more than working this website 365 days in 2001 will pay me by a wide margin. And some people think $80 a month isn't worth the lessons we teach in here? Try losing many times that in a week or two and we'll revisit said opinion.
Traders Demand The Non-Existent
I've read surveys where traders say they only buy calls, they only play LEAPS, they only buy long stocks and refuse to do otherwise. That's fine, but I hope & pray they sit in cash until well into 2002 from here. Trying to force one's will against the market will always result in maximum capital separation in favor of the market.
Truth of the matter is this: reactionary traders who sit in front of their screens and go with the flow during live markets have a chance to win. Part-time and longer-term traders have little chance, simple as that. All of us here would love for that to be different but it's not. Anyone who tries to buy calls or puts one day and sell them a few day later may see wild price swings up and down with a net gain of nothing for their effort.
These are either flat or wild times right now with little in between. Read a new trading book or a few of them. Take time to paw thru our how-to article archives. Track some new trading signals or methods right now on paper. Don't be in a hurry to force your will on immovable markets. The precious fortune you save may be your own!
Best Trading Wishes