Running For Cover
Looked like a real bearish beginning to Wednesday's session, which should have been fair warning of a pending reversal to us all. When the initial plunge failed to accelerate downside pressure we had our first clue that shorts just might be losing the battle of direction for this day.
Markets moved flat for a bit while neither side could figure out who should do what next and then Cisco CEO John Chambers turned the day. He reiterated that mighty CSCO was comfortable with the next earning report of a few pennies loss per share... what great news! No comment on forward guidance except to say CSCO would continue its historical shopping spree to drive growth externally. Bears ran for cover across the entire tech sector and ignited a short-squeeze fire we've been awaiting for some time.
But that's the stuff bear-market rallies are made of. Someone says something that can be twisted as remotely good news and open shorts scratch & claw for any available "ask" prices to exit. Make no mistake: far more supply ended up in hands today that have no intention of holding very long than actual investors bought. This could repeat from here if more shorts capitulate but all of that supply will soon be dumped en masse back on the market from whence it came, first chance the begrudging owners get to short again. That's the difference between an actual basing rally where strong hands buy with intent to hold versus what we witnessed today.
Regardless why the markets went up, there were profits to be gleaned for day traders and buy & hold traders who've held several days. The one group that takes a beating right now are swing traders, where proper entries and holding stops are almost an effort in futility. Let's review and try to anticipate the action at hand:
(10/5 Minute Charts: SPX)
Here's a partial look at 10/5 minute charts for the SPX today, but could as well be the Qs, OEX or Dow. Day traders watching the early plunge could await the first dual stochastic alignment and see where price action is from there. Higher high than the previous? Uptrend in place. Price pattern consolidation? Yep, wedges on 5-minute charts to target breaks above. Bullish entry? Give it a try. Repeat on the next dual cycle down if higher-lows hold and uptrend remains intact.
This is nothing we haven't covered to death in articles archived in "Swing Trade 101" hotlink on the main page of this website. Subscribers who strive to learn these methods can do quite well on days like this. For those who would certainly ask, we cannot follow this action in Market Pulse nor signal trade setups. Too many neophyte readers hesitate like deer in headlights when it's time to act. They buy late, hold too long and flood me with emails on how to bail them out of a situation they had no business getting into. But that's human nature and we do not exist to get people financially killed, so the education is there for all who care to glean it.
That's what nimble, intraday traders could have done in a session like this. What about swing trades?
(60/30 Minute Charts: Dow)
Nothing. Nada. Zippo. All 60/30 minute chart signals remain buried in overbought extreme and warned of pending bearish reversals at any moment in time. Individual day traders can dodge & weave their way in traffic but no swing trade setups existed today. Late Monday afternoon was the only clear 60/30 minute chart reversal that offered high-odds continuation for call plays this week. The Tuesday bounce was iffy and nothing existed as a swing trade setup today.
What about tomorrow? Well, the Dow continues to ride up a steep ascending channel (left chart), which is bullish while it lasts but eventually will break off to the downside. A bearish ascending pennant shows price action coiling for a break in some direction soon. With stochastic values buried and weakening in oversold extreme we can only assume it will be down.
However, such a pullback could be very slight and merely the next call-play entry on a quick dip & pop. Try the put plays and risk getting stopped on further short squeeze explosions. Lay off the puts and risk missing a profitable move down instead. Which is the right choice? The one that fits your particular risk profile.
One point to keep in mind is the Dow has tacked on 1,100 index points since Friday 9/21 intraday lows. How much higher can we expect it to go before exhaustion sets in ahead?
(60/30 Minute Charts: QQQ)
It's Alive! The QQQ actually posted a change in prices today and what a move it was. I haven't personally traded the Qs in many months and have no intentions of doing so anytime soon, but this was a session to be in. Those who missed the upside burst might get a second chance to enter soon if a pullback is successful ahead.
(60/30 Minute Charts: OEX)
OEX looks much like the Dow as one would expect. Bearish price patterns and overbought stochastic values that won't remain pegged for long. Soon we will see them cycle back down and what happens during that time and beyond is anyone's guess.
(60/30 Minute Charts: SPX)
Ditto the SPX. Looks ready to roll like all the rest, but I wouldn't load up on buy & hold bearish plays just yet.
Bear market rally. Bulls are getting lulled into false sense of security and see all kinds of tempting bargains around them. Some went long near the recent bottom and made great money. What would you think they want to do next? That's right: more of the same.
It will take another shift in sentiment to change the near-term trend back to downward in harmony with long-term trends. For sure there will be a catalyst that causes the market to test recent lows ahead, but it remains unknown to us tonight. Until that time we can expect plenty of choppy action with an upside bias such as witnessed for the past week. Look for early selling and late buying to persist until the mood reverts back to bearish as it eventually will.
Weekly chart stochastic values (not shown) are attempting to post bullish reversals up from oversold extreme, while daily signals (not shown) are buried in overbought extreme and looking for a bearish reversal next. Keep in mind that daily charts cycle within weekly charts and we could see several up & down moves across all indexes as the charts make their respective cycles within.
Until that time whence they all align in unison again do not fall in love with either direction. Take positions in capital size that lets you sleep at night. Ignore that golden rule and you'll sleep like a baby: waking up every two hours crying and screaming.
If you are a skilled day trader, bob in and out for quick scalps on the morning and afternoon moves. Otherwise wait until the next clear entry comes along, buy some directional plays using 100% risk capital and be content to target small gains during these continual and persistently volatile times.
Best Trading Wishes,