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Wednesday, August 25, 2004
Good evening friends,
Market Recap
The market rallied today with oil prices declining quickly. The price of oil was down over $1.50 a barrel and that caused some buyers to come in the market today. Whether it was short covering or real buyers remains to be seen. The Dow gained +83 points, the NASDAQ tacked on +23 more points, and the S&P was up +9 points.
The price of oil is moving down more rapidly than I expected. The stock market should be rallying much more and with much higher volume than it has been considering the decline in the price of oil over the last few days. The Dow is approaching its 200 SMA; this will be the test to see if this rally is for real. I do not think it will get through the resistance on the first test. I am looking for a decline in the market once this 200 SMA is touched. It is at that time when selling should begin.
It is possible this market may continue up through the 200 SMA on the Dow. But if that happens on this weak volume, it will be much to my surprise. It is very uncommon for weak volume rallies to hold up. This has undoubtedly been a rally on weak volume and the volume numbers or lack there of cannot be refuted.
Self Discipline
Sticking to your trading plan was discussed in a commentary earlier this week. If anyone thinks they can outsmart the markets, they will find out soon enough how wrong they are. I have also reiterated many times about keeping your emotions out of the trade. Those are two of the hardest lessons to learn when trading. Human nature tells us to be optimistic and to buy stocks when the market is going up. This can be true, but this low volume rally is no time to be buying stocks unless charts of those stocks have set up for advance.
There are some charts that look good right now for long positions, but only those will be on my buy list. As this market comes up against resistance, this is not the time to enter new long positions. I know it is hard to hold off, but do not let greed, egos, and self doubt factor into your trades. If you let these things control your trades, you will wind up buying based on emotion instead of sound charts.
I really cannot teach anyone self discipline. That is something you will have to learn on your own. But I can tell you that if you can master self discipline and apply it to your trades, you will come out far ahead of most traders out there. This is one of the most important points to playing the markets. Great charts, a solid portfolio of stocks, wonderful analytical abilities - none this matters if you cannot trade with self discipline.
Too often I think people have a tendency to fall in love with stocks. Whatever the reason they love the stock, when people fall in love with a stock they tend to forget about charts and everything else they have learned. When the stock goes against them, they get upset and feel they need to make the stock pay them back. Or, they brush off the drop and claim that the stock will come back for them, “It has in the past and it will again, this time is no different”. Traders who find themselves in this position have tossed out the golden rule of self discipline. They are no longer making sound judgments based on technical indicators. Their emotions have taken over and they will most likely pay the ultimate stock market price for this trade.
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