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Wednesday, October 13, 2004
Market Recap
The market pulled a fast one today with another head fake open. The Dow was up early in the day with a high of 10127, then quickly reversed course and dropped well below the 10000 level. It fell to the lower Bollinger band before making a small comeback near the end of the day to close just above the 10000 level with a -74 point loss. The NASDAQ faired a lot better only losing -4 points with only a 34 point swing, far narrower than the 170 point wild trading range on the Dow. The S&P was down -8 points and closed below its 200 SMA.
Oil spiked up over $1.00 today and I am sure this contributed to or was the cause of the reversal in the stock market. Today, Mr. Bihigh and Mr. Sellow showed up on Wall Street and let it be known that they were there to take some money from the people who just had to jump in at the open.*
Always Remember the 200 SMA
Yesterday I mentioned that stocks could go up today, “at least at the open.” I wrote “at least at the open” because I was not positive the gap up this morning would last. Sure enough, it did not last for long. I wanted to believe it was for real, but you always have that doubt, especially when the major indexes are below their 200 SMA's.
I also mentioned in the commentary that this market could very well throw us another curve and Zig when we think it will Zag. Why not? After all, it has been doing the unexpected for eight months. When the market should go up, it has gone down; when charts say it should go down, it has gone up. The action in many individual stocks has been the same, with failed breakouts on the long side and failed break downs on the short side. The truth is, the market has been very difficult to say the least, and today was another example.
There was great news last night from tech bellwethers like INTC and YHOO, but the market shrugged it off today. The smart money threw the herd for a loop again by selling the strength of the gap up this morning. We can never trust a market below its 200 SMA, no matter what the news or how good some stocks might look. If the indexes are below the 200 SMA, forget about buying into the gaps in the morning. Most of the time, you will get burned by sellers invading the market to sell the strength.
In a bull market when indices are above their 200 SMA's it is acceptable to buy the gaps. If you do not, stocks will run away from you. However, this market is not a bull (yet) so there is no need to be impatient and rush in at the open. Cash has been and continues to be King for many months. This market has been tough on even the best of traders. Some make money yes, but I can guarantee there are many more traders losing money than making money over the last eight months.
All we can do is look for the best chart set-ups and hope they do not let us down. If they do, you must cut your losses quickly to preserve your capital. In this market, if you insist on trading, you will have more losing trades than winners if you stick with your tight stops. It can not be helped with the whipsaw action we have been seeing. Notice I said more losing trades than winners but not necessarily losing capital. You can have more losing trades than winners and still make money if you cut your losses quickly (which we have been doing lately). Let the winners run to a certain point, then lock in profits before you start to give them back. In bull markets, you can let winners run for a long time, but in sideways or bear markets; lock in profits quickly. As we have seen over the past few months, any winners we have had have come back to our buy points rather frequently. The way I see it, there are three choices:
1. Tight stops as explained above,
2. Do not trade at all, until market improves, Cash is King, or
3. Trade without stops so you do not get whipsawed and take your chances.
Number three is the riskiest style.
Swing Trades
Lately, you may have noticed that I have been closing trades out the same day we open them. This is not the norm for us. We never enter a trade using a day trade mindset. We are a swing trading service and the plan is to always hold a position for at least one day. The times that we do sell the same day will be on a failed breakout/bounce or when a stock runs up an incredible amount in one day and we want to lock in profit.
With today's market action there are no new stocks to show tonight. Many charts have damage but many are holding up well. We will see if there is any follow through selling tomorrow.
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* Mr. Bihigh = buy high, Mr. Sellow = sell low |
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