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Tuesday, January 04, 2005
Market Recap
A brutal sell off in the markets today left the indices staggering around like a boxer after a Mike Tyson upper cut. Another day like this and a technical knockout will have to be declared. The Dow was bruised and battered all day, losing -98 points by the close. The NASDAQ dropped -44 points, that's a 2% drop for this index in a single day. The S&P was trounced with a -14 point loss. This was some serious selling today and something we have not seen in the market for quite some time. To see the good news from this, take look at the charts of the big three indices posted tonight.
Are you really surprised?
Well, the market has done it again, it was no surprise. It never seems to do what the majority expect it to do. It was supposed to go up the first week of January wasn't it? At least that is what most everyone thought it would do. It seems there are some who did not learn the lesson in patience, one of our big lessons from 2004. Right out of the gate yesterday we saw the markets pull a huge head fake at the open that caught a lot of the crowd buying early, ignoring the “do not trade in the first 30 minutes rule”. As the crowd rushed in at the open to buy those “stocks I just have to have for the New Year”, the smart money swooped in for a wave of profit taking. Looks like the smart money pulled out some old tricks and fooled those people who keep making the same mistakes over and over. We have seen this many times before. Of course the Federal Reserve added fuel to the selling with their comments about their fears that inflation may be on the rise. Leave it to Mr. Greenspook to spook the market and spoil any momentum carrying over into the New Year.
Alert: Today stunk
No matter how bad we think we have it, it could always be worse. Today was just one day. We could be in India or Iraq where every day is a hardship. I think about the Tsunami victims and the solders in Iraq where the bloodshed is real every day. Then I realize how good things are in my life and that the blood on Wall Street is nothing compared to bloodshed others in these unfortunate situations have gone through. If you can look at things from this point of view, a bad day in the stock market is really not that bad.
Folks, today was a lousy day for the market, there is no other way to say it. Weeks of gains in the markets can be wiped out in just a few days without tight stops in place on your positions. On the other hand, weeks of gains can be missed if stops are too tight and they get taken out in market shakeouts like we are seeing here in the first couple of trading days of 2005. Is this a shake out or the beginning of something we would rather not think about? I wish I had the answer but right now, I am leaning to a good old fashion shake out. As long as the indices stay above their long term 200 and 50 SMA lines, then the trend remains bullish.
Pullbacks and Shakeouts
I have mentioned before that in bull markets, pullbacks and shakeouts like we are seeing now are healthy and quite common. It is not the end of the world if you are using tight stops and you do not enter your positions when they are too extended. Some traders have a habit of chasing stocks up and those are the people who get hurt the most when they get caught in a down draft without a tight stop in place. If you buy stocks when they pullback, your risk is far less than the trader who is chasing stocks up. Momentum buying is fine, but is dangerous if you do not know how to protect yourself from a market reversal. We protect ourselves with stop loss orders and that is our focus in tonight's commentary. Yes, stops sometimes do not work out but in the end, they will save you from a market melt down. They are a necessary evil in my opinion that no trader should be without.
How the Professional Trader Survives
We have been stopped out of some positions already because we have stop losses in place whenever we take positions. Stop losses will happen and that is the strategy in place to preserve our capital and live to trade another day. If you are not using the stop loss method, I advise you to start soon. Professional traders will take many small losses without hesitation and move on to the next trade. They are disciplined, obey their personal trading rules, and dedicated to stick to their strategy. This is how they maintain their trading capital. I urge you to think the same way as professionals when trading. We know we will have many profitable trades over time, so taking a small loss when a trade or market goes against us is perfectly acceptable. We have been stopped out of our recent positions that we took because the market did not go our way. No problem. In the big scheme of things they add up to paltry losses in the overall portfolio if you stick with our “no more that 5% in each position and no more than 5% stop loss”.
Us Against Wall Street
I would encourage everyone to take 5 minutes to read and refresh your memory of how to use the trade bulletin. Be familiar with the positions and what the data there means. Then, take a few extra minutes and read through some of the past commentary. Get yourself in the right frame of mind for 2005. It will be another year of us against them as it always is. You have the tools and strategies we use at TWPD to consistently outperform the market. You have the knowledge and the skills to beat Wall Street at its own game.
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