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Wednesday, January 26, 2005
Market Recap
There was some very nice follow through buying today on the indices which we always like to see after a big rally such as the one we had yesterday. The Dow closed up +37 points, the NASDAQ gained +26 points, and the S&P gained +6 points. This two day bounce was over due and very welcome. I had mentioned a few nights ago that when the bounce comes, it would not repair the charts unless it was a sustained rally, meaning it would take several up days to get the charts back into shape and look bullish again. So far, we have had two nice up days but it will take at least two or three more up days before the charts our completely repaired.
Resistance Targets Reached
I showed charts of the indices last night with resistance points and said it could bounce to those levels then have some trouble getting through them. Those levels were Dow 10500, NASDAQ 2050, and S&P 1175. After some great earnings news, the markets have bounced as expected from over sold levels. But today, all of the indices closed just below those resistance levels mentioned above. The Dow closed at 10498, the NASDAQ closed at 2046, and the S&P closed at 1174. Just 2, 4 and 1 point below those targets I showed in the charts last night. This means that with resistance straight ahead, do not be surprised if the two day rally does not continue into a third day. A glance at the bulletin tonight and we see that our short and long watch lists have roughly the same amount of stocks on them. When this happens, it is a good indication that the market is in no-mans-land and could go either way. Cautious trading is still advised until a firm direction can be determined.
Gut Check Time
It is time for a gut check, a flash back to reality. Tonight we take a step back and reflect on a commentary in December about learning some valuable trading lessons in 2004. It is almost the end of January and the first month of trading in 2005 will be over soon. It is time to see how well you have done this year and see if you are following your trading plan or any of the goals you may have set for yourself at the beginning of the year. No doubt, January has been a bad month for the market, most investors, and the majority of traders. (Remember, the majority is the average dumboberry and not the professional). It has been a bad month, because the markets are all down. However, I am willing to bet the disciplined trader is either up or flat for the year so far. I know because including some day trades my portfolio is up slightly while the NASDAQ is down 7%. We have been sitting on a lot of cash lately and waiting this market out. My trading has been limited and when I do trade; my stops are tight to preserve my capital. I am hoping things change in the near future but I have no control over what the market does, I can only control what I do.
Don't Sweat It
I know that it can be very difficult to sit on cash for any length of time. It is a trader's nature to trade, it is what we do and it kills us not to trade. I am itching to trade but I also know that it may not be the smartest move right now. Sometimes the best investment choice/decision is to sit on my cash and let in just simmer for awhile. Like a good pot of spaghetti sauce, the longer it simmers, the better it is. It may not be growing but you are guaranteed that you will not lose any either. Let the crowd keep trying to make the markets go up while we sit and wait it out. The crowd sits and worries about what the market will do next and they lose sleep because their money is at risk. We cannot sweat it like that; there is no reason to put yourself through that stress. Let the markets come down all around us; we should not care if it does. When the time is right we will be positioned perfectly to take advantage of the panic sellers.
I mentioned a reality check, because the December commentary stated that we should all set up a trading program as a New Year's resolution. I said that you should go over your trades from last year and see what mistakes you made and learn from those mistakes. Make it your personal goal not to make those same mistakes again.
Patience, Part of the Plan
Like every year, I started the year with a diet. I can normally last until at least the first week in February before I cheat. This year, I made it to January 10th. If my trading discipline was like my dieting, I would be a terrible trader. I gave up already on the resolutions I made to better my eating habits. It is very tough for me to eat things that do not taste good and to give up the things that taste great. Trading is much the same, we love to trade and everyone around us seems to be trading while we sit idle. It is like eating a carrot stick at a party when everyone around us is eating pizza and cake. It is hard to bare but we know the carrot is better for us right now. I hope you are not making the same mistakes you may have made last year in your trading. Learned from any mistakes made, set up some goals, and decide on a path to take to reach those goals. The only way to get ahead in the market is to have a plan and stick to your plan. Patience should be a big part of that plan.
Don't forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
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