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October 23, 2008

Confirmation Needed

Chalk another one up for the bulls, but don't discard the bear case. That summary best describes today's session, which witnessed a huge, late-day come back. The reversal spanned 50 S&P handles and brought price back to close above the open. Volume also picked up moderately over yesterday's thrashing, which is positive for a reversal day. Another takeaway from volume is that price nearly reached the 10/10 low without coming anywhere near the volume seen that day, supporting the idea that we just successfully tested the low. That's the bull case.

index chart

As luck would have it, there are some bearish signs, as well. Counterpoints abound. To begin, fifth waves usually make marginal new lows. They don't have to extend, but it is uncommon for them to abort short of a new low. Of course, wave 5 gave us a marginally new closing low yesterday, so we do have something to hold onto. Also, it would have been nice to see more strength on a reversal day. Granted, a 5% swing is significant, but we closed nearly 2% off the day's high. Counterpoint: the end of wave 5-of-1 was less than awe-inspiring, as noted in the chart above. The bottom line is that we need a confirmation day, and we need it tomorrow.

The next chart could appropriately be called TA potpourri.

index chart

The shaded area highlights a pattern that is typically bearish (thanks to 2sweets for pointing out this pattern). We also see an expanding wedge forming off the tail of a sharp decline... very bad form... as well as the fact that the late-day rally did nothing more than bring us to a backtest of the lower triangle bound! Whew. How is one to get excited about the long case?

Well, at least the market gave me some trades today. The morning patterns looked fairly bullish, and since I was anticipating a rally... as described yesterday... I took a stab at the long side. The trade worked out well until about noon when my trailing stop took me out. A juicy short-side setup presented itself less than an hour later, and I was able to capture a chunk of the drop into the 2:00 hour. A late-day flip back to the long side rounded out a nice session. If you combine all these trades, I went out net long the S&P 500 at ES 873. However, after writing the paragraphs above, I've just about talked myself out of the position and may close it overnight!

A takeaway from my trading is how nastily the market is behaving. I am a poor day trader. My sweet spot for a trade is 2-3 days, so the fact the market can whipsaw me into reversing my stance twice in a single session shows what a difficult environment we are experiencing. The best thing a trader can do... and this advice applies to all environments... is to not worry about missing the next big move. Just trade what you see, and stay flat when the signals are too murky.

On a closing note, precious metals. Gold continues to get hammered, and I still don't see anything that will stop the decline. There are several potential support levels between $560-640, but in a period of liquidation, what does support mean? All I can say is the lower it goes, the bigger the opportunity to get filthy stinkin' rich on the next cycle. Bon bénéfice.


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