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May 26, 2009


After today's action, I feel utterly exasperated with index trading. Such is the nature of the markets that they can take some of a trader's most confident reads and eviscerate them. There were early warning signs against the bearish read. As I noted in the comments section right after the open, stocks seemed to be holding up rather well in the face of a higher dollar, and the NDX was leading strongly. The observation was prescient. Once again the market gods have turned a prime bearish setup into a rout in favor of the bulls.

There is a complete lack of support in the charts for what happened today, and so the only explanation I can offer for the result is that too many traders were leaning the same way. A short squeeze, in other words. Don't be surprised to see these gains erased in coming days. I'll remind you what market forces did to bears just ahead of the Jan/Feb decline:

S&P 500 chart

And what followed this setup?

S&P 500 chart

I've mentioned before a point worth reiterating: holding through the next decline is going to be even tougher than the last. It seems a lot of traders are stalking the next decline, and each retreat in the indexes is greeted with piles of shorts. It is only natural for these shorts to get cleansed, and we will not get a large thrust downward until enough weak hands have been shaken. At that point, the market will likely put in a huge one-day decline to trap these weak hands out of their positions. Who knows? This decline may even happen tomorrow. In this environment, it is prudent to keep your time horizon expanded and trading size manageable in the face of 2-10% whipsaws.

S&P 500 chart

weekly S&P 500

I would not be surprised to see this week paint a failed candle, as well, but I'm not holding my breath.

Precious metals reacted lower this morning to the pop in the dollar, but eeked back to just short of flat by the end of the day. If they had flipped positive and closed above resistance, I would have revved up my game for a spike higher. As is, I think we should still expect a mild pull-back, which is fine by me because it means I would be adding at lower prices rather than chasing higher ones.

For those of you watching natural gas, price bounced right off where one would anticipate, and the result was a small, bullish hammer:

natural gas graph

For anyone reading the rally earlier this month as an indication of bigger things to come, today's action provides a well-defined entry with a close stop.

See you after tomorrow's madness.


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