“Bottoms are bottoms and they too shall pass. You’ll know you’ve hit bottom when you land on your (well you know).” – The Buffalo Trader 3/09/09
I am skeptical of “bottoms” in severe bear markets. Strong bear markets are normally indentified by steep declines, followed by nearly equally violent rallies. I do not, at least for now, think this one will be any different.
$INDU – Dow Jones Industrial Average
For some initial resistance areas in the $INDU, take a look at the daily chart. For longer-range targets, take a look at the Ensign generated weekly chart. The point is, the rally is probably going to be sharp, somewhat rapid, but will likely end in another shorting opportunity. Steep declines like this are seldom erased in one bullish reversal. Clearly, earnings are not likely to improve much in the next quarter or two, unless something truly miraculous occurs. If I were to guess at this point, the maximum extent of this rally woud be in the 9100 area, with the outside possibilty of 9624 to 9791. If we do not rally much past 7500, we are still in the throws of a hardcore bear market.
$SPX – S&P 500
Take a look at the daily chart. Though the confluence levels are not as strong, a rally back to 797 to 813 is possible. On the weekly chart, the 0,618 retracement is 836.37, and there is loose confluence at 941 to 964. Remember that if we do not take out 771 roughly, we are still in the throws of a brutal bear market.
$COMPQ – Nasdaq Composite Index
Take a look at the daily chart. We are very close to price resistance at 1432, but we could easily rally to between 1432 and 1471 before encountering even more resistance. If we do not take out 1527, we are still in the throws of a bear market. On the weekly chart, there is still resistance on a trendline basis around that 1475 area, and loose Fibonacci confluence between 1695 at 1729.
Summary: The talking heads are likely heralding that all is well and that a new rally to erase the bad taste of this bear market is about to occur. In reality, we are seeing a countertrend rally that may end up hitting a wall again shortly. As traders (and even as investors), we need to stop thinking like bulls and bears and try to read what is happening in the markets and be objective about support resistance and targets. As long as there is some room to the upside, we should take our long set ups and run with them. Options strategies that take advantage of the advance are the order of the day.
If price resistance is still and markets turn down, we need to be prepared on an intraday basis to short stocks (inter-day or intra-day) or be long the ultrashort ETFs intra-day. Option strategies that take advantage of falling markets should be considered.
I tell people on the radio spots that I am neither bull nor bear, I am a buffalo (and indeed, that is true). My point is not to buy into the hype you see from either side on the financial media. Have a plan that identifies the times in which the proper strategies are to be used and use them. Once you learn to read markets and not react to the emotionalism, you will become a far better trader or investor than you were when you wasted time worrying or taking that latest tip. It is in times like these that the greatest investment you can have is the investment of time in studying charts and market action. If your trade plan is solid, you do not care what the market is doing as much as you care about how to EXPLOIT the market when it does what it does.
This is NOT Cramerica, this is real life.
I hope you have a great day trading today and have a fantastic weekend. More interesting blogs to come (hopefully).