Anything But Random
by Dominick A.K.A. "spwaver", TradingTheCharts.com | March 31, 2008Print
It was something of an intense, emotional close to the week as indices spiked down to levels that left bulls dangling on the edge of a cliff but not enough to instill overwhelming confidence in the bears, even as news and economic data continued to unfold in their favor. The idea of a bottoming process has taken root in Wall Street but fears the economy could be heading towards a deeper than expected recession and the realities of a bear market keep alive the prospect of new lows.
Of course at TTC we don't rely on such conceptions and base our trades on evidence in charts, many of which still suggest the market is closer to near term support than falling over the proverbial cliff. That said, on Friday we attempted to buy a bottom in the 23/20 area but were stopped out as the market fell to 1313. Seeing prices attempt a modest bounce into the close, however, has us looking to Monday�s action to clarify the situation.
The above chart is an example of the big picture information members receive at the start of every week to orient their trading. It's also an illustration of why Elliott wave analysis has not been the most effective way to look at this choppy and indecisive market. Eventually there will some sort of capitulation in the form of a huge move in one direction or the other, but with both counts coiled ready to spring, wave-counting alone leaves a trader on the sidelines or, even worse, guessing.
At TTC we avoid trading blindly by using our indicators, our collective knowledge of many markets and techniques and, as last week�s update explained, our proprietary targets: da numbas! Shown in the chart above are two of our most important target levels recently. Remember 1333 is where we initially took profits after the buying the low at 1256. We said last week that getting past 1360 would trigger a massive rally but weakness there would be trouble for the bulls. Sure enough, Monday�s huge short-covering fiesta failed to decisively take out that level and brought the market down into support at our 1333 level. Certainly the action on Friday underscores the failure at 1360, but seeing these numbers return week after week is a compelling argument that contrary to popular belief, these markets are not simply random.
After Wednesday�s negative close near the lows, and after bouncing up off 1333 in overnight trading, the cash markets opened Thursday with a gap higher � despite no real news to trigger the move. Actually, the news was rather dismal, with GDP showing an anemic economy and a major private equity buyout on the ropes. Though we respected the bounce off our target level, recent history suggested the cash indices would have to at least go back and test those levels. Making that trade even easier were our proprietary trend cycle chart, particularly the 60-min chart shown above. This relatively slow-moving indicator rarely leaves a sweep across it’s oscillator unfinished and the gap up would have caused it to do just that. Given the circumstances, members were advised to be prepared in case the opening was reversed, which is precisely what occurred.
On the other hand, support in our other relative strength momentum indicator coincided with a retest of 1333, suggestive of at least a scalp buy. As it happened, the market rallied off 1333 to the highs of the day, as shown in the chart below.
As you know, Friday�s market moved below 1333 and violated all expected support levels for a potentially dramatic upside reversal. The chart below was posted to help members navigate the close. Notice how the market initially tried to hold at the top of the target box, but eventually penetrated through the bottom. The correct way to trade this area depended, of course, on time frame. Scalpers should have shorted the break of 1320 and could have made up to 7 points in a matter of a few minutes. Others may have attempted small longs and gotten stopped out; swing traders may be roughly even on their trades and looking ahead to next week, if they traded it at all.
In any case, it’s important to understand that losing 1320 did not change my view of the big picture, it was only a guidepost for a short term trade. That's why it’s not a fat red line on the chart like 1333. Members in the TTC forum are already aware of another crucial target number below here that would change our attitudes. Whichever direction the market chooses to take, we have numbers and patterns for next week and will adapt them as shown above to suit whatever the market provides in realtime. Even though the week closed on an inexorable drip lower in stocks, the overwhelming evidence continues to show this market is anything but random and, going through the end of the quarter we're likely to see volume pick up again and clarify the current ambiguous situation.
Copyright © 2008 Dominick A.K.A. "spwaver"
Disclaimer: Market analysts are always welcome to contribute to the Forum or
newsletter. Email me @ Dominick@tradingthecharts.com if you have any interest.
Ideas from this update are provided as general information and are not investment recommendations. TTC accepts no liability whatsoever for any losses resulting from action you may take based on the contents of its charts, commentaries, or price data. Each person must do his or her own research to determine the appropriateness of taking a position in any financial or commodity market. If you are uncertain, please check with your licensed financial advisor or broker prior to taking any action. Securities and commodities markets inherently involve risk.