If we examine both points of view, each has its merits. The recent data clearly indicates a slowing economy: Unemployment claims have risen to multi-year highs, home foreclosures are skyrocketing, and the bond insurers are on the verge of bankruptcy. On the other hand, the Federal Reserve's humongous rate cuts will gradually work through the system providing the much-needed stimulus to enable a speedy recovery. In addition, the view that the market has largely discounted the worst-case scenarios in a lot of the financials, retailers and other economically sensitive stocks, is also a plausible argument.
Until this is all sorted out, large intraday swings will be the norm. In this type of trading environment, both longs and shorts have to be nimble to capture profits, as trends seem to reverse on a dime. This market setting is not one to reward the stubborn or greedy. To this end, I advise newbie traders that they have to "manage their expectations".
In my experience, I find traders – much to their detriment - are too slow to react to continually changing markets. Managing expectations helps in the adapting to these changes. Specifically, a day trader must identify early in the session, what type of trading day is unfolding. He/she should ask these questions. Is the market trending? Is it a choppy day? Alternatively, are we in a reversal day (one direction in the morning and a counter move in the afternoon)? Once this has been ascertained, the decision making process is made a bit easier. Why, might you ask is it easier? Well, at this point you can elect to trade or stay away. This decision will be predicated on how your particular methodology performs in current conditions. If the method has performed well in the past, then of course you should trade. However, if the present market is not your bailiwick, then you probably shouldn't trade. Regrettably, newer traders haven't gained the necessary experience to trade in different market conditions, or try to implement methodologies designed for specific markets i.e. trend following, breakout etc., in all environments. As a result, what usually happens is that after a string of losing trades, a perfectly good system is often discarded prematurely; when in fact, the real issue is in the person implementing it. The takeaway here is to learn which market works best for you; once you've figured it out, trading will become more fun and more importantly, profitable!
Let's shift gears now and look at the charts. Below is an example of just how many swing moves are occurring in a single day of trading. On Tuesday, there were seven mini-trends (indicated with red and green arrows). As I mentioned earlier if you didn't take some kind of profits during the day, you were left with nothing.
In the daily chart of the E-mini Russell, what's noteworthy is the triangle that seems to be forming. This is indicative of the battleground between the buyers and sellers. Similar to a coiled spring, the impending move should be violent. The direction is not certain but it's beginning to look like an upside move is more probable.
Finally, the hourly chart of the ER2 distinctly illustrates the 20-point range that this market has been largely confined to for the last two weeks. Again, this bears out the notion of uncertainty among market participants. Although, I do expect this will resolve itself fairly soon.
In summary: Today's market has become hypersensitive to just about any piece of news about the economy, subprime, and most recently, the bond insurers. I'm getting the sense that the market has largely discounted most of the bad news. Also, supporting this idea is the fact that the public has become extremely pessimistic. All the recession talk being bandied about has soured consumer confidence. All the while, major corporations and their execs are buying back shares at a very healthy clip. I see this as a good omen for the market in the intermediate-term. In my opinion, this all adds up to more upside for the market in coming days. Regardless of what the market does, make sure that your expectations are realistic and positive.So until next time, I hope everyone has a profitable week.
Author
Gabe Velazquez
www.educational-dvd.com
DISCLAIMER:
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.
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