Saturday 6 February 2010
An unusual day, Friday. So many futures were deep in the red, while the fiat
Federal Reserve “Dollar” rallied to new recent highs. Imaginary money
outperforming real substance. Anything is possible! As to the S & P, it reached
our first objective, 1062, the Dubai lows from last November. The momentum
carried the day, however, as price fell yet another 20 points to the 1040 level.
Some are of the mind that one of the purposes of the markets is to punish
participants, a somewhat cynical point of view, but in reality, not without some
merit. The premise behind this notion is that the markets are controlled by
large money forces. As we have seen in the stock market rally since last March,
where the dominating influence was the Federal Reserve-directed Permanent
Open Market Operations, [POMO], by large money forces, we are talking
nations, not a few wealthy individuals. See our article,
http://www.edgetraderplus.com/articles/Are_Markets_manipulated.htm.
We also discussed POMO on several occasions, and here is an example from
10 October 2009:
S & P – Will POMO Win Again?
The past three weeks’ decline that just erased almost four months of effort
reflects how artificial stimulation can, and will, distort market reality. The intra
day decline that reached 1040, a drop of 107 points from the recent highs,
touched an oversold reverse trend line. Unlike many mechanical methods,
such as RSI, Bollinger Bands, MACD, et al, when price reaches an oversold or
overbought level, all it tells us is that a market MAY react from it. An often
overlooked aspect of a market being viewed as oversold or overbought is that
it can become MORE oversold, or MORE overbought. For this reason, one has
to wait for market activity to indicate a reversal of some kind.
The weekly and daily trends are down. The hourly trend remains down, but it
could turn around and begin a counter-trend rally. We observed that the widest
bar and strongest volume occurred late in Friday’s trade when price rallied from
that oversold condition. The smaller 10 minute time frame chart has turned up,
as a consequence, but bear in mind, this is the weakest time frame, one used
more for timing of an entry than as a decision-making determination for a
position.
Because we know that the trend is down, we basically only want to be on the sell
side of the market. Now that the 10 minute “trend” has turned up, it tells us to
watch the next rally, going into Monday, to see if it is weak and stops at a
resistance area on the still down trend of the 60 minute time frame. If that turns
out to be the situation, it will give us another entry for a short position. If the
market turns out to be stronger, sufficient to turn the hourly trend up, that tells
us to wait until the hourly time frame exhibits a weakening rally to establish a
short position using THAT time frame for entry.
For disclosure, we were short from 1094.50 and covered the second half of the
position at 1062, and we are now flat, waiting for a new entry point. This makes
the discussion of using smaller time frames for entry very pertinent to the
developing market activity. There is an article on the importance of trends on
our website you are invited to read: http://www.edgetraderplus.com/how_to_trade_successfully_in_any_market.htm
For those who may entertain the thought, after such a large move down, what
an “opportunity” to catch a correction rally back up. Good luck! How many
counter-trend traders do you think have made money during this correction, as
of Friday? We cannot over-emphasize the importance of knowing the trend and
keeping the market within a context. Few are able to do it successfully, and
those who try, most often unsuccessfully, fall into the category of being among
the many who are “punished” for their market participation. It takes a very
specific set of market conditions to know how and when to counter-trend trade.
The big, and consistent money is made in following the trend.
If you miss a trade, and we all do, so what? There are good market moves
coming along all the time. Just be patient and wait for them…easier said than
done, but necessary for profitable overall results.
Going onto Monday, we will be watching developing market activity to help
determine the next direction of price movement. Scenario one harmonizes
with the established down trend: evidence of a weak and failing rally in which
to go short. Another is the possibility of continued strength, turning the hourly
trend up and delaying going short until that time frame runs its course. A third
possibility is for the shakeout rally from 1040 to 1063 get retested with an
unchanged to lower opening that retraces the late in the day rally gains, holds,
and then mounts a stronger potential for a corrective rally.
There is no need to front-run the markets and “predict” or guess. Let the
market convey its intent, as we have just put into a context of possibilities.
There can be others, and we will watch how price reacts and react, in turn, to
maintain harmony with the trend in the defined time frames being used.
