New trading video
Hi,
It sure is good to be back. This past weekend I returned from vacation in France with my wife where we were cruising the canals just outside of Strasbourg. It was a great deal of fun.
I have to say, every trader needs and deserves a break away from the markets. Normally the August markets are fairly quiet, so it seemed like a good time to get away. Boy… was I wrong. Not wrong on the markets, but wrong on the markets being quiet.
Arriving back in the States having not seen a newspaper for two weeks and with limited access to internet, I was surprised to see some of the moves in the major markets. I was also happy to see the price of crude oil!!
I have known for a long time that news is not the important driver of price action. Most new traders believe they needed to be glued to the news every second of the day, frightened they will miss some news headline.
Here’s a little secret… the most important element in the market is not the news, it is the market action itself. Everything else is secondary. In my new video I explain exactly how we look at the market and how you can benefit from looking at the market the same way.
The new video is only four minutes long and I think you’ll find it fresh, timeless and interesting.
The simplicity speaks for itself.
Enjoy the video,
Adam Hewison
President, INO.com
Fundamental or Technical Analysis
Today I’ve asked Tony from TheGrainTrader.com to talk a little about Fundamental VS Technical Analysis when it comes to the grains…and trader in general! Enjoy!
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I have always been a faithful user of technical analysis as my choice of ways to predict market direction, and I have had much better success with it as compared to what I have had with fundamental analysis.
Technical analysis lets me use a price chart to compare the past and present markets to find profitable trends and patterns, which brings me to one exception that I do use at times.
Although I don’t put much faith in crop reports, hard freezes, or droughts, I have had some use for seasonal patterns in the grain markets, and I like them, because I can identify them on a price chart.
Now, a tendency is just that, a tendency. Not all seasonal patterns are consistent enough to trade on, so you have to be careful to only use them as a guide and not as a fact. You must verify them with technical analysis before you actually make a trade. Don’t make a trade based solely on the seasonal tendency, or you probably won’t have much success!
Seasonal data can be found many places, but the best tendencies to use are the ones you can validate for yourself, on a chart. One of the best tendencies, I have identified, is for Oat futures to bottom around July and August, and then rise into December. (That’s just a little tip!)
Just remember to verify seasonal patterns with technical analysis, and always keep your stops placed! Good luck with your trading.
Tony Lorenzo
The 4 Characteristics of Strong Breakouts
For today’s Guest Blog post, I’ve asked Harry Boxer to come and teach us a little bit about what makes a breakout a STRONG breakout…and MUCH more! Harry’s been a contributor on CNBC, CBSMarketWatch, WinningonWallStreet, Stockhouse, DecisionPoint and more. If you’re eager to learn more about Harry Boxer and his methods, check out TheTechTrader. Enjoy the post.
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Breakouts of long bases on strong volume are frequent harbingers of continued price appreciation. Another harbinger, after the initial up-leg, is a low-volume, orderly pullback towards support.
An analysis of the Converted Organics (COIN) chart illustrates this strategy. As the daily chart indicates, COIN in October 2007 broke out of a base pattern that extended back since its IPO in late February. Some traders who missed entering early may have given up on the stock when it rose 50% from around 2 1/2 to 3 3/4, but a closer look at the chart shows why it had more room to move.
COIN’s pullbacks were orderly, coming on lower volume and holding near its moving averages, a key sign of more upside to come. Not once did its pullback break beneath the 40-day moving average, and most pullbacks hugged the 21-day moving average.
The pattern was breakout (mid-October), flag, breakout (early November), flag, breakout (late December), flag, and then breakout in mid-January, where it closed on January 15 at 12.58, more than 5 times its pre-October breakout price. Volume on each pullback was a small fraction of the level of the breakout, and a shallow decline just grazing the moving averages suggested a continuation of the uptrend.
As a stock in a rising pattern pulls back, look for several factors to portend the continuation of the pattern.
1. First, look for very low volume on the pullback between 10% and 25% of the average volume of the last 90 days. Second, watch for the decline to flatten near the 21- or 40-day moving average on the hourly charts in a quiet, narrow flag-type formation.
2. When the breakout comes, buy on the initial thrust out of this flag pattern. This means a sudden dramatic change in price accompanied by heavy volume. The price doesn’t necessarily have to rise above the top of the flagpole (i.e., the previous rally high prior to the consolidation), but only needs to be a price bar that is at least several times the size of the previous several bars on the chart.
3. Wait to add to the position until the stock takes out the top of the flagpole, which is key short-term resistance. This will protect against a head fake, which is a move that starts out dramatically but quickly fizzles price- and volume-wise after just a bar or two and has no follow-through and, in particular, does not make it through the top of the flagpole.
4. Set a stop below the bottom of the lowest level reached during formation of the consolidation or flag pattern out of which it has broken. When COIN, for example, in its November upmove exceeded the top of its October flagpole around 3.75, that was one signal to get in or add to the position. Another signal came in the second week of January at around the 8 level, when we first highlighted it for our subscribers.
We saw COIN having consolidated and tested its 8.70 triple-top resistance over the previous 3-4 sessions, and noted that if it broke through that level it could initially head to 10 1/2-11, and then beyond that to our next target of 12 1/2-13, where it last resided, as mentioned, on January 15. The COIN example illustrates the potential that chart patterns like high-volume breakouts from long bases and low-volume flags can have in predicting price appreciation.
Harry Boxer is an award-winning, widely syndicated technical analyst and author of The Technical Trader, which features a real-time diary of Harry’s minute-by-minute trades and market insights, plus annotated technical charts & stock picks, based on Harry’s 35 years experience as a Wall Street technical analyst. You can find out more about Harry’s work at TheTechTrader.com.
What makes a worthwhile forum?
After visiting the forum of Blain Reinkensmeyer, one of our frequent guest bloggers, I started thinking about forums. So I started searching. There are hundreds, if not thousands, that I came across. Some free, some paid, and all different. I ran across some that were very niche, only covered “edible futures” (YES EDIBLE FUTURES). After looking through as many as I could manage in a 3 hour time window…I decided to go to our amazing user base to see what they think makes up a worthwhile forum.
Blain and StockTradingTogo have a forum that I spent a good bit of time reading, and learning from. Take a look at the StockTradingToGo Forum, analyze the posters and moderators, look over the content, and see how it compares to YOUR favorite forum.
There are many things that make up a good forum…but what do you think are the most valuable tools?
Please post in the comment section what YOU think makes up a good forum. There are no right or wrong answers as everyone trades differently, thinking differently, and needs different info.
OK…COMMENTS ARE OPEN!!
All my best,
Brad Stafford
Director of Marketing
Bear Market
Today I have the opportunity to introduce Brian Shannon from AlphaTrends.net. Brian is the author of “Technical Analysis: Using Multiple Time Frames.” I had the chance to read this book on a flight form Maryland to California and I can tell you that I didn’t put it down. The insights and strait forward analysis made me come home and rethink my positions and methodology. Brian takes what he’s learned as a broker, hedge fund manager, speaker, and writer to really convey his knowledge. Enjoy his post below.
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For the majority of market participants, the stage four bear market decline is a dark, scary period that they wish didn’t exist. Whether you are a died-in-the-wool bull or someone who feels trapped by the long-only choice of your 401K, a bear market is most participants least favorite time to be involved in the markets. Unfortunately, it is a painful time for many market investors who try to catch a falling knife, rather than wait for it to drop and then pick it up.
For the perennial doomsayers of the world, a bear market is their time to say “I told you so” as they endlessly preach their pessimistic viewpoints.
The fact is declining equity prices bring about the strongest emotional response — annoyance from longs to jubilance of shorts — from the average participant. However, if you are an objective trader who understands the cyclical nature of the markets, a bear market can represent a terrific opportunity for your short-term profits.
There have been many attempts to classify exactly what constitutes a bear market, but it simply boils down to this: It is an environment where the path of least resistance is lower for the market being studied. The sellers are clearly in control and are able to create a condition where lower highs and lower lows prevail. The supply of stock offered to the market is greater than the demand can absorb at current prices, which forces a move lower in search of liquidity. That’s it.
The stage three distributive action which precedes a downturn robs the market of further upside as sellers gradually wrestle control from buyers. When prices break below the lows of stage three and establish the first evidence of lower lows and lower highs a new downtrend has begun and ensuing rallies should be treated as “guilty until proven innocent.”
Note that trend reversals can occur early on. However, as more long participants are trapped with losses, fear-driven liquidation is more likely and typically will play out in multiple waves. Not only is there an absence of buyers; there is also an increasingly aggressive source of supply from who short sellers apply further pressure to the market. The obvious resulting technical signs of bearish enviornment take the stage — lower lows which form below declining longer-term moving averages.
The stage four decline is market by lower lows and lower highs, regardless of time-frame. Notice the direction of the moving averages, they can be used to quickly identify “the path of least resistance.”
It is easy and tempting to look at bounces in a primary downtrend and think there is an opportunity to make money form the long side, but simply math favors trading the short side. For example, when a stock drops three points, the only way it can remain in a downtrend is to rally less than three points as a counter trend rally ensues. On other words, the sum of the declines will always be greater than the sum of the rallies in a downtrend. Understanding the basis of trend trading (once a trend has been established, the more likely it is to continue than to reverse) increases the likelihood of further downside, and the declines will travel further than the corrective rallies within a downtrend. This creates a powerful reason to embrace short selling.
Picking bottoms is the hardest job on Wall Street, and frankly, nobody rings a bell at the market bottom. Yet for some reason there seems to be an attraction to declining prices among most participants. Natural human optimism and learned behavior of hunting for bargains in a retail environment provides a “slope of hope” along which stage four stocks, decline, crushing the dreams and finances of bewildered longs in its path.
We have all experienced the helpless feeling of searching every new source for a shred of bullishness to justify holding onto a stock in the face of declining prices. This fruitless action only delays the inevitable recognition of truth. It does not delay your losses. The is said that “it is better to be in cash wishing you were in a stock than it is be in a stock and wishing you were in cash.” This is perhaps never truer than the point at which you are “foraging” for a reason to continue on a course that offers little promise.
For long participants, the stage four decline is market by two brands of fear:
- Fear that the stock’s descent will continue to wipe out their equity (a good fear to have as it may portend a proper action into cash).
- Fear of feeling stupid for selling “the loser” at a point just before the stock turns higher (a bad fear to have). Do not fall prey to the short-term pauses in a primary downtrend; the short term action will typically be resolved in the direction of the larger, more powerful trend of the longer time-frame.
See the rest of this post by clicking HERE.
The Dimensions of a Successful Trading Entity
In June I asked my friend Dean Whittingham from Traders Universe who wrote a GREAT post that got me, and our readers thinking. I asked Dean to see if he could write another piece that got us all thinking again…and I think the below article is exactly what we need!
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Many considerations go into creating and running a successful trading entity. We’ll look at the most popular which get the most attention, right through to the most important, which usually get the least attention.
Here is the list:
1. Entry signals
2. Risk management
3. Exit signals
4. Reliability
5. Reward to Risk
6. Opportunity
7. Capital management
8. Objectives
9. Familiarity with Markets
10. Resources
11. Mindset
12. Style
13. Management
Most, and by most I mean probably close to 80-90% look at number 1 and that is it! That is a startling reality, but a reality nonetheless. But there is a reason this happens. Most new traders are unaware that such a large number of traders ultimately fail in this business, and more importantly, this fact is well known by the very people who market trading in this way.
But enough of that, let’s look at some serious considerations you should make and the order in which you need to do it.
Objectives – Set a target, a goal, a reason. Without this, you can’t create or find the right system for you. You won’t know whether the system will work for you, or even if it is on track or not once you begin trading it.
Familiarity with the markets – Quite simply, markets move in similar patterns which is all good, but there are different costs, margins, hours of trade, laws etc associated with each market that need to be considered.
Resources – These are your physical and mental assets. Everything from your time, capital, computer, to your mental strengths forms your list of resources. Day traders need different resources to a long term trader, not only in hard assets but mentally too.
Mindset – This is part of your self-image. Your self-image influences your decision making process on a continual basis. It stands to reason a trader would only become successful if they were making the right decisions. You need to see yourself as a success first.
Style – This is something you’ll need to work out way before you look at any system. Are you mechanical or discretionary, in other words, do you want a system to tell you what to do, or do you want to be analytical? Do you want to trade for growth or income (part of your objectives)? These sorts of styles all require different tools, and so it seems silly to purchase a system before you even know your preferred style.
Once you have these aspects thoroughly researched and sorted out, I can guarantee you that finding or creating the right system of entry and exit tools will become far easier and much more enjoyable too. You’ll naturally be attracted to the type of market tools that suit you.
But even then, once you find the entry and exit tools that suit you, there is more work to do.
You need to back test and paper trade your entry and exit rules to determine the rest of the considerations mentioned above.
Reliability – How reliable is the system for producing winning trades compared to losing trades, and does this suit you? The latter part of this question is the most important part. The reliability of the system does not tell you its overall profitability. It tells you your ratio of winning trades to losing trades, and this is a psychological question. Do you need to be right more times than wrong? This is the simple question you need to answer.
Reward to Risk – What is the average profit per trade? This is your total net profits divided by your total number of trades (if your system has a net loss then it’s no good - obviously). When you know the average profit per trade of your system over a decent sample, you can then determine the number of trades you need to make to reach your objectives.
Opportunity – Now that you know the number of trades you need to make over a time to reach your goals, you must determine whether or not your chosen markets will offer the opportunities you need. Will you need to trade in multiple markets, trade both long and short and so on?
Capital Management – If you do find that your chosen markets offer enough opportunities for you to reach your goals, you need to consider if your capital can handle it. Many systems will require multiple positions open at one time in order to reach goals in a specified time. This means your capital may be stretched, or may not even cope. The size of your positions in the market is a part of your capital management and is also determined by whether or not you have leverage and the margin required.
Risk Management – Risk is what you are willing to lose per trade. Your exit strategy aids in determining this factor, but it also needs to gel with you, because your risk per trade is a factor in your drawdown. The higher the risk, the higher the drawdowns and you need to know the maximum drawdown you’re willing to tolerate.
Management – The final consideration we’ll cover here is management. You are controlling an entity and so management of all key areas is important. If you log each trade, you can assess for human errors, bad habits, you can also assess costs associated with trading and whether or not they can be reduced. In fact management is the part of your trading that is always looking for ways to improve the running of the business.
If you look at the list above it can seem like a lot. If one was to think of what goes into creating the great business models like McDonald’s, Starbucks and so on, then I don’t think it even compares. But why should it be so daunting? Enjoy the process and it will be a lot easier than you think.
Happy Trading
Cheers,
Dean
Secondary Offerings
Last month I asked Zach from Zachstocks.com to give us an insight into IPO’s. Today he’s going to teach us the in’s and out’s of Secondary Offerings.
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Besides Initial Public Offerings (IPOs), the fund that I manage is also very involved in secondary offerings. The concept of secondary offerings may not be very familiar to most individual investors, but it actually may have more of an effect on the price of stocks they participate in than originally thought.
A secondary offering is simply an additional issuance of stock to the market. The additional stock may be considered primary shares (shares actually being sold by the company itself) or the stock may come from large existing holders of the stock. While the net result is often the same (additional shares in the public float), the resulting fluctuations in the underlying price can vary drastically and often depends on which type of stock is being offered.
While every case should be analyzed individually, it is widely accepted that primary shares are more constructive to a company and its stock. The reason is that the actual company is receiving the majority of the capital and can put it into use within the context of the business. One industry that has been very active in issuing additional primary shares this year is the shipping industry. Zachstocks has covered companies such as Diana Shipping Inc. (DSX) and Euroseas Ltd. (ESEA) that have come to market from time to time to raise additional capital. This capital is put to work to buy new vessels which increase the profitability of the company over the long term. While the sale is often initially dilutive to current shareholders in regard to the technical book value per share, if management can explain how the additional capital will be put to work profitably, the shares often rally after a deal is priced.
On the other side of the coin is a secondary offering that is simply providing existing shareholders an easy exit. Ironically, while this type of trade has virtually no economic effect on the underlying company, this type of secondary offering can be damaging to existing shareholders. The reason revolves both around the supply/demand equation as well as hinging upon the element of trust or confidence which is paramount in the trading of securities. If I as an investor know that one of the founding members of the firm I am holding has decided to liquidate his position, it immediately makes me suspicious. Questions such as why this party would be selling some or all of his position can result in a lower multiple as the perceived risk in the stock is higher.
At the same time, basic economics will tell you that when there is excess supply (imagine a large block of stock hitting the market) and demand is not strong enough to soak up that supply (who is going to buy this insiders 10 million shares?) then the natural result is lower prices. While the price may often bounce back as nothing has fundamentally changed within the company, it is uncanny how many times an insider will sell prior to a large decline in the stock. It may be that he knew more about the business environment than the general public and so his expertise allowed him to exit the stock at an attractive time. This does not necessarily mean that there is insider trading occurring, but more likely that his knowledge of the entire industry or economy leads him to make a wise selling decision.
So while secondary offerings may not rise to the top of applicable data when choosing an investment, one who is holding a stock long-term should pay attention when an offering of this type is announced. While there are some private transactions that never hit the news wires (I field calls from underwriters about these on a weekly basis), many of the larger offerings actually hit news services and can be found on ino.com, or any other capable news feed. If one of the stocks that you are involved in issues a secondary offering, look up the prospectus which is free on the company’s website and see who is selling the stock and if it is the company, see what they are going to do with the capital. You may find that the capital is being put to wise use and that may lead you to increase your position. On the other hand, if the company’s founder is selling his last remaining shares, consider yourself warned!
Zachary D. Scheidt, CFA
8 Great Ways to Fight Stock Market Stress
Good Wednesday to everyone! Today’s guest article comes from Blain Reinkensmeyer of StockTradingToGo.com, a site that provides free investment tips for online stock trading. You can read over 100 free stock education articles and share investment ideas on his stock forum with over 5,000 other investors. Yesterday I had the chance to chat with Blain about the market’s current state and his words really conveyed an air of confidence. His post below covers 8 keys…that we all fall short on. So read and apply!
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We all know that stress is bad. As an investor, it is very important to stay balanced while trading because Monday - Friday you are in the game whether you like it or not. So how do you fight stress?
The key is to stay calm and be disciplined with your investing. Market induced stress can be caused by you being too involved in your daily routine and the second by second moves versus staying focused on the bigger picture.
How do you fight stress from the stock market? Here are 8 ways:
1. Use stop loss orders. Stop loss orders are like insurance, they are stock orders that will automatically sell your position at a pre-determined price if that price is hit anytime during the trading day. They remove the “do I sell now? Should I hold instead?” drama of investing and replace it with a disciplined strategy. They are also perfect for maintaining a strong profit vs loss ratio.
2. Dont watch your streamer live all day every day. The real time ups and downs of the market can really cause some temporary stress. If you are like me you have your real-time streamer streaming live quotes from your favorite stocks and the market all day. If you know you aren’t in the right mind frame it sometimes is better to just close the streamer for a few hours or the day and bring it back on tomorrow.
3. Refresh your portfolio balance only once a day. Are your stocks losing ground fast? Instead of refreshing your portfolio every 5 seconds and seeing fresh losses, wait till after the market is closed and then refresh your portfolio balance. Remember, your stop loss orders will minimize your losses for you so you don’t have to.
4. Have a investment strategy. Not having an investment strategy is like trying to play a sport blindfolded. Don’t be disorganized, trade with a plan. Every buy and sell should be part of that plan and as a result will greatly reduce any stress you may have. In fact, a well assembled investment strategy can mean the difference between daily stress and no stress at all.
5. Eat healthy foods. Eating healthy can help keep your body well balanced. I personally enjoy an Apple almost every day while watching the stock market. Eating junk food doesn’t help stress because if your body isn’t happy your mind typically won’t be happy.
6. Get enough sleep each night. Adults should sleep on average 6 - 8 hours a night. If you are getting 5 hours or less of sleep and are wondering why you are more sensitive when your stocks open down take a look at your alarm clock. Getting that extra hour or two of sleep will make a big difference in how you react and respond to different situations throughout the trading day.
7. Don’t surround yourself with stressed individuals. You act like those who you spend the most time with. Take a look at your colleagues, and if they are investors themselves assess how they handle their own stress. If they are emotional investing evangelists screaming at the computer screen and breaking keyboards like Jim Cramer you may want to take a step back and reconsider how much time you spend with that person.
8. Stay calm in intense situations: stop, think, then act. Perhaps the most affect way to fight stress is to take those stressful times head on with a calm mindset. Remember always to stop, think, then act. This applies with everything from making a tough call with a unknown earnings report coming up to finding your portfolio down several percent on the day.
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Take some time and visit StockTradingToGo.com, read over 100 free stock education articles and share investment ideas on his stock forum with over 5,000 other investors.
Using Ratio Charts to Gain an Edge
Today’s guest blogger comes from Gary of Biiwii.com, a site that provides top notch analysis and commentary on stocks, currencies, commodities and bonds. I’m a frequent reader of the blog and HIGHLY encourage you to check out Gary’s site for more analysis.
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Long time readers of the Biiwii.com blog know that I rely on ratio charts to the max. In fact, I find these ratios between different markets to be absolutely vital to being on the right side of the trade where macro themes are concerned. A recent example is the Dow/Gold ratio, which allowed me to navigate the oncoming - and entirely predictable - rally in stocks (both in nominal terms and in ‘real’ terms as measured in gold) that began in the fear filled days of March. Our April Letter from the main website, Reset/Recalibrate explained the process by which market sentiment needed to be reset. Here is the monthly ratio chart that was used in the letter:
Of interest now is the Gold/Oil Ratio, which appears to be in the bottoming process amid bullish divergence by RSI & MACD. This is an absolutely vital ratio to gold stock traders as oil is a major cost input to mining operations and with the likelihood of the ratio bottoming, gold miners’ bottom lines stand to benefit as their product (gold) begins to outperform one of their major cost drivers (oil). Here is a current daily chart showing the status of the ratio. Gold, while having been pummeled in oil terms recently (along with nearly everything else), may well turn up from here in terms of crude:
I also routinely use the Gold/Silver Ratio to gauge general market confidence or lack thereof, along with more traditional sentiment indicators like the VIX and Put/Call Ratios. Other ratios which have appeared on the blog have included the S&P500/Nikkei Ratio, NDX/Dow and even SOX/NDX. All provide hints as to sentiment and/or macro-fundamentals and hence future market direction.
To summarize, you can trade any market but it is very important to be aware of the major trends and turning points between different markets and assets classes so that you may be aware of whether or not you are on the right side of the trade in the bigger picture. As traders and investors, we need every edge we can get.
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Read more Biiwii.com TA & Commentary by Gary at Biiwii.com
The Symmetry in the market is Incredible
Today’s guest blogger comes from the popular MYSMP.com site and it’s creator Kunal Vakil. Kunal is a man who is plugged into the market literally!! I asked him to give his unique perspective on the market…and it’s symmetry.
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First off, I want to thank Adam and Brad for allowing me to post my materials on Trader’s blog.
Today, I want to share my thoughts on the S&P 500 and where I see it heading before this bear market is over. And, yes, we are in a bear market. Not only has the Dow Jones already fallen 20% off its highs of last year with the S&P 500 nearly there as well, but the price action in the broad markets has been that of a bear market. It is typical to see sharp sell-offs and ferocious bear market rallies which make even the bears capitulate, all before the market begins a move lower again. Big volume down, and low volume up. This is precisely what we have seen since the top at 1576.09 on the S&P back in October of 2007.
Now, let’s talk about the culprit a little. We know that the banking index has been decimated with the exacerbating write-downs and credit quality issues due to the unscrupulous practices of many bankers and loan brokers. Many banks have lost over 50% of their value, and the beating continues. As we review the daily charts of the major banks, one can easily see a pattern that is definitive of a bear market, lower highs and lower lows. From looking at these charts, it is my firm opinion that the worst is not over yet. We are probably half way through the write-down cycle. Now what does this mean for us as traders?
Well, here is what I am watching very carefully. I want to see some of the major banks (ie. C, LEH, MER, MS, GS, FNM, FRE) start to show signs of strength relative to the entire market. I want to start seeing them make higher lows and higher highs. I want to see a base building process develop within these stocks. I want to see volume lighten up to the downside and increase to the upside. When these developments start to take place, we can start to look for long entries in these stocks. Is the US banking sector going to fall to 0? NO!, but don’t try and catch a falling knife, stay patient. Remember, Cheap can always get cheaper…and it has.
Moving back to the S&P 500, I want to now walk you through a few charts that will illustrate where I think this market is headed by the Sept./October timeframe. This period historically provides some dynamite buying opportunities and it looks like this year wont disappoint.
On longer term charts, especially index charts, fibonacci retracements and extensions offer good points of support and resistance. Here you can see that the S&P has a major support area at the 1171 area. I will show you why this is a very important level.
Our next chart is another weekly chart of the S&P, however, this time notice the fibonacci extension. Notice the initial move off the top and the subsequent rally off that reaction low created an extension target between 1353 to 1248. Notice how the 1.382 and 1.618 levels held the two lows set in January and March and the market showed its weakness by extending down to the lower end of that zone.
The next chart shows you the current extension that we are watching now. It starts with the December 2007 highs going down to the March lows and the retracement up is at the May highs around 1440. Now, notice the extension targets. The 100% extension takes us down to 1173.65, very close to the 50% Fibonacci retracement level in our first chart.
One final point in terms of symmetry that I want to make here. Back in 2003 when we were looking for a breakout in this market, the 1165 to 1175 range was a key pivotal area we watched. It represented the neckline of a massive W bottom, which some would call an inverted head and shoulders. This area is going to provide massive support on the way down.
All things considered, I am looking for another 100 point drop in this index before I can see a true bottom being put in. Remember, you want to watch the leaders on the way up and the way down. The banks have been providing that leadership and are showing no signs of letting up. Therefore, we are not bottom picking here. The speculative soul in me believes that the shoe is going to drop with one of the big banks out there. Time will tell but until then, be safe and protect your downside risk.
All the best,
Kunal Vakil
MYSMP.com
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