Beware the Volume Warnings!  Chop City on Wednesday!

It was the kind of day that revealed itself early on – as in pre-market.  Volumes across the board were very light making for extremely choppy trade in most equities, the broader indexes, treasuries, and forex.  Notables that drew in traders were MSFT, AAPL, and BAC.  It was a day where even the HFT algorithmic computers seemed bored.  It doesn’t leave me with much to add over what has already been presented. 

As I discussed yesterday the markets are showing signs of exhaustion, and pushed further doesn’t make them find renewed energy.  Decreasing volumes, momentum oscillators in overbought territory, and a strong feeling of complacency in the air all spell a classic “trap” is in the making or about to be snapped.  Again, the way the market plays this out as of late is to press on until the rollercoaster crests the top of the incline and pauses slightly while the rest of the cars in the train push it over an into a vertical decline.

In a previous blog I discussed the markets putting in larger corrections off of April highs.  This remains in the near-term picture and should new highs (DJIA, S&P 500 and maybe Russell 2000) come first it would suggest more of a rough ride down as the correction rolls through.  Again, a 10 to 20% down draft is not out of the picture, in fact the signs are pointing to the next leg down ready to begin at any moment. 

Broader Indexes

The Russell 2000 led the charge on Wednesday and pushed towards 935 (basis the RUT).  The intraday chart is overbought suggesting some type of a pull back,  but keep in mind that would be on an intraday basis for now.  As previously discussed some of the broader indexes (RUT, DJIA, S&P 500) may push to new highs before the expected correction kicks in.  The probability of this occurring in the RUT increased strongly today.  The hourly chart below shows the pattern in progress and Fibonacci support levels to watch for.  From current levels the RUT would need to break back below 912 before negating additional upside potential and giving a stronger signal that a larger correction is indeed at hand. 

The DJIA charged out of the gate on the opening bell on Wednesday and failed within the first 10 minutes spending the balance of the session attempting to regain balance of move higher.  Resistance at 14717 has held thus far.  The pattern in progress could go either way and be well defined.  In other words the DJIA may just play catch up to finish out the week and push to new highs before sliding back into a correction.  Or a continued breakdown could be in the works now.  This would gain strong support on a break below 14550.  Note that the intraday oscillator is oversold which supports at least a higher opening. 

The S&P 500 pushed and held above resistance at 1573 for most of Wednesday’s session failing late in the day.  Here as well it would be a mistake to consider the S&P out of the running for new highs.  On the contrary, this index along with the RUT are high candidates to do just that before beginning the anticipated larger corrections.  As previously discussed due to the exhausted nature of the current rally and the severe decline in volume I would not expect much if any follow through if new highs are seen. 

Restated Dynamics (Support levels) for the Correction

DJIA – support at 14550 has been reached this week.  There remains support at the 14500 to 14450 area, but eventually downside momentum will prevail with stronger support coming in at 14400 to 13750.

S&P 500  – Resistance at 1574 was breached, and I now suspect a shot at new highs before a larger correction takes over.  Support is now at 1573, 1566, 1559, and 1550, with stronger support below between 1525 and 1475.

Russell 2000 – Resistance at 935 was tested today, at this point look for this index to make a run for 960 before all is said and done.  Support should be found at 926, 920, 916, 912, and 906.  Ultimately, it remains highly likely that it could get very ugly for the Russell 2000 with stronger support seemingly far below at the 850 to 820 area. 

Precious Metals

Gold continues to inch higher and is now approaching next resistance at 1455, (basis the future).  The intraday momentum oscillators are overbought and the pattern in progress is more corrective than impulse suggesting another leg down is waiting in the wings to begin.  The risk remains to the downside for gold with another “slap down” type move breaking below 1300 not out of the cards yet.  Intraday support should be found at 1423 and 1383.  Resistance remains at 1455 and 1486. 

Silver has been held below resistance at 23.35, which doesn’t suggest this metal is finding any serious buying momentum.  The intraday momentum oscillator has reached overbought nonetheless, which keeps another leg down in the picture for now.  Support is at 21.90 and then 20 with resistance at 23.35, 24.25, and 24.98.

Repeated from this weeks discussions –

Day Trading vs. Position Trading

Recent discussions have revolved around the necessity to toss out most if not all of your old trading ideas and join the ranks of algorithmic trading.

I advocate the use of overbought/oversold indicators and momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a  “bull trap” or ”bear trap” forms.   

I believe that it only gets more confusing going forward as the market ignores “the writing on the wall” and continues higher with a false sense of security built on negative input.  Price volatility has increased with the broader averages easily moving 2 to 3 percent and as high as 10 percent intraday.  Many stocks have seen daily trading ranges average between 10 and 15 points, with one day being 15 points higher and the next being 10 points lower. 

This type of action is the primary motivation behind my advocating switching strategies if necessary and focusing on day trading and less on position trading.  I do believe there are discernable longer-term positions investors should consider and implement, but the near to mid-term market gyrations have produced far more profitable day trading opportunities without overnight risk. 

I continue to recommend the best trading platform available to a broader range of traders from novice to expert.  The Diversified Trading System offers a cost effective product that allows a trader to enter into the “chaos” and trade more effectively.  

Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have.  Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades. 

Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

• DJIA future (e-mini available)
• S&P-500 future (e-mini available
• US$/Euro futures (e-mini available)
• GS (Goldman Sachs)
• AAPL (Apple Computer)
• GOOG (Google)
• LNKD (LinkedIn)
• NFLX (Netflix)
• 30-yr Treasury Bond future
• 10-yr Treasury Note future
• TLT (Treasury Bond Long ETF)
• TBT (Treasury Bond Short ETF)

The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in Gold and Silver futures, GLD and SLV – gold and silver ETF’s and several mining stocks.