May 22, 2013

Logical Market Update: Correction Begins – Ultimately the First of Several Over the Next 2 Quarters

Correction Begins – Ultimately the First of Several Over The Next 2 Quarters


It was a sight to behold on Wednesday morning.  The futures were poised to race higher; the markets were on edge waiting for the Housing Starts and then Bernanke’s testimony before Congress.  The Housing starts gave a jump-start to what I will call the initial round of capitulation.  Shorts needed to stop the bloodletting and were now willing to do it at any cost.  Then Bernanke began speaking.  Again, the second and final round of capitulation began bringing the broader indexes (DJIA, S&P 500 and Russell 2000) to fresh all time highs.  The NASDAQ 100 and Composite moved to new recovery highs. The 30-yr bond reversed course and moved lower along with the precious metals.  Then it stopped as the buyers evaporated and the patient bulls began to take their profits.  The broader indexes slide lower caught their breath resumed the rally (just to make sure nobody was left behind) and then came in for the “slam dunk”. 


I stopped counting after the tenth email, IM, or phone call this morning as trader friends were calling to ask what I was doing as the markets screamed higher.  While I will always carry some “core” positions the bulk of my funds have been earmarked for day trading.  So, unfortunately, the answer I gave was not what they wanted to hear, but when you must defend a position against the backdrop of what is seemingly nonstop bloodletting your focus is not on the multitude of opportunities being presented across the wide spectrum of trading vehicles offered.  Everything participated today.  The last signal that the rally, (at least this portion of it) was complete – total market capitulation was the missing piece to the correction puzzle and that was received today.


It is vital and important in maintaining a healthy and efficient market for the process to ‘normalize’; for the markets to move back towards their mean centers or comfort zones– so to speak.  The place where two-way trade takes place and not the one-way ride witnessed the past couple of months and please don’t misunderstand this applies to a one-way up or down market.    


This remains the reason I continue to extol the benefits of day trading versus position trading during these finishing moves of the much longer-term bull market.  It may well take another year or another 5 years before all is said and done.  Missing opportunities in either direction should not be a part of your trading strategy.  There are numerous opportunities in a myriad of indexes, ETFs, and futures to choose from within the equities, treasury, commodity, and precious metals markets.   


Day trading has increasingly become my first choice as the markets become more stubborn and push to extremes.


I use the stochastic overbought/oversold indicator and RSI momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a  “bull trap” or ”bear trap” forms.  Both oscillators are very useful whether on a tick chart or a monthly chart.  Keep in mind that there are many indicators available and when used properly do produce solid tradable signals.  Unfortunately, many fall prey to the inexperienced that don’t take the time to learn how to use them and therefore get “tossed” into the garbage pile.   


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 suggesting 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. 


Diversified Trading System


I continue to recommend the Diversified Trading System as 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. 


Let’s Review where we are:


While I remain firmly in the bullish camp over the mid to long-term I have been expecting and anticipating a correction to begin for the past couple of weeks. The patterns to the intraday highs on Tuesday again show completed 5 wave patterns which in turn complete larger 5 wave patterns which again in turn complete yet a larger 5 wave pattern.


The Big Picture:


Staying in touch with what your “big picture” is critical.  I spent some time recently updating all my long-term charts.  This was important as it gave me a very clear perspective on how large of a correction should be coming.  While my expectations is for a decent “slap-down” to occur it is not the “mother” of all corrections as some have forecasted.  For example:


All of the broader indexes (DJIA, S&P 500, Russell 2000, and NASDAQ) began their perspective rallies off of the March 2009 lows.  I fully expect additional new highs (several) for the DJIA, S&P 500 and Russell 2000.  The NASDAQ may have reached its peak(s) in 2000, however I don’t think it would be wise to exclude them just yet.  All the patterns are very similar in size and breadth with smaller differences likely within the internal counts.  Therefore based on this it appears that an across the board correction is due – but again not the collapse that many are forecasting.  That is at least a year or more away. 


(Updated 5/22/2013)


So, what can be expected?  Smaller 4th wave corrections within the context of larger (Cycle degree) 3rd wave advances.  Here then are the updated levels for the:


DJIA – Support begins at 14865 to 14424 – additional support zones are below at 14369, 14006 to 13644.   I would not be looking for a drop into the second or third zone, but rather for the top end to the middle of the first support zone to contain the move and set the stage for the rally to pick up again and take the DJIA to additional new highs.


S&P 500 – Support begins at 1600 to 1535.55 – additional support zones are below at 1526 to 1508 and 1479 to 1427.  Again, I am not looking for a more serious drop, which would take prices into the second or third zone, but the top to middle of the first zone to contain the move.  Here as well expectations would be for the rally to pick up again and move the S&P to new all time highs.


Russell 2000 – Support begins at 953 to 896 – additional support zones are below at 868 and then 836.  While a stronger drop can not be ruled out as the Russell has tended to be the weak link previously – but the Russell along with the QQQ’s are more tech laden and that has added stronger upside momentum with the Russell 2000 breaking above the all important 1000 level on Monday.



The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA).    


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) – Highly recommended
  • S&P-500 future (e-mini available) – highly recommended
  • US$/Euro futures (e-mini available) – very highly recommended
  • GS (Goldman Sachs) – good two way volume –
  • AAPL (Apple Computer) – very highly recommended
  • GOOG (Google) – very highly recommended
  • LNKD (LinkedIn) – solid intraday range
  • NFLX (Netflix) – solid intraday range
  • TSLA (Tesla Motors) – highly recommended
  • 30-yr Treasury Bond future – may get quiet
  • 10-yr Treasury Note future
  • TLT (Treasury Bond Long ETF)
  • TBT (Treasury Bond Short ETF)
  • Gold (futures and ETF – GLD)
  • Silver (futures and ETF – SLV)