May 9, 2013

Logical Market Update: Why All the Chop City? How Close is that Correction? Which Correction??

Why the DJIA, S&P 500 and Russell 2000 are Very Choppy – How Close is That Correction – Which Correction?

Thursday started with great promise that the long awaited correction was finally at hand.  Then “presto- change-o” the market reversed headed higher, picked up some momentum – and “presto-change-o” that didn’t work and the market again headed lower. Now here is the strange part – it does all have meaning. 


Students of Elliott Wave know these types of moves as extensions.  Extensions occur with frequency within the first, third or fifth wave of a five-wave sequence.  Most often it is within the third as this sequence is usually the longest and the strongest with the larger “wave”. 


Click on the Daily chart of the DJIA below to expand and follow the “extension” of what will eventually mark a complete “third wave”.  The current extension began off of the mid November 2012 lows.  The next extended wave is also a third (started 12/31/2013 and completed on 4/11/2013) within the next degree larger third wave, which began on 11/16/2012, and remains in progress as of today 5/9/2013.  Still needing as a minimum an additional small 4th wave decline followed by another 5th wave rally to complete wave 5 of 3.  Click on the second chart below (Weekly chart of the DJIA) to big the bigger picture of how extensions unfold within impulse moves.  Notice that in turn each completes part of an extended 3rd wave of the next degree higher (began 6/4/2012) and a degree higher (beginning 10/3/2011). 


Confused yet?  Don’t be – the appearance of the markets indecision as to direction is really nothing more than the pattern completing the series, which in this case has extended at least 4 to 5 times.   


Daily DJIA:



 Weekly DJIA:



The markets remain extremely overbought and trading ranges are shrinking along with volumes.  This again is showing exhaustion of the current move.  A time when buyers and sellers are not willing to step in leaving the daily grind to day traders, professional money managers, hedge funds, and the algorithmic computers.  And I’ve been hearing from many other day traders who are not trading that much these days. 


Remember, an efficient market will always trade to volume.  At the moment the search for volume remains to the upside, even though so many remain suspicious that the volume will be found at lower levels.  So it becomes a game of patience.  The shorts are not budging and the longs aren’t either – not yet anyway.


Observations from Thursday Unchanged


The Russell 2000 also remains in the process of completing several extensions within the current advance.  While things seem to have slowed down in terms of ground gained to the upside there is still likely new highs to come before we see correction (pull back) that unfolds over a few days rather than a few hours.  First support for a correction would come in at 913 with the more likely zone being at 878.  The momentum oscillators (near-term) remain at extreme overbought levels but have turned lower with the mid to longer-term oscillators remaining overbought. 


Comparable levels for the DJIA begin at 14580 with the more likely zone being at 14090 to 13777.   For the S&P 500 first support is at 1567 and the likely zone comes in at 1524 to 1489.  Here as well, the momentum oscillators are sitting at extreme overbought levels and volume levels have dropped off substantially over the past couple of weeks. 


The discernable rotation that appears to have caught some momentum the past few sessions is what I believe was responsible for the mid-day rally on Thursday.  Continue to watch as money is pulled from the biotech sector and back into the technology sector.  I continue to favor MSFT, AAPL, and INTC to name a few of the titans and still believe they will become very attractive if and when the broader markets pull back. 


Adjusted Support levels for a Larger Correction.

DJIA – initial support is at 14750, and then the 14480 to 14450 area, but eventually downside momentum may prevail with stronger support coming in at 14090 to 13777.

S&P 500  – Resistance is at 1645 to 1650.  Support is at 1590, 1578, 1535 – 1524, and then 1489.

Russell 2000 – First support should be found at 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 877 to 850 area. 


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 and GS. 


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) – very highly recommended
  • 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) 

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.