Updated Sunday, 11/12 for Monday's Market
Key DOW Levels for 11/13
UP Through 10,700
DN Through 10,600
At Critical Support
Went short on the failure at 10,850 - We need to watch
10,600 carefully, as this level is critical support for the
Dow.
Recap from yesterday's commentary, "What I would do is just
watch the behavior around 10,850 and trade the short term
lines that form during the day. If we rally through this
level and hold, we should go on up to the high and
eventually break it. However, if we push back down under
10,850 you should go short until a new V-Bottom forms. It's
tough, but the key is whether the market can overcome this
important level."
Needless to say, the Dow did NOT overcome 10,850 but rather
started down again at the Open. We were officially short
as soon as this occurred, and rode the short down all day,
as the market continued to show weakness right up to the
close.
Will this be the Crash of 2000? We normally think of
crashes as being cataclysmic events, like the one in 1929
and 1987. But, clearly, we are not taking a walk in the
park here, with the index down over 1,000 points from the
high. Not to mention the NASDAQ, which we will of course
discuss in a moment.
As I have said many times, I am not a "guru" and certainly
not a predictor of crashes. But, what I CAN do is
illuminate the patterns coming into play now, and where the
strengths and weaknesses are. My objective is to point out
the clear lines through which the market will accelerate
its movement. And today, we have several of these.
Let's start with the Dow - now sitting above our VERY
important level of 10,600. As I mentioned above, based on
commentary for Friday (from Thursday night) we went short
at the Open below 10,850 and are still short for a 200+
point profit, but I think the real money is going to be
made in the next two weeks.
If you look back on the chart to the end of September, you
can see that the 10,600 level was key in the downside
consolidation that formed. This level is also
approximately 30% of the way down to the low from our
recent high at 11,000. So, I would very simply trade off
this level, on both sides. But be careful on the Long side
- the market is clearly vulnerable right now.
Remember the Diamond in the Weekly Chart? Well, it got
distorted a little bit on the right side, but it's raising
its ugly head again. It's been a while, so let me just
refresh the concept. Diamonds are formed by narrow ranges
on either side of a wide range. You can clearly see this
happening in the Weekly Chart. If the market fails on a
Diamond - that is, trades through the low, it will
historically trade down the height of the diamond, which
would imply a move to 7,800. Again, I am not saying the
market is going to 7,800. I'm just saying that is the
classic interpretation and outcome of this pattern. (ref.
"Technical Analysis of Stock Trends" by Edwards & MaGee)
Short Term Dow. *
If we drop through 10,600 I would go short (more) and
expect a move to 10,400. Be sure to use our whipsaw rule
if you are trading in the short term - that is, if you go
short and the Dow moves back through 10,600 you should exit
there and not go short again until the market drops through
the swing low point (that you just saw). By the same
token, a rally through short term resistance at 10,700
should be bought, with a stop at the same level (whipsaw
rule also applies here).
Medium Term Dow. *
Now that we have dropped through from our consolidation
last week, it's much safer to trade for the medium term. I
would follow the same basic rules as mentioned above for
the short termers. Long above 10,700 and Short below
10,600. If you cannot watch the market during the day, I
would wait a little longer - until we form a higher low in
the 60 Minute Chart and then consider going Long. The
problem with this market is it moves so fast, so far, that
if you take a position - Long or Short, you are likely to
be left in a terrible position at the close. If you
really want to get "in" here, I would consider buying the
bargain basement NASDAQ stocks, but be just as ready to
dump them if the NASDAQ continues to tank (which, frankly,
is fairly likely). I wish I could give you some sage
"buy and hold" advice here, but the market is in a "tizzy"
and behaving badly. Hopefully, Monday will give us some
clear chart patterns to bank on for the medium term,
after-hours trader.
NASDAQ and OEX (SP 100 index)
Wow. The NASDAQ is simply amazing. We exited our Longs at
3,400 and boy, are we glad we did. I'll take the meager
100 point gain to that point. We also went short at the
same level, as the market pulled up to a lower trend line
in the 60 Minute Chart and failed (which is why I posted
"Caution is advised" last Thursay on our NASDAQ page. ** I
knew we were weak, but I had no idea just how weak.)
Obviously, the election now absolutely IS affecting the
market, as the uncertainty has dragged on from Tuesday,
with no clear end in sight. One thing is for sure -
markets do NOT like uncertainty.
Now, here's an eye-opener. If you look at the Daily Chart
for the NASDAQ, you can see a very clear downside
consolidation, with a center at 3,200. The high is at
4,200. So, what does this say? Yep. The NASDAQ could go
to 2,200. Now again, I am NOT predicting a crash. Those
of you who are new to my page, just use this information to
"arm" you for the nastiness of a drop early next week.
The problem here is, so many stocks that were trading at
200+ six months ago are now in the $10 range. Bargains?
Yes. Absolutely. But remember, the market is a fictitious
entity. Stocks have no intrinsic value (whereas
commodities do). It's a confidence game. The only reason
CMGI traded at 160 is folks were willing to pay that on the
theory it was going to 200. Now that it's at 15, it is
clearly a bargain, but it could certainly go to 10 as the
buyers - even at this level - dry up. The great trader,
Jesse Livermore, once said, "a stock is never so low it
can't go lower, no so high it can't go higher." Now,
that's sage advice!
The OEX has a similar, nasty downside consolidation with a
center at 730. The high is at 830, so where can it go?
That's right - 630. Again, that's what the consolidation
measurement would imply (by my reckoning). The question
is, how can we trade in the face of such dire input?
If you want to go Long the Dow or Dow stocks, I would wait
for the market to settle down and form a higher low in the
60 Minute Chart. It's tempting to go in here and buy the
bargains, but waiting for chart confirmation of a bottom is
the safest approach. If you are comfortable with the Short
side, I would short (again) on a crossing of the current
low at 10,600, and hold stops just above them, using our
whipsaw rule (see Short Term on the Dow, above). Why? The
market has plenty of downside potential (based on our
consolidation measurements) but it could turn around here.
If it does, we want to be on the Long side. If it doesn't,
we definitely want to be on this train as it heads for the
real basement.
In Summary
This is one of the most exciting junctures I have ever
seen. Yes, there is mayhem in the election. Yes, folks
are scared. If you are a trader, that's very good. The
short side is always the most profitable place to trade,
because declines are fast and furious. If you have a Long
side bias in your trading, don't be in a hurry to get on
board just yet. Give it a day and see if we can form a
higher low above 10,600. If you can watch the market
during the day, and see it form, go Long with a stop at
10,600. Either way - Above or Below, I think you will be
handsomely rewarded as the drama plays itself out.
Thanks for listening, and good luck in your trading!
Ed Downs
edowns@nirvsys.com
----------------
* Short term vs. medium term. We define short term as 1-4
days, and medium term as 1-4 weeks. This column is designed
for both types of trading/ investing.
** We are now publishing charts on the NASDAQ and OEX (SP
100 index) in our Premium SignalWatch section, with short
and long term assessments, similar to this page. Click
"Subscribe" at www.signalwatch.com for more details.
*** Our software, OmniTrader, includes a feature we call
OmniTrader Online, in which we post alerts during the day
when they appear to us. To find out more about OmniTrader,
visit www.omnitrader.com.
----------
"What to Trade?"
I received a very nice email from Mr. Walsh asking what
symbol to trade to mirror the movements we discuss on this
page. What I would suggest is, that you look for
individual issues which are poised to gain the most from a
break of one of our levels. I know this is a bit more
work, but you will often get a nice "spring" effect and
also reduce your risk.
As an example, the weekend of October 28, we speculated
that a rally was likely in store on the NASDAQ, and
mentioned MUEI. It jumped off the launch pad Tuesday, and
has been carried up by the initial momentum.
You can certainly trade the indexes directly (DIA, QQQ,
etc.) but I think your results will be better if you focus
on the issues which will move the most on any given
incentive. Good question - thank you, Mr. Walsh.
Thanks.. Ed Downs
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