Love from Spain (Dow)Updated Tuesday, 12/19 for Wednesday's Market
Key DOW Levels for 12/20
UP Through 10,675
DN Through 10,600
Rally Failure
Fed news reverses market direction at 2pm. Now, we are Short below 10,650.
From yesterday's commentary, "... The short term should be easy to read tomorrow. We are forming a tight consolidation in the 15 Minute Chart from 10,600 to 10,675. Seventy five points in this market is nothing. Whichever way it breaks, go with the flow and watch for the first trendline crossing the other way in the 5 minute chart. That should give you a reasonable profit right out of the gate tomorrow. My best guess is that the Dow is going to break to the upside, and the NASDAQ and OEX follow its lead. But don't anticipate! Wait for the break...."
The Dow played out well in this mode today. Note the clear, upside break at 10,675 a few hours into the session, and then a rapid climb to the high at 10,775 - followed by a trendline reversal back down on fundamental news at 2pm. This was a great play for intraday position traders - Long on one side and Short on the other.
In the medium term, we just had another whipsaw day around our "center" at 10,650. Isn't it interesting how much the market wants to react around this number? Now that we have dropped through this level again, we are of course Short, and holding on. Our strategy will be to hold (short) here and see what develops.
Since we are consolidating right in the center of the broad range from 9,700 to 11,700. The absolute center is obviously 10,700 - very close to our current level. This is where the battle is being waged. I would continue to hold short/long below/above the 10,650 level, because once the market moves away from this level, it is likely to trend a good distance.
The Diamond (repeated)
The Weekly Chart is still forming a Diamond. This slow-moving pattern is just something you want to be aware of, and it is the main reason I am trading defensively, with tight stops and so on. If we drop through key support and head towards 10,000 you certainly don't want to be Long.
Can the Dow really drop to 7,800? Did anyone expect the market to react negatively to the election outcome? Anything is possible. I don't try to rationalize the market, but rather to use solid technical patterns and do what they say. In my heart of hearts I don't think it's going to 7,800 either, but I won't be totally surprised if it happens, based on the existence of this pattern.
Short Term Dow
Wow. The short term was phenomenal today. Now, we have a new, clear trendline coming down along the line of action from the high, and clearly you want to trade Long as this line is broken, expecting a push back to the 10,650 level before dropping (if that is the outcome). I'd just continue to use the intraday lines to trade the moves - like the ones you can see in today's 15 Minute Chart. That's the best way to trade a trading range market.
Medium Term Dow
As I said yesterday, 10,650 should be the steady equalibrium point above which we want to be Long, and below which we want to be Short. This level is right, smack in the middle of all the action. So, while we do risk getting "whipsawed" on either side of the center, being "in" on either side provides the greatest opportunity.
Now, if you cannot watch the market during the day, you obviously can't enter on specific level crossings. In that case, I would consider holding off on new positions until we clear the consolidation - 10,800 up and 10,300 down. That's a VERY wide range. But clearly, if you take positions in here you are going to go through "investor hell" as you watch them rise and fall in the trading range. The best scenario, as I say, is if you can select your candidates and trade them during the day on crossings of 10,650 (which means right now you want to be holding good short candidates). That is ideal.
NASDAQ & OEX
The NASDAQ looks a bit scary. We have a downside consolidation formed at 2,650 which implies a continued drop to our original target of 2,300 posted a few weeks ago. There are a number of chart measurements that confirm this view. We added more short positions on the downward crossing of 2,600 with mental stops at 2,650.
The bottom is near. Listen to the news - everyone is talking about "dot bombs" and how much high tech is getting thrashed. By my calculation, the new consolidation target, based on today's intraday chart on the NASDAQ is December 25 ** - so if we drop to 2,300 in the next few days you may want to consider some extra Long exposure before the holiday. We'll see how it plays out over the next two days, and prepare for Friday.
The OEX, like the Dow, had a great up and down day, with tremendous potential to profit on both sides of the fence - Long AND Short. The infamous 2pm announcement turned us down, giving us an incredible 20+ points to the Close. Outstanding. Now, we are at the most critical support level of them all and watching for the resolution - break or bounce. **
In Summary:
This is getting exciting. While the Dow is moving back and forth in its trading range around 10,650 the NASDAQ and OEX are quickly approaching their downside consolidation targets. I am expecting a blowoff decline and reversal, which I believe will be the optimal time to go Long. Obviously, if you can't watch the market during the day you are playing with fire in here. I believe the "true" bottom will form over the next five days. We will see how the charts mature over that time, in hopes of catching it when it occurs.
Thanks for listening, and good luck in your trading!
Ed Downs
----------------
* 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 market commentary and individual candidates posted each day. 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
15 Minute Chart (NEW!)
60 Minute Chart
Daily Chart
Weekly Chart
chart legend
Get Signalwatch Everyday!
Free Service! Send a blank e-mail to
SignalWatch E-mail and have Ed's commentary automatically sent to you each day! |
