Today is Wednesday, October 14th and we did get that rally I thought was coming.
It started out with a gap opening and closed at the high of the day. Often times than not, gap openings get filled. What I mean by that is the price will trade back down to fill in the gap where there was no trading. Gap days can be more difficult days to trade, because the whole equilibrium of the day is thrown off. It can take a while to bring current cash prices in line with the future’s price and that is why there is such indecision and erratic price action. Future contract prices, by nature take their cue from the cash market, in this case, the S&P 500. Seasoned traders know that it is often just the other way around, where the futures will lead the cash market. I rarely look at the cash market, but I do take a peak now and then to get a bigger picture view, that would be 5 minute, 60 minute and daily. It is a good idea to know where you are in the overall price action structure. That can give you insight, but that is all it is meant to do. Do not make a science out of it and convince yourself about any market direction, because it can all change very quickly. This was yesterdays advise and is a good point to remember.
You can see below, the two charts I have labeled “Daily Dow” and “Daily S&P”. This was a chart that I posted two weeks ago, before the last little drop down. We did end up breaking the rising wedge and pulled down to support. Not so far on the Dow, but right on support for the S&P. The pattern is inside the context of a larger pattern at work and it seems to be playing itself out very nicely. That is why it looked like a rally day today. It is on its way the at least the upper yellow line (top side of the larger Wedge).
Trading is assessing probabilities, “If This, Then That” Conditional Statements. Well, we had “This” which was an initial minor break, the “That”, is the follow through in price action in the direction of the break. The same is true for the continuation break back to the upside. I have it marked on one of the charts. Again, the “This” is the break out and the ”That”, is the continuation of the break, as prices gun for the top of the larger formation.
We are not far from reaching a 50% retracement from the top of the market 1564 to the low, 666 and the middle would be, 1120. This is how price action and market rhythm usually flow. Once the down-trend has slowed and starts to retrace from the oversold condition, often times it will move back to the middle of its range. I don’t see anything to say, that this is going to be anything different. That is why I have been calling this move back up to the middle, for months now. Anyone following me knows that is true.
I have a chart of the S&P below, click on the link and notice how back in February, say around 11th or 12th. I remember saying that if that line gets broken, it will be “LOOK OUT BELOW”. Well, it did just that, 1,400 points came off the Dow in just a few weeks and the same percentage in the S&P. The reason I bring that up is because it is that same line which is coming into play now. In technical analysis, “Support Becomes Resistance, When Broken”. The price action broke through the support and that same line extended but rising out to the right side of the chart will often times act as resistance, as is the case now. In fact it has come up into that line 5 times now and backed off each time. There will come a time when it hits the line and backs off, but will not come back as it has previously. That is also what I have been expecting, but not until the lower support of the formation has been broken. We are not anywhere near that right now, but pushing to the upper limits of the pattern as seen in todays price action.
Daily price action takes a long time to develop. It is nice to know where you are in the big picture but as day traders, it is not the dominant focus. Positioning yourself to capture small pieces of movement in price action is the name of the game. successful traders usually trade for the money. That statement may seem obvious for many, but to often that is not the case. You may want to ask yourself, “Why are you trading the financial markets” ? Just check your answers, but be honest.
You would be surprised that, many people are involved in trading for a lot of reasons other than the money. I don’t need to take a poll to know the answer to that question, but I would estimate that is so true. The reason why I know that, is because of human nature. Trading successfully is not natural for most people. It is hard and unless you know something about human nature and why people do what they do, you will be at a disadvantage to others who do.
Buying and selling stock is a very emotional process. You will never be able to separate the two. That is a good thing, in that as a successful day trader, you should be able to read other players. This in a way is like, reading the players at a poker table. I don’t gamble, but I know how the game is played and I know players get a lot of information from reading people. Very similar to reading price action, if you know how. Do you know how?
http://www.screencast.com/t/mKvrLEnMFZQN Cash S&P Daily Chart
http://www.screencast.com/t/bByMQxRy Cash Dow Daily Chart
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