Observations About the Current Market Trend

Today's post I'm going to discuss about the overall market indices rather than specific stocks. Because I have noticed something in the charts that may drastically go against my short positions - even though I still believe the market, and some of my particular stock positions, are still overbought.

As a disclosure
I own short positions on X @ $140, $146. RIMM @ $123. MA @ $232.
I am long AAPL @ $120. MOS @ $105.

Being a swing trader one must recognize and acknowledge both sides of the trade. And recently there have been an overwhelming bullish sentiment on stocks. Unemployment @ 5.2%? Shake it off. WAMU requiring $7 billion infusion? Not a problem. Fed acknowledging recession? Not even a dent in the market.

Most people (well, the bears at least), is probably wondering the same thing I have been for the past couple weeks. How is the market holding up like this? It is the current consensus that if the markets are able to acknowledge the problems it faces, then the worst may have already passed.

The current indices have been on a very bullish consolidating pattern. What do I mean by this? Observe the following three charts that maps out the Dow Jones, Nasdaq, and the S&P from a 3 month perspective. Even though the analysis is simple, the point is very straight forward:

Here's the Dow Jones




Nasdaq


S&P



So what's the relevance in these charts? "Neckties" is a term that describes the convergence of 2 moving averages coming together. In this case, it is the 20DMA and 50DMA. If the current indices were below the necktie, then it would be considered a strong resistance (which could be used as opportunities to short). However, if the indices are ABOVE the necktie, it becomes strong support. All 3 indices are closing in on neckties from ABOVE. Which makes me believe there could be a very strong possibility for another big push up; DESPITE the negative economic news we have been seeing everyday. In my opinion, the newsfeed thats generated by the media everyday is just a cover that exacerbates and confirms the movement of stocks indicated by TA. This is one reason why despite the negative news we've had recently we're not seeing severe selloffs. Because the charts are showing a consolidation pattern forming...and in my opinion, charts tell the truth.

My game plan going into the remaining week: I will continue to hold my short positions and monitor these 3 indices very carefully. If all 3 indices hit the neckties and BOUNCES, I will go on record right now and say I will cover all my short positions and reverse my stance for the time being even if the stocks I'm shorting have not reached my optimal price target. Because there's no saying how high the market can bounce back up and it is a sin to not lock in profits when it's there.

However, if the indices reaches this necktie point and PIERCES it with confirmation (so meaning a definitive pierce and not a fakeout), then I will be confident in adding to my short positions. And riding the wave down.

So how much more room to go down before the possible bounce? As of Wednesday 4/9/2008:

Dow Jones closed @ 12,527. Necktie support is at 12,368. That gives the market potentially another 159 points of downside.

Nasdaq closed @ 2322. Necktie support at 2300. That's 22 points of downside.

S&P closed @ 1354. Support at 1339. 15 points downside.

I will be watching the next few days very carefully. Hopefully you will too. I acknowledge the problems the current economy is facing. But as the saying goes, "Wall Street can stay insane longer than us solvent". Just follow the rules, and don't listen to the wall street hype.

Invest wisely, and be careful out there. Good luck to us

- DL