MARKET WRAP UP 05/26/10
In sharp contrast to yesterday, today we saw a strong gap up at the opening bell that was faded for the duration of the trading session, as the S&P 500 finished down 0.57% to close just under 1068. Whichever reason you choose to finger as the culprit for the weak close, whether it be the weak Euro, Steve Ballmer’s negative macro comments, or an overall broken market, it is crucial as a trader to keep a level head. Anecdotally, today I noticed many traders on television and around the internet grow extremely frustrated with the market’s inability to turn on a dime and hold its gains.
However, as I noted last night, even if we do, indeed, confirm yesterday’s bullish hammer, we will likely need a few days of consolidation to heal charts and stabilize the market. Stabilizing a market that has endured the type of technical damage that we have seen over the past six weeks requires an awful lot of capital and patience by the bulls. So, why not let others step in and do the hard work for us? If the bulls are unsuccessful in their attempts to heal the market, then they will surely be burned, as we could easily be consolidating before completing another leg lower.
In fact, if you look back at the bullish hammer that marked the bottom of the January/early February correction of this year, you will notice several choppy trading sessions after we printed that reversal candle. To state it simply, the fight was on between the bulls and bears, and eventually the market resolved to the upside. The best risk/reward strategy would have been to wait for the resolution, and only then allocate your capital to the long side. Unlike the fast and furious “elevator down” nature of bear markets, a healthy bull market is going to give you better entry points.
It is also worth noting that just because we had a few choppy–and even down–days in early February, that did not negate the hammer that was printed on February 5th. Similarly, today’s price action does not negate yesterday’s hammer. The updated and annotated daily chart of the S&P 500, seen below, should illustrate the similarities between early February and now.
This analysis should reveal why cash continues to be an ideal position for swing traders right now. We are still relatively oversold, but we can most certainly form a choppy bear flag and break lower over the coming days and weeks. On the other hand, if yesterday’s bullish hammer proves true, we are still going to need to stabilize this market before moving higher. I might miss out on some quick money to the upside, but I am always looking at the potential rewards in the stock market through the prism of risk.
Hey, don’t take my word for it. Listen to George Harrison. It’s going to take money, patience and time to do it right.
[youtube:http://www.youtube.com/watch?v=-_niy2ZM5Jo 450 300]
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