Trading What Is

MARKET WRAP UP 06/07/10

In the sequel to last Friday’s thrashing, the bears delivered several more sharp blows to the bulls into the closing bell today. With the S&P 500 off 1.35% to finish at 1050, Mr. Market is punishing anyone who is trying to get in his way.   What we are seeing is a constant flow of traders trying to call a bottom, buy stocks, and then eventually get stopped out or sell out in frustration when the market tumbles further. This type of action is the essence of a bear market, and helps to reinforce the market to the downside. It is only when traders give up on the idea of picking a bottom, that we will get close to seeing the selling pressure alleviated and exhausted.

As the updated and annotated daily chart of the S&P 500 illustrates below, we have remained in a steep downtrend since late April, complete with bearish pattern after bearish pattern.

With our close at the 1050 level, we are back to an area that has served as key support dating back to early February.  As we become more and more oversold, it is likely we will see some kind of bounce.  However, whether this bounce is ephemeral or lasting remains to be seen. From a swing trader’s perspective, you should resist the urge to immediately stick your bid in if we see a bounce in the next day or two.  The bounces that we have seen since mid April have either been total duds that have abated within the same trading day, or have been exuberant but ultimately short lived bear traps.  In order for swing trading opportunities to present themselves again, the bulls have an awful lot of work ahead of them.  Not only do institutions needs to start providing some heavy buying volume, but the charts of many key stocks, such as $FCX, need to stabilize and form healthy bases, if we are going to move higher in a sustainable manner.

To an impartial observer, it may seem foolish to see bottom callers inflicting this much economic harm on themselves day after day, but human emotions are powerful and can have a profound effect on one’s trading.  One of the best remedies to trading on emotion is self-awareness.  To be sure, everyone wants to make an exorbitant amount of money in the stock market.  However, it is crucial to understand that you should only trade the market that is actually there.  Trying to trade the market that you want to happen, wish would happen, would really, hopefully, maybe-would-kind-of like to see happen, is futile and ultimately counter productive. Trading, or not trading, “what is” will keep you grounded and clear headed, which is exactly the frame of mind you need to have to make the best decisions on a day to day basis.

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