OMG! A Rally

MARKET WRAP UP 06/08/10

With their backs pressed hard against the wall, the bulls managed a nice rally into the close today, as the S&P 500 finished up 1.10% to 1062.  Despite the fact that the Nasdaq and the small caps finished slightly in the red, the bulls won the day. More importantly, they have momentarily halted the bears’ stranglehold on the price action.  It is a real plus for the bulls that the volume today was the strongest bull volume that we have seen in two weeks. It is also crucial to note that the 1040-1050 zone has proven to be support once again.

With all of that said, the bulls are going to need much more than one solid day to turn the tide. A deeply oversold bounce does not an inflection point make.  While many traders were eager to rush back into the market with their bids today, throughout this downtrend we have seen several promising one day bull victories that ultimately fizzled out in a speedy and violent way.  As the updated and annotated daily chart of the S&P 500 illustrates, the bulls could bounce a bit more from here, but we would still be in a steep downtrend (see below).

The real issue is this: Whether you have already defined yourself as a trader, or whether you will let the market define you.  If you choose the later, you will be insufficiently focused in your trading style and, simply put, you will be a long term money loser despite any short term luck.  If, on the other hand, you have defined yourself as a daytrader, swing trader or long term investor, you should know exactly what you are looking for in terms of the various opportunities that the market presents.

Many unprofitable traders figure that they will just do whatever makes money, whether it be intraday scalping, or buying and holding a blue chip company forever.  What usually happens is that they try to daytrade a stock, only to see it become a losing position.  They then average down into the position as it falls, and figure they will turn it into a swing trade.  Before long, they become frustrated and either sell at a huge loss, or continue to average down out of stubbornness and turn it into a longer term investment.  Even if they happen to turn a profit on that given trade, they have let the market define them.

You want to specifically avoid this type of situation as a trader, especially in the current volatile environment.  While bull markets may be forgiving, corrective markets will punish you for any lack of discipline.  As you know, I have defined myself as a swing trader. I fully recognize that I have missed countless shorter term opportunities, in terms of intraday or one-two day trades. In retrospect, I should have been more aggressive to the downside, as I took off all of my short exposure back when the S&P was above 1100.

My main focus right now is respecting the fact that we are in an unhealthy, choppy, news driven market full of broken charts on heavy selling volume.  I want to, above all else, preserve my capital for a better setup down the road.

Who knows? It may very well happen sooner than you think.

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