1262 - Buy Zone

Good Morning!

It is early. I am still a little sleepy. However, I wanted to share my developing thoughts before my busy day kicks into gear.

1262 should be a buy zone this week for the following reasons:

First, a 100% retrace of Thursday's dramatic up move would take us to 1262. This means that everyone who decided that 1262 was a good buy on Thursday will be either underwater or flat. This realization should produce demoralization among new Bulls. Demoralization among new Bulls = a buying opportunity in an up trend. (Remember, I use "up trend" advisedly here. When I say "up trend," I mean "up trend" until the S&P 500 Index hits the downward sloping 50-day moving average @ 1318. By no means do I believe that the dominant trend has changed to up.)

Second, a test of support is required to put in a bottom. First, we tested the 1258 low with Thursday's 1262 low. Another test of 1262 is consistent with how bottoms are formed. Remember that we profit by buying fear. Maximum fear is at the point of the re-test. Our minds will produce fear because we project a drop from 1268 to 1262 as continuing into infinity. Markets don't work that way. They cycle, although our minds are not hard-wired to presume a cycle. High-speed computers have an advantage over retail investors in this regard. Computers don't have to get dressed for work. Computers don't listen to CNBC and feel the fear. Computers don't imagine scary conditions. Computers operate on raw data. We would profit to do the same.

Third, corrections against the trend come in three waves. This is Elliott Wave Theory 101. So, if we trust our technicals, then we are in an up trend until the downward sloping 50-day moving average or roughly 1318. The Correction down from the 1298 high should come in three waves. I'm thinking that Wave A down was from 1298 to 1262 (Wednesday-Thursday). Wave B up was that dramatic short covering rally on Thursday (1262 to 1282). We are now in Wave C down from Thursday's 1262 short covering high. Friday was one long Wave C down all day with a low of 1267 and a close @ 1268. Since Wave C should surpass the Wave A low to trigger stop loss orders, 1261 is a logical terminus for Wave C. Then, the fun begins on the road to the downward sloping 50-day moving average or 1318. I am not that good, so I would buy just above 1261 and wait for the market's behavior to confirm my strategy.

Fourth, the closing trin on Friday was 2.27. A high trin suggests that more money is leaving stocks then entering stocks. As a contrarian, I take a high trin reading as a buying opportunity. Any closing reading above 2.4 is considered high. While the closing trin was not above 2.4, the high of the day was 2.6 That's good enough for me. In my experience, the following day should produce a buy opportunity, particularly since we are in a short up trend.

Finally, there are so many long tails on the japanese candlesticks in the 1258 to 1268 zone. (By this point, I have totally lost Barbara/smile.) A japanese candlestick is a way of depicting price action for the day. A day has four points of interest for the trader and investor: the open, the low, the high, the close. If the close is higher than the open, this day is considered a bullish day. The candle will be white. If the close is lower than the open, this day is considered a bearish day. The candle will be red. Sometimes, the opening price will be followed an early morning plunge or drop in prices. These early morning bulges (to use Larry Williams' phrase, see How I Made One Million Dollars Last Year Trading Commodities) sometimes reverse. When the reversal in price exceeds the opening price, then the drop in price produces a visual long tail on a chart. Long tails reflect buying pressure in the market. They are good places to buy as the odds favor higher prices ahead. For examples, pull up a chart of the market action on February 5, 2010. The market opened at about 1062 and then dropped about 20 points. You can be sure that early morning drop placed the fear of (insert the word of your choice) into the hearts and minds of retail investors that morning! But the professional institutional investor was lying in wait for a rebound. (Remember Gary Smith's admonition that the time to buy is a late day reversal and positive close after a period of price decline?)

Here is the take away point about February 5, 2010. February 5, 2010 was the low point in the market until the April 26, 2010 high. The market never came close to 1042 again for months. The price action on February 5, 2010 produced a long tail from which the market bounced onward and upward. For another long tail, look at May 6, 2010. Yes, this was the day of the infamous Flash Crash. But the market rallied sharply into the close. The price action produced one of the longest tails in 2010. Is it no surprise that the bottom on May 6, 2010 was met with buying pressure that took the S&P 500 Index up to resistance @ the 50-day moving average of 1173? There was also a long tail on May 24, 2010. From a low of 1042, the market bounced up in corrective fashion until making a high of 1131 on June 21 just below the downward sloping 50-day moving average.

Conclusion.

For these reasons, I consider 1262 to be a buy zone. I hasten to add that I consider the downward sloping 50-day moving average at 1318 as resistance. The character of the market during the first hour of the trading day will determine whether a buy recommendation is issued.

Have a good Sunday!

Wink

Quote of the Day:

"Without a doubt, the most important trading advice I can give you is

BUY ONLY ON DOWN DAYS
SELL ONLY ON UP DAYS"

Source, Larry Williams, How I Made One Million Dollars Last Year Trading Commodities, page 128.

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