What a Day!

Dear Club Members:

What a day in the market! There is so much to say. In my continuing effort to be creative, I will address the day's action in a question-and-answer format.

Q: What happened today? The market was all over the place!
A: Yes, it was. Before the market opened, the futures were tanking. I saw the drop in futures as a continuation of the sharp drop in price action on the S&P 500 Index during the last hour of yesterday's trading day. Remember that the professionals tend to drive price action in the last hour of the trading day. Yesterday evening, I saw the price evaporate on the futures market, thus setting up a lower open this morning.

Q: How did you see the low opening this morning? Was it a buying opportunity or a selling opportunity?
A: It depends on your time frame. For day traders, it was a heaven-sent opportunity to go long the market. For longer-term investors like our Club members, it was much ado about nothing.

Q: Please explain.
A: Well, here's the thing. The dominant trend is down and that's what we care about in our Club. However, there are always bounces even in a Bear Market/dominant down trend. For the guys with a time horizon of a day or 60 minutes, these bounces can be quite profitable.

Q: How so?
A: Well, you might recall that I said a few posts ago that the daily trend had changed from down to up. I define the trend for purposes of daily action by the MACD lines. Pull up "Stockcharts.com." Type in "$Spx" as a symbol. "$SPX" stands for the Standard & Poor's 500 Index. When the chart pops up, you will notice at the bottom of the chart a graph for the MACD lines and MACD Histogram. Now, this information is like a dashboard for an airline pilot. The MACD readings keep me on the right side of the trend on a daily basis. This is invaluable data! When the black MACD line is above the red MACD line, then you know you are in an up trend on a daily basis. It is a short-term reading. It will change as the short-term character of the market changes. Anyway, the black MACD line is above the red MACD line now. That means it is time to rock and roll if you are a short-term Bull.

Q: Ok. But how do you make money once you know the short-term trend is up?
A: Simple, You identify an oversold condition and go long the market. You buy. Oversold conditions in an uptrend are excellent buy opportunities. The harder question is defining an oversold condition in real time.

Q: There is no objective definition?
A: It depends on the choice of the investor and trader. This morning, I defined an oversold condition by going to the website futuresource. com. They have a wonderful chart of the S&P 500 contracts, including a 60-minute chart. A 60-minute chart is really good for catching turns in the market before they register on the daily chart. I then affix a MACD and Stochastic study to the 60-minute chart. Now, I was looking for a 0.0 stochastic reading on the 60-minute chart. Do you know how rare a 0.0 stochastic reading is on the 60-minute chart? It means that everyone is standing around waiting for someone else to buy. Those are wonderful buy opportunities in the short-run, even if the dominant trend is down is the short-term trend is up. I saw a 0.0 stochastic reading this morning. And I stood there transfixed.

Q: Did you execute?
A: I have a day job, so its a little bit hard to move on a 0.0 stochastic while trying to have breakfast, read market conditions, shower and get ready for the work day. I think the institutions recognize the limitations that retail investors operate under.

Q: How so?
A: Well, it is very interesting to me that the precise low of the day, 1262, occurred at 7:50 a.m. (PST). I was probably getting out of the shower precisely at 7:50 a.m. LOL! Anyway, I don't believe for a moment that the low of the day at 7:50 a.m. after a dramatic gap down open was a "coincidence."

Q:What is the take away lesson for the Club?
A: Stick with the TSP! (smile) Seriously, if you are a retail investor, you have to trust your technicals. If you see a 0.0 stochastic reading on a 60-minute chart in an uptrend, execute first and think later. You can't go wrong buying an oversold condition in an uptrend.

Q: Anything else?
A: Today was classic. We had a panic open and a late day powerful rally. I can place the price action in context. We are in a short-term trend likely to top out around July 1. When this short-term rally finishes, it should complete a Corrective C Wave. That point (1305-1315) should provide a wonderful shorting opportunity as it will be an overbought condition in a down trend. Think of the rise from 1258 to 1298 as Corrective Wave A. Think of the drop from 1298 to today's 1262 as Wave B. We are now on our Wave C to the 1305-1315 selling zone. Then, the dominant down trend should resume in July.

That's my story and I'm sticking to it!

Have a great Friday!

Your blogger on the beat,

Wink

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