This Week’s Battle Plan
When Four Points
Means More Than 480 Points
On Wednesday, the market exploded. It was the second biggest up-move
in the history of Wall Street. The Dow rose over 480 points. The
butcher not only killed the lamb, he killed the whole flock! (see last
week’s commentary) When everyone looks back at last week, they
will all focus on Wednesday. It’s the day that stands out the most.
But there was a day that stands out more. It’s a day the Dow moved a
whopping four points. That day was Thursday.
So why does a four point move become more significant than a 480 point
move? Read on…
That Damn Lamb Should Have Won Again!
The Dow should have been killed on Thursday. No, that’s an
understatement. It should have been decimated. Let’s walk through
the events:
First, we have been in a one-way spiral down since March. No secret
here. And over the past 120 days, the market has found every reason
under the sun to sell off. Second, after the close Wednesday, AOL
announced the SEC is opening a fact- finding investigation into their
earnings. This news alone has recently taken the markets significantly
lower when other major companies have revealed such information. But
let’s not stop here. Durable goods sales came in Thursday morning, not
only weaker than expected, but much much weaker. Ninety minutes later,
housing start numbers also came in weaker than expected. And then to
top off the mother-of-all-bad-news days, a few hours later,
Citigroup
(
C |
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News |
PowerRating) and JP Morgan
(
JPM |
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PowerRating) get hit with rumors that the
SEC was investigating them for fraudulent practices tied into hiding
debt for Enron.
So let’s add all this up. We’re in a bear market that has found every
excuse possible to sink lower. One of the biggest media companies in
the United states is being investigated for accounting irregularities,
two very weak economic reports hit within a 90-minute span, and two
companies in the Dow Jones Industrial Average are being accused of
fraudulent business practices tied into one of the largest business
collapses in history. And if you didn’t already know the outcome, you
would have to guess the market should have dropped 300, maybe 400
points on this news. It did not. It dropped four. And more
importantly, it was the first time in a very long time that it both
ignored bad news and then followed through higher the next day.
This Week’s Lesson:
Thinking Of Banging Bids For A Living? Think Again
In spite of the upward bias from the last half of the week, we remain
very oversold. And combine this with a market that at least for three
days last week said “I’ve already factored in this negative stuff
in and I’m shrugging it off and going higher.” And this is a heck
of a lot healthier behavior than the behavior we have seen previously
where, for example, the President and Greenspan tried to talk this
market up. But the market was not ready to listen to them. It ignored
them and moved lower. Late this week it did the opposite. It
ignored the bad news and moved higher. There are few magic bullets
in this game. Few magic rules. But one of these rules is that “it
pays to listen.” Markets like to talk. And Thursday the market
talked loudly. Yes, the trend is down. Anyone can see this. But maybe,
with Thursday’s reaction to all the negative news, it will lead us to
more days like Wednesday, a day that was long overdue. A day the
butcher killed the lamb and killed all the short-sellers who told us
how easy it is to simply short stocks and make a great living. Yup, do
nothing else but bang bids for a living. Sorry, but markets don’t
work that way. Markets behave in a predictable one-way manner for
short periods of time. Just as they have over the past four months. And
when this occurs, too many people come to believe that this is the
only way that markets always behave. There is nothing further from
the truth. Yes, they many times do behave in a predictable one-way
manner. Until they completely change the rules and start to behave
differently. Wednesday, Thursday, and Friday they started to behave
differently.
Online Traders
Expo
On August 9, 10 and 11, The Online Traders Expo is having their annual
event in Anaheim, California. This has turned into one of the premier
weekend events for traders. If you plan on attending, both Don Miller
and Dave Landry will each be conducting a seven-hour seminar. Don will
be teaching how he trades the QQQ’s (and now the SPY’s) for a living,
and Dave will be teaching his swing trading methods. If you would like
to attend, you can get more information at the Online
Traders Expo site. Also, I’ll be there on Saturday morning at the
TradingMarkets booth. If you get a chance, please stop by and say
hello.
This Week
As we discussed, we are still oversold. And volatility is still at
extremes. But Wednesday was good and Thursday was even better. When
you combine these things, it gives us an upward bias for the week.
This bias will be better read with all the economic news coming in
this week. Should the news be good and the market declines, it will
tell us the market likely has another leg lower. But, should the news
be bad and we rally…well, you’ll know what to do. You’ll again bet
again on the butcher. And hopefully get returns like you saw on
Wednesday.
Have a great week trading (and remember, once in a great while, four
points really can mean more than 480 points)!
Larry
Connors
and Brice
Wightman
Larry Connors is
CEO and co-founder of TradingMarkets. He is also the author of four
books on trading, including “Street
Smarts,” co-written with Linda Raschke, “Connors
on Advanced Trading Strategies“, and “Trading
Connors VIX Reversals.” Larry also recently released the
video course ”Buy
The Fear, Sell The Greed: Timing The Market Every Day For The Rest Of
Your Life.â€
Brice
Wightman is a Market Analyst at TradingMarkets.com