Trade The Technicals First

• November 15, 2001
• Dave Floyd

The market
had its first dose of real selling pressure yesterday morning, and
unlike other sessions, the market did not go on to make new highs. The S&Ps
closed at roughly a 50% retracement of yesterday’s high / low. The Nasdaq was
almost a carbon copy. Due to the selling pressure early on, trading the moves
was a bit less of a battle that it had been in previous sessions. 

I had a long talk with a TM
subscriber/contributor last night and we both agreed that much of the "big-picture"
price action lately was contained to just the futures, with the underlying
stocks not being as responsive. Yesterday the stocks were moving in lock-step
early on, yet still not to the same extent as a few weeks ago. 

Go back and look at some of the big
liquid trading stocks and overlay their intraday one- and five minute charts on
top of either the S&P or Nasdaq futures chart of the same time frame. You
will find that very few are trading tick for tick with the futures. A very odd
situation. This can be partially explained by a lot of arbitrage going on, as
futures contracts are being bid up without a lot of buying of the underlying
stocks. Once that arbitrage opportunity is spotted, it is exploited and will
create some rather erratic price action in the underlying stocks. Until this
scenario changes, it is imperative for your to be very selective on your trades.
Trades based on a hunch or a whim will degrade your performance measurably. Trade
With The Trend has never been more prophetic

The chart below depicts how I made a
few trades based purely on the trend as well as using a KTN
as a "trigger" point.  The "X"
denotes a trade I did not take, and will usually never take. Yes, the trend is
down by virtue of the slope of the moving average, but the price is actually
above it at this point. In addition, you are sitting right on support at 1142. 
In essence you have two strikes against you right from the start if you wanted
to short. The more prudent approach is to wait for the 1142 level to be broken
and then play it from the short side as it rallies back up to the moving average
(Point B) and has not traded back through the 1142 level. The
nimble trader may have made money shorting at Point X,
but the odds were much more in your favor at Point
B.

One-minute
chart of December S&P Futures (SP01Z) 11/14/01

The release of the Jobless Claims was
a bit of a surprise on two levels, initial claims were down 8,000 but continuing
claims were up 140,000, bringing the total number of unemployed to around 3.4
million, the highest since 1983. The market appears to be digesting that number
and does not like it. 

As I have been mentioning lately,
trading this market from a fundamental perspective has been disastrous.
Nonetheless, being familiar with what is happening on an economic level is still
necessary. When and if the market turns to the downside, your conviction on
establishing positions will be far greater. Until the technicals line up, leave
your opinions and views at home. In reviewing some of my recently closed-out
position trades, it was clear I established some of the trades based on my
fundamental viewpoint. The trade should be dictated first by the technical
picture, then the fundamental view can be added to give you a level of
conviction.

Key
Technical Numbers

As always, feel free to send me your
comments and questions. See you in TradersWire.

Dave