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New Year, Old Issues
The market has kicked off the New Year with a bit of a hangover on Wednesday. The first trading day of 2008 goes down in the history books with the dubious distinction of being the worst point decline for the Dow of any start to a New Year. The 220-point drop was attributed to weak manufacturing data and oil prices touching a record $100 barrel. This heightened the concern that the economy would continue softening, and in turn, could hurt corporate profits.
As I expected, all the major averages (except for the Russell 2000) did manage to eke out modest gains for 2007, but the landscape for this year looks a bit sketchier. The economy is clearly starting to slow, as evidenced by the punk sales figures for Christmas and the aforementioned ISM manufacturing index. This by the way came in with a reading below 50 for the first time in several months (a reading above 50 indicates an expanding economy, whereas readings under 50 signal contracting activity in the manufacturing sector). In addition, the employment situation is becoming more tenuous by the week. Unfortunately, the credit crisis is forcing many financial institutions to trim their work forces and the fallout is finally being felt on Main Street.
With a fresh year come new opportunities, new challenges, and new goals - the demarcation in which everyone makes their resolutions for improvement. I'm always amused – and sometimes annoyed – at how crowded the gym always gets the first week in January. I also know that as the weeks go by, the crowds will thin out, and by mid-February, only the "regulars" will remain. I'm using this example to illustrate a very important tenet of trading stressed in the classes we teach at Online Trading Academy, and that is of course, discipline. Why is it so hard for most people to stick to a plan until a goal is attained? I can go into the "planning" aspect of discipline, but instead, I'm going to delve into the root causes of what leads to a lack of discipline.
I believe certain personality traits account for people having a hard time following rules, always being late and never being able to finish what they start. As we know from our own personal trading experiences, one such trait is impulsiveness. Holding back and having the patience to wait for the right set-up can sometimes be tough; but having the self-control to do this is the difference between a great trader and a mediocre one. All traders have to self-diagnose, and sometimes self-medicate from time to time. To this end, we should work on stifling those unwanted aspects of our wetware (human brain cells as computer analogs) as often as possible.
The other aspect of this struggling-with-discipline theme is the "fear of losing money". If a trader becomes riddled with anxiety every time he or she enters the market, this is symptomatic of two likely issues. First, this individual is probably trading more contracts or shares than he can handle psychologically, and is trading with funds he cannot afford to lose. His mindset becomes one of NOT LOSING versus WINNING which makes the trader miss opportunities (can't pull the trigger) and/or exit trades prematurely before they are given a chance to work. A trader's focus should only be on the structure of the market, period! Making money is the by-product of good planning and execution.
In our usual fashion, we'll move on to the technical aspects of the ER2 (Russell 2000 e-mini). First, let's peruse the weekly chart below in order to capture a longer-term perspective of where this market currently stands. Remarkably, the ER2 is trading near the same levels that it was back in the summer of 2006 (19 months ago). Additionally, notice that all of the gains for this market occurred in the first half of 2007, leaving the second half in a big trading range.
If we dial down to the daily time frame below, the October lows begin to loom very big in the first quarter. Notice the downward slope of the 50-day EMA. This leads me to believe that this level will be breached, sooner rather than later.
Lastly, the shorter-term hourly chart below shows us that maybe the selling will pause for a day or two, as we seem to have found some support at the 78.60 Fibonacci retracement level. I think this will only be a respite for the sellers, since I view the trend as lower for now.
In Summary: the new trading year has arrived, and just as I suspected, it's gotten off to a rocky start. My sense is that it's not going to get much better in the near term, either. The market's action for the last week has been very ominous, though some would argue that the decline is on low volume. This argument always puzzles me because I don't think people feel any less pain, if their stocks go down on heavy volume or light volume. The big data point for this holiday-shortened week is the payroll number early Friday morning. As usual, market participants will be eagerly awaiting the release to see which way the Fed will lean in its meeting later this month. As you can probably tell, I've become a bit bearish since my last newsletter; this is because of the information that's in front of me at the present. When things change, I will also change, but for now, rallies are to be sold.
So until next time, I hope everyone has a profitable week.
If you have questions or comments, please e-mail me at gvelazquez@trading academy.com
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Gabe Velazquez is a professional
trader with 14 years of experience. His focus is intra-day and swing trading the
ER2 (Russell 2000 e-mini) using technical analysis as his primary tool. Gabe has
managed both stocks and futures accounts as well as conducted educational seminars
on technical analysis for the past ten years. He is a frequent guest on Biz radio,
where he shares his market knowledge and utilization of technical indicators.
Gabe also teaches the
