Dysfunctional Markets Lead to Erratic Trading
Every day that passes brings another dysfunctional market to the fore. Lately, the bond insurers - also known as monolines - have been wreaking havoc in the municipal bond market. Almost weekly, we hear of some plan designed to pull these battered concerns out from under the rubble. This once pristine business is the latest casualty in the incessant mortgage mess.
The worries that these monolines could go under are legitimate, as without these companies, states and municipalities will find it hard to raise capital, and if they do find investors, the interest cost they'll pay will be much higher than they're accustomed to. One of the direct fallouts of this is that wealthy investors holding instruments known as Auction Rate Preferred Shares - in particular those that deal in the Muni market- had a rude awakening last week, when these assets were frozen due to a lack of liquidity. These instruments were sold to them by brokers as money market alternatives, and hence were labeled very safe. As it turns out, even the safest of investments are to be looked at askance in this harsh environment. This is most likely transitory, but it has shaken the confidence of many investors and has contributed to the uncertainty on Wall Street.
It looks as though the menacing tentacles of the subprime crisis not only have affected the average American, now they have extended their reach to the richest among us.
I just finished teaching this last week and as usual, I had a great time. In one of the early segments of the class, I was talking to the students about trading on the simulator for a minimum of four weeks in order to gain the confidence to launch into the markets with real money. One of my students (a retired airline pilot) chimed in and went on to tell the class he had to train a certain amount of hours and then pass his simulator training before his former employer (Continental) would let him fly their 737's. In other words, he went straight from the simulator into the cockpit of a 737 complete with passengers on board! No other trial run in the actual airplane was required of him, not one! Now that's confidence!
This underscores the need to do the work before you engage in the markets with real funds. Some would argue that paper trading doesn't feel "real". Then again, I would rather have a new trader learn how to identify patterns and execute trades properly in simulation mode than have them lose any money in the process. This practice at the very least builds "muscle memory", which better prepares the new trader for the many situations he/she will have to encounter in live trading. The true test for any new trader, of course, is how they will perform under fire. Once a trader goes live, all the practice performed on the simulator will give him/her a more solid foundation upon to which to spring into action.
Let's move on and look at the ER2 from a technical perspective. In the daily chart shown below, the range bound pattern that we had been in - seemingly for forever- has finally given way. On Monday, the support level that had been holding for the last six weeks - and three prior attempts - finally was breached, albeit with little conviction, leaving the old support level (681-682) as the new resistance. The next inflection point comes in at the January nadir, around 845.
On a shorter-term basis the hourly chart below indicates an almost textbook downtrend. Note how the 8-period EMA and 20-period EMA act as dynamic areas of resistance on most of the rally attempts. It would stand to reason then, that a change in trend would be manifested in the ER2 trading above these MA's.
In Summary: The market has been extremely choppy lately, having many fits and starts that ultimately end in a lower market. Just when it looks as though the markets are perilously close to falling off the precipice, some positive news headline crosses the newswire and the short-sellers run for cover. This lack of follow through - which I've been writing about for the last couple of weeks - is what's making it so tough for many of you out there. We have plenty of economic reports to mull over this week, but none as important as the Jobs report early Friday. We all know the economy is slowing. Is another bad employment number going to be that big of a surprise? We're in a Bear market, plain and simple. Longer-term investors should be selling rallies and we day traders should take advantage of the intra-day volatility, which I personally hope persists for a long time.
Until next time, I hope everyone has a profitable week.
If you have questions, comments or you'd like a specific topic covered, please email me at gvelazquez@tradingacademy.com |
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
