Once again in response to emails, I am publishing an update to explain our current outlook of the markets.
The re-occurring question has been: Why the lack of trading activity in WiseReport Auto-Trade?
WiseReport Auto-Trades are position trades. Position trades work in time frames of 42-52 plus days. The current correction with its 100 point plus up down days (sometimes intra day) is a day traders market. Day trading requires major price volatility to work, and entails taking on major risk due to the rapid changes in direction and counter direction that a trader will experience within the one trading session. The market with its frequent counter trend reversals in the last hour of trade has been especially tricky in the past two weeks.
Another major difficulty with day trading is that the market in response to major price volatility widens dramatically the Bid / Ask on all instruments, which equates to rotten fill prices on entry, and even more rotten fill prices on exit.
From an ex-dealers perspective, this is where I watched many traders get “whipsawed” out of existence and end their trading carears pre-maturely. In the past few weeks, for every 1 day trader beating their chest and telling his story of glory, you will find there are another 9 licking their wounds. It is a well know fact within industry that professional trading desks use this time to send their employees on golfing holidays.
I have always viewed the markets as bigger than any one player, even global interventions by reserve banks haven’t lessened the fear. So if they can’t inject a degree of confidence into the equity markets, where to next? At 1427 the $SPX broke support for what was a potential test and re-test of the market. Significantly on the 14th of August the index closed for the second day in a row below its 200 day Moving Average on a daily chart. With the 10, 20 and 50 day moving averages pointing south, we were firmly in a down trend to the present levels of 1370.70, but the question is. How long is this correction going to take and how far can it go down?
To give us a feel for potential lows, we can only fall back on tried and tested technical measurements and see if we can make sense of what is before us. Just as we use Fibonacci ratios to estimate price targets to the up side we can now reverse the procedures and estimate the next level of support. Using the counter trend B-C as the basis for our measurement we can project from the top of C a 1.618 extension down to 1380. 1380 is also roughly the support level for the March 2007 fall. This is an exercise in projecting a range down, not a prediction, and the market stopping within a reasonable range either side of 1380 would be a good estimate. (This was written Wednesday.) Thursday the market had a low of 1370.70. Nine points from the estimate is o.k. by me.
In addition we can compare some range down measurements: If we take the range A-B and extend it down from C (see chart below) we get 1375.43 once again trading around the March support line. Again the markets low last night was 1370.70 what does this all mean? It means that technically at the low of last nights trading there is a high probability of a short term low. I did not say “certainty” I said “high probability”. Therefore what could happen next?
What should happen if significant support is found, is that we should see a sharp bounce? If this happens do not get sucked in and interpret this as the bottom of the market. Remember my last article “Certainty or Panic.” The market has to test, then re-test its lows before it forms a base and starts once again to trend up. For the market to rebound then fall for a retest something has to push it back down post re-bound (I predict more bad news).
For the bulls amongst us this re-test is critical for keeping us out of the market until there is some evidence that a base is forming. If it slices through the re-test the market is still falling, but what’s important is that by waiting for the re-test it stops us from taking a position on the wrong side of the market.
What’s my message here? This is a dangerous market for a new trader. This is a dangerous market for a professional trader. If you take a trade profits should be taken quickly. (We may open a trade tonight.) This market will be suitable for position trading when a basing pattern is complete. This will may develop quite quickly. We have 108 potential trades sitting on our order book waiting to be triggered.
Kind Regards,
Paul Wise.
Last note the AUD has had a dramatic fall in the last week. Clients holding large USD funds will discover that this is a huge move in their favour.
