Stock Market Direction
The Smart Profits Report: Issue #405
Wednesday, March 21, 2007
Stock Market Direction: This Volatile Market Can Eat You Alive… Here’s What To DoBy D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
The stock market direction, in an extraordinary upward climb from July 2006 to February 2007, was a wonderful rally.
But it was ever so uneventful. In the end, it became almost boring, shooting straight up with very little volatility. The biggest pullback during that time was a measly 2%.
Today, however, that’s all changed… and the stock market is at one of its most interesting junctures in a long time. It’s frothy. It’s volatile. And its next directional move is a bit of mystery.
Hmm… volatile markets that can’t decide which way to go. That’s either a recipe for disaster - or for huge profits. Let’s see how to avoid the disaster part and concentrate on the profits…
Make A Plan… And Dodge Disaster
Simply put, the only sure recipe for disaster here is indecision.
If you keep trying to go short every time the stock market breaks down, then go long every time it pops back up, a volatile non-directional market like this current one will eat you alive. It will take a pound of flesh a day (or more) if you let it.
So how do you combat the inclination to chase volatile moves like a dog chases its tail?
The answer is to adopt a market model or belief about how the stock market direction works. Then make a plan based on what the model tells you - and stick with it.
Two weeks ago we talked about Fibonacci retracement levels. This is based on the work of a 13th century Italian mathematician called Leonardo Fibonacci. In the investment world, these levels are usually 38.2%, 50% and 61.8% of an index/stock’s major move - and give us an excellent model for understanding this stock market direction. Let’s quickly revisit the theory to see how you can approach this new situation…
Leo’s Tri: How Three Numbers Can Clear A Path Towards Profits
Take a look at the S&P 500 chart below, which shows the three longer-term Fibonacci retracement levels drawn.
As you can see, despite the big down day we had on February 27, we still haven’t quite retraced 38.2% of the move up that began in July 2006.
This basically means that if the bull run is to resume strongly, then this major support area at 1,370 should hold. If it doesn’t, then we can expect a continued move down to the 50% retracement level around 1,340 area.
However, we can’t get too excited about the upside until the old highs are broken at around 1,460.
The Shorter-Term View of the Stock Market Direction
If you want to make investment decisions in a shorter time frame, the retracement levels from the S&P 500’s February highs around 1,460 to the March 14 low of 1,363 give us a useful model. Let’s turn to the charts again:
Here, you can see that the price has already broken through the 38.2% retracement level several times, but the 50% level is holding firm.
That means the 1,411 area now becomes very important. Bulls cannot get too excited until we have a close or two above that level. And bears have to hold fire until we get back below the March 14 lows, too.
This is just one model you can apply to your investment decision-making process. But you can see how merely having a theory makes the process easier - and lessens (or eliminates altogether) the need to chase every volatile move.
My tip for now is to plan for a volatile sideways stock market direction until the price action tells us that it’s moved into a new, more significant range that matters.
Great trading,
D. R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- Wednesday sees the Federal Reserve make its latest interest rate announcement - with the bankers widely expected to leave rates unchanged once again. Although these announcements occasionally have an impact, they’re usually minor market disruptions. They’re really much more important for the media than for investors. But it’s worth having a plan in order to mitigate any potential price upsets - especially if you’re a short-term trader or swing trader - so you don’t get caught on the wrong side of a market reaction to the announcement.
- Negotiating your way safely through the stock market can be a tough task - even at the best of times. But when the market turns volatile - as we’re seeing today - the decisions you make become even more crucial. That’s where the proven expertise of an elite group of former money managers is invaluable. Armed with over 480 years of experience between them, the 31 secrets they reveal will show you exactly how to consistently dodge the stock market’s bullets and book gains of 119%, 190%… all the way up to 4,001% a year. The research is now public, so for more information, click on this link.
Related Articles:
- Leonardo Fibonacci: Predicting The Stock Market’s Next Move With The Fibonacci Sequence
- Fast and Furious Volatility is Back in a Big Way: How To Profit Using Leg Spreads & The VIX
- Trading Index Options: Two Ways To Profit
The Chart Of The Week
While the broader stock market has taken a beating, the telecom sector has shown amazing resilience. This chart of the Telecom Holders (AMEX: TTH) shows that the drop in the sector was less severe and the recovery was faster than for most other sectors. If we break to the upside in the general market, look for the telecom sector to be a leader.
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