Opening Position
July 2010
Can we say confidently that the long-awaited downside in the markets has finally shown up? After months and months of being in overbought territory and broader indexes all inching up and up on light volume, not to mention weak economic growth globally, it appears that the market is beginning to do what it is supposed to be doing: pulling back. Although many market participants may argue that the “flash crash” on May 6, 2010, triggered the selloff, I have to say otherwise. If you bring up a chart of the Dow Jones Industrial Average (Djia) or the Standard & Poor’s 500, you can see that the signs of a selloff started as early as the end of April 2010. So whether or not the flash crash happened, I think the markets would still have witnessed a selloff sooner or later.
Think about it. There was nothing to support an extended bullish rally. Take a look at the global economic fundamentals. Government debts across the globe are unsustainable, especially in the eurozone. We’re also seeing very slow growth in Japan. And things in the US still haven’t stabilized. So the rally we did see was overextended and a selloff was way overdue; it was just a matter of when. And I think it’s finally here.
Selloffs, typically hated by investors and portrayed negatively by popular media, are always a pleasant relief for traders. It’s a time to sell off our long positions and look forward to reentering the market either with short positions or await a reversal so we can open those long positions again. At times like these, I can’t help but spend hours poring over charts and applying as many techniques as I can to identify that next support level. Is the market going to hit the next Fibonacci retracement? If it does, will it turn or will it continue lower to the next retracement level? Or are prices going to respect a specific moving average before they turn up again? Are they going to adhere to Elliott wave patterns? Then, of course, you can see if there are points where there is a confluence of various indicators or trend tools, which makes them more probable turning points.
Then there is the question of how long we can expect this retracement to last. Timing, as we have learned all too well, is critical when it comes to trading, whether a market is trending, pulling back, or in a trading range. I, for one, will be watching these markets very closely just so I can time those entries and exits just right.
Jayanthi Gopalakrishnan, Editor