Tuesday, January 17, 2012
Stock Pullback is the Next Big Move; Euro Rally Creates Good Shorting Opportunity
There's nothing new to add to prior posts. Stocks continue to flip flop around with an upside bias on light volume and diverging momentum suggesting the next big sharp move will be to the downside. Ideally, 1356 in the S&P cash index needs to hold for the bears to still have a high probability trade in my opinion. I'm adding to my current short position as the market rises.
Five Fatal Flaws of Trading
On the hourly chart, the RSI is diverging drastically from prices. This doesn't signal when a turn is coming necessarily, but it does suggest underlying weakness and that a pullback is probably the next big move ahead. Also notice that the daily stochastic is starting to trend downward. Again, not necessarily a good timing indicator, but a suggestion that the next big move will be down. To me, the only question is whether or not the upcoming pullback is going to just be a temporary decline before moving higher, or if it's going to be a major top signaling the next major downphase has started. The wave count suggests the latter. But I can't say with any level of certainty when stocks will stop floating higher, so I don't want to just load up on the short side right now since I could encounter a lot of pain if this float higher continues much longer. And I don't want to wait for the decline to jump in short because it may decline overnight several hundred Dow points and I'll miss most of the move if it turns out to just be a short term decline. So I decided to simply just add small short positions as the market moves higher and average into the market on the short side. It's the best way to play this type of market and reduce risk in my opinion.
Learn Elliott Wave Principle (EWP)
Although stocks are boring me to death, the euro is moving around quite nicely, making it good to trade right now. The huge rally we got today was a good opportunity for the bears who may have missed the big previous move. I added short today at 1.2750 and put my stop just above today's high. The chance of a top here is solid, and the risk/reward for the bears here is excellent. So in my opinion, it's worth taking a shot at the short side here. If today's high is broken in the overnight European session, then I'll simply wait for another reversal pattern to reshort as long as 1.2877 remains intact.
PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.