Sunday, October 26, 2008

This Week's Trade

As we head into another week of trading we can be sure the volatility will persist. Like I said Friday, after the ugly gap down and weak finish at the end of the day, its hard to see the market not breaking down below 850 this week. Friday marked the lowest close on a daily and weekly basis since late 2003. We have retraced a significant portion of the prior bull market's advance and it now seems probable, in my opinion, that we head lower to test the lows of the early 03 period when the market hit lows around the 768-840 on the SPX. I could be wrong and this market may hold the 850 level and just grind around current levels but something tells me we have at least one more leg down to beware of.

This week's economic data to watch for includes Monday's New Home Sales, Tuesday features Consumer Confidence, Wednesday we have Durable Orders and the FOMC policy statement (more on this below), Thursday the market is greeted with Initial Claims and the first look at Q3 GDP. Finally on Friday we get a look at Personal Income and Spending, Chicago PMI, and Michigan Sentiment. With Fed meeting set for Wednesday this week it should be interesting to see how the market trades ahead of the statement. It's tough to see them not cutting rates again, but it really doesn't matter anymore. The market has been telling us that all along. It is far too late for this market to be saved by rate cuts because simply put, the Fed waited too long and did not act upon the current credit crisis at the first sign of trouble. They waited to bandage up the wound when the patient was already shot and bleeding to death, instead of backing the endangered patient when the troops first attempted an attack (the housing bubble bursting). I do not think a rate cut will do one damn thing so please Ben Bernanke, take a stand and do not cut rates.

Looking at the VIX chart I would like to see volatility come in and actually break beneath the 20 day ma to feel like this market can rally more than a whimper. The 20 day has been support and kept the trend higher since way back before Labor Day if you can believe that. The 20 day ma now sits around at 57.67 and it is clear that even once we come down below that area there will be a new norm in volatility, where the floor may be around 35-40 instead of the past 20s. For traders this is great as our objective is to simply play the volatility intraday for the wild swings it produces.

I think this week it is best to keep our scalper's mentality when trading. Taking sizable quick gains is the best way to go in this market and has worked quite well for me in the ES futures lately. I will be trading the futures from the short side more than likely to begin the week but this is likely to change as I am expecting another choppy up and down market that will be hard pressed to establish a trend. Support below is 868, 853, 843, 837, 788, 770. Sell into resistance at 875, 898, 915, 920, 930, 939, 945, 955, 963, 980, 1000.

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