Some market thoughts

Posted by downtowntrader | 1/26/2010 03:55:00 PM View Comments

Everyone once in a while I like to post some random thoughts on the markets. I think this type of post helps me by forcing me to corral some disconnected rambling thoughts into more coherent thoughts with a specific purpose.

  • I was bullish on financial's until proven otherwise, and it looks like I was proven otherwise. It sure looks like a bulltrap was set into motion on XLF and financial's like GS, JPM, etc.
  • I've always hated airlines, but I still find them intriguing here and haven't sold my position in Southwest Airlines Co. (NYSE: LUV) yet. Many of these stocks have withstood higher oil prices, an attempted terrorist act, and continuously weak economic data and have held up above their 20 and 50-day moving averages.
  • Been sitting on my hands last several days as markets throw up. There has been some real damage to many stocks and I see two possible trading scenarios setting up. The first is a plunge to new lows in the next few days after no real rally attempt or consolidation. I would find this more bullish, as it would flush out a lot of weak hands and setup a possible snap back rally that could be pretty sharp. The other scenario would be a weak bear flag consolidation that would setup a great shorting opportunity.
  • Some of the underlying thinking behind these scenarios is that we are starting to get oversold on the Mclellan Oscillator and T2108 (stocks above their 40day MA). We still have room for a plunge, but could get a reprieve already. We theoretically could resume the uptrend from these levels, but the price action in some market leaders recently is suggesting more weakness ahead.
  • I've seen several traders attempt at catching a falling knife lately and would like to share my thoughts on the concept. I think its a perfectly valid trading setup to take a stab at picking a bottom, but its probably not for the average trader. The reason I say this, is the average retail trader has a problem managing risk and therefore stopping out of this type of trade. Trying to pick a bottom can be a complicated setup and often a trader will get whacked when they attempt to pick a bottom due to a host of reasons. Often, traders will be early to the party as stocks will move lower than can be reasonably expected. Sometimes you can time a low, but the stock ends up trading sideways before rolling back over. Other times, it will start to move higher only to get the rug pulled out from under it and a trip to even lower lows. The key to this trade setup is for a trader to really understand what the trade setup is and then aggressively playing it. Where the typical retail trader fails, is in buying something just because they perceive it to be a good value with no real plans for how to sell whether the trade goes well or not.

Good Trading,


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