Thursday, September 29, 2011

Bull Trap Has Been Set for US Stock Investors

The Markets

If you're like a lot of people, confused by the volatility of the stock market and the herky-jerky, up-down pattern that has persisted for over two months, you are not alone. Most people simply have given up on stocks and may take a look at their 401k or investment plan statement from time to time, but the day-to-day fluctuations are simply too severe and too random for anybody to really get a grasp on what's going on with stocks.

Fear no more, because Some technical analysis and a couple of definitions from Investopedia explain the condition to the letter. After studying the pattern, it is clear that what we have been experiencing is nothing more than a Bull Trap with a series of Fakeouts built into it.

Using the Dow Jones Industrials as a guide, we know that after the initial decline from 12724 on July 21 to 10720 on August 10, a loss of 2000 points in just 14 sessions, the Industrials have generally traversed a range from 10733 to 11613, a mere 900-point range which the markets cannot seem to penetrate either on the upside on downside. In other words, it's been hovering - up and down - closer the bottom, setting up the classic Bull Trap and offering a series of fakeouts when in an uptrend, only to collapse.

One can take the news of world financial events at face value or ignore them at this point, because unless something truly extraordinary occurs, the global financial conundrum won't matter to the market, as the trap has already been set and the next move will be lower, below the range and below 10733, probably down to 10200 or 9400 before it's finished.

Of course, the timing is everything, and this sideways trading could continue for a few more months or the final breakdown could happen over the next few weeks. It will appear as if the world is coming to an end, but it won't be, as there will still be at least 9000 Dow points underneath as a base. Those caught buying in here will be hung out to dry, with lots of overhead resistance, trapping them into losing positions for six months to possibly a few years, depending on which individual stocks one has bought.

So, the correct strategy at this point is to short near the top of the range, or the middle, but be prepared to wait. Options players may be interested in long-dated, out-of-the-money naked puts on the Diamonds (DIA), which tracks the Dow. A tiered strategy starting in November, December or January may be the best way to go, depending on one's own risk appetite.

That's all for today, some food for thought, as stocks finished in a very diffuse manner again, though in reality it was nothing but another failed rally.

Dow 11,153.98, -143.08 (1.30%)
NASDAQ 2,480.76, -10.82 (0.43%)
S&P 500 1,160.40, -9.34 (0.81%)
NYSE Compos 6,974.91, -97.97 (1.42%)
NASDAQ Volume 2,329,045,750
NYSE Volume 5,151,046,000
Combined NYSE & NASDAQ Advance - Decline: 4292-2216
Combined NYSE & NASDAQ New highs - New lows: 15-367 (still screaming SELL)
WTI crude oil: 82.14, +0.93
Gold: 1,617.30, -0.80
Silver: 30.52, +0.39

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