Dear Friends,
Even though my earlier article talked about the DJIA going to 9000, I wasn't expecting it to go down this fast. It would seem that the situation is even much more desperate than we thought. The acceleration in downtrend is due to realization by most fund managers that this is a Bear Market / World Economic Recession / Asset Deflation Environment, aggravated by significant negative news which spurred heavy redemptions and margin calls.
Practically all the US Stock Market Indices Charts show the same thing, i.e. a big jump into the abyss. When such things happen, we have to wait for the time when the market will stabilize before buying anything. Although the technical rebound can be fast and furious, it will also be shortlived, given the extremely bearish sentiment. Theoretically we can make money from the rebound, but practically, unless we know where exactly is the lowest point, we can't. There is no such solution to pinpoint a market bottom. We can only know a market bottom AFTER it has happened. So, usually the Market Wizards don't trade on such rebounds.
From past experience reading the charts of the DJIA from 1929 to 1940, such a chart will show a rebound, and then, a downturn following the rebound. This downturn will hopefully set the floor for the next few weeks, unless further significant bad news hit the market.
Please note that there have been occasions where the rebound is just a "Dead Cat Bounce", i.e. a short lived rally, and then, the market crashes again. This was what happened in October 1929 Great Crash. This is why it is so important to ensure that the market forms some form of solid base before you buy, IF you MUST buy. It is better to buy at slightly higher prices and have a better chance of success than to buy where you think is the low, only to see it go lower. Wait for a solid base to form.
Given that the price is now quite far away from the SMA200 (Green Line), we can expect either a slow but steady climb back to near the SMA200, or a volatile wide range daily swings which goes higher over the next few weeks, after the Solid Base is formed. It is possible to trade Long if you believe this "Climb Back to Health" to happen, especially if the market volatility drops significantly.
Most of the while I do not recommend trading against the Main Primary Trend, which is Down at present, but steep crashes have tended to produce prolonged "Climbs Back to Health", and thus, this could be an exception to the rule. For the Ultra Conservative, you may wish to look at other markets while waiting for the right time to Short again, i.e. when the Climb Back to Health runs out of steam, possibly in 2 to 3 months' time.
Best wishes,
Ooi
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