On 22nd January 2010, I wrote the email entitled, "SMA50 Breach on the Dow", and effectively, the message was, "Get OUT Now!". The Dow stood at 10,389 then. At that point in time, two scenarios were possible, i.e. the increasingly high risk of a crash or a major 5 wave downturn, OR a complex pattern formation which I call "WSTR", i.e. Wide Sideways Trading Range. However, there was no way to decide which of the two scenarios would be the reality of tomorrow, at that point in time, and thus, I did not mention them then. I needed more data, to be accumulated from observing the market / price behavior for further clues before deciding on the higher probability scenario of the two. This is inspite of my highly negative Global Macro perspective of the US and Global Economy.
In this respect, the price movements of the last 3 days on the Dow, especially last night's were the crucial acid test of what is to come. The Dow was grossly oversold as at 3 days ago, and this was evidenced by the Stochastics. But the Stochastics is not a very reliable indicator, and is merely a short term signal, of up to 3 days (bars) reliability, based on my past observations. Thus, I expected some form of rebound, but that it would be shortlived. In fact, the rebound was stronger than I expected, and lasted two days, which raised questions on whether this time around, the situation will be valid. Had it gone on a 3rd straight day of upward trend, of another 100 points, I would have had to admit that the WSTR scenario is the more likely scenario of the future. As fate would have it, the Bears showed the Bulls its ugly teeth, and the Bulls capitulated surprisingly easy, by 268.37 points last night. This is confirmation of the weakness of the Bulls, and the overall market sentiment, which has turned increasingly bearish. Forget about what news caused the Dow to fall. When market sentiment is bullish, bad news were merely shrugged aside. But when market sentiment is bearish, the slightest bad news causes reaction that is extremely exaggerated. That is how the market works.
In this respect, the price movements of the last 3 days on the Dow, especially last night's were the crucial acid test of what is to come. The Dow was grossly oversold as at 3 days ago, and this was evidenced by the Stochastics. But the Stochastics is not a very reliable indicator, and is merely a short term signal, of up to 3 days (bars) reliability, based on my past observations. Thus, I expected some form of rebound, but that it would be shortlived. In fact, the rebound was stronger than I expected, and lasted two days, which raised questions on whether this time around, the situation will be valid. Had it gone on a 3rd straight day of upward trend, of another 100 points, I would have had to admit that the WSTR scenario is the more likely scenario of the future. As fate would have it, the Bears showed the Bulls its ugly teeth, and the Bulls capitulated surprisingly easy, by 268.37 points last night. This is confirmation of the weakness of the Bulls, and the overall market sentiment, which has turned increasingly bearish. Forget about what news caused the Dow to fall. When market sentiment is bullish, bad news were merely shrugged aside. But when market sentiment is bearish, the slightest bad news causes reaction that is extremely exaggerated. That is how the market works.
Now the Dow stands at 10,002.18, i.e. on the brink of breaking down on the all important psychological barrier of 10,000. It has fallen 389 points from the time of my 22nd January 2010 email. If you have not got out by now, what should you do? This is the question I am trying to answer today.
This is an appropriate time to remind you that you are responsible for your own trading / investment decisions. I am merely sharing my own opinions, so that you may be able to make a more informed decision, having considered a more diverse perspective.
Like Columbus looking for the Indies, involvement in the financial markets is about navigating an unknown future. In doing so, we need a map and some navigational equipment to help us. So, I am going to share with you, a possible road map of the Dow. The secret to success is not only in knowing what is likely to happen, but in understanding that what is LIKELY need not necessarily happen. So what good is it to us if we cannot know for sure that it will happen?
A plan is better than no plan. Also, by having a possible road map, we know when things don't behave the way it is supposed to behave. We then have to decide what to do, when we are right, as well as when we are wrong. When things go as planned, we take action as planned. When things don't go as planned, we continue to watch, until a new feasible plan emerges, or until our earlier plan is back on track. Only in this way, are we in control of the situation, rather than letting the market control us.
So, what is the road map of the future?
We are now on track for the following price movements on the Dow: -
- Dow will fall to 9,400 +/- 100. This is the first key milestone in charting the potential crash / significant (> 20%) downturn on the Dow.
- Upon reaching this critical support level, it will rebound strongly up to 10,100 +/- 100. This 2nd Key Milestone will serve to be the final test of the strength between the bulls and the bears.
- If the bulls win, the Dow will resume its previous uptrend. If the Bears win, the prophecy of a significant downturn / crash is likely to happen. This is the stage where we can take Short positions. Based on what I have seen of the price behavior thus far, the probability of a significant downturn / crash, i.e. a 5 wave downward impulse is the more likely scenario.
How low will it go if the Dow cannot hold at 10,100 +/- 100? The 3rd Down Wave will take the Dow to at least 8,400, possibly even lower.
Please do not take this road map for granted. There is no sure thing in the stock market. We need to monitor and observe price behavior at each critical milestone. We must also not adopt a dogged approach of being right, but to let the market tell us if we are right or wrong, and then, adjust our trading decisions accordingly. However, if we do not have a road map of what CAN happen, then, we do not have any idea if we are right or wrong.
This is THE Road Map of the future of the Dow that I have in my mind, and I am sharing it with you. I think the price movements today are very consistent with the very gloomy economic outlook I have, and this increases the probability that this downturn is a PRIMARY DOWNTREND, and not merely a correction. If anything, the uptrend from 6,500 to 10,700 was THE major correction, i.e. part of an upward correction in the Primary Downtrend that started in July 2007. The problems that plagued us in 2007 and 2008 are not over. They have not been resolved. Rather, they have been swept under the carpet, and now, in 2010, they are back to haunt us. The earlier upturn was merely a cash driven, market sentiment upward correction in a LONG TERM BEAR TREND. If I am correct, there is going to be a lot of economic pains coming in this second major long term wave. I was right the first time, when I shot out the alarm bells in August 2007. Let's see if I am right this time around .... again.
You will notice that I started out with the objective of answering the question, "What should you do, if you have not got out till now?" Yet, I have not answered the question, but instead, merely given you a possible road map of the future. Why?
Because of the words of wisdom of the highly successful traders. The secret to success is in getting out when the pain is bearable, i.e. when taking the loss is not going to hurt that much. Right now, if you have not got out at 10,389, you are probably hurting. I'm not trying to add salt to injury, but merely to highlight the need to implement risk management and to have a systematic strategy to exit a trade, be it a profitable or a losing trade. Of course, the secret to getting out with minimal pain is to get an excellent entry point on your trade.
Yeah right! Who doesn't know all this stuff? The challenge is in effective implementation. But, it starts with actively and constantly thinking in this manner. When you are caught in no man's land like today, then it is much harder to pinpoint an exact place to get out, or a good strategy of what to do next, which is why, at this stage, I can only share the possible road map, as the best help I can offer.
I hope that this email has started you thinking about your own trading system. A good trading system is one where you can adopt a process of continuous improvement, possibly even incorporating quality management programs like Six Sigma into your decision making processes. If you do not have a systematic trading system to make decisions, how can you measure your own performance whether what you did was right or wrong? And how do you improve what you can't measure? In fact, how can you even know if you have improved, if you have not measured your performance?
Best wishes,
Ooi
Please do not take this road map for granted. There is no sure thing in the stock market. We need to monitor and observe price behavior at each critical milestone. We must also not adopt a dogged approach of being right, but to let the market tell us if we are right or wrong, and then, adjust our trading decisions accordingly. However, if we do not have a road map of what CAN happen, then, we do not have any idea if we are right or wrong.
This is THE Road Map of the future of the Dow that I have in my mind, and I am sharing it with you. I think the price movements today are very consistent with the very gloomy economic outlook I have, and this increases the probability that this downturn is a PRIMARY DOWNTREND, and not merely a correction. If anything, the uptrend from 6,500 to 10,700 was THE major correction, i.e. part of an upward correction in the Primary Downtrend that started in July 2007. The problems that plagued us in 2007 and 2008 are not over. They have not been resolved. Rather, they have been swept under the carpet, and now, in 2010, they are back to haunt us. The earlier upturn was merely a cash driven, market sentiment upward correction in a LONG TERM BEAR TREND. If I am correct, there is going to be a lot of economic pains coming in this second major long term wave. I was right the first time, when I shot out the alarm bells in August 2007. Let's see if I am right this time around .... again.
You will notice that I started out with the objective of answering the question, "What should you do, if you have not got out till now?" Yet, I have not answered the question, but instead, merely given you a possible road map of the future. Why?
Because of the words of wisdom of the highly successful traders. The secret to success is in getting out when the pain is bearable, i.e. when taking the loss is not going to hurt that much. Right now, if you have not got out at 10,389, you are probably hurting. I'm not trying to add salt to injury, but merely to highlight the need to implement risk management and to have a systematic strategy to exit a trade, be it a profitable or a losing trade. Of course, the secret to getting out with minimal pain is to get an excellent entry point on your trade.
Yeah right! Who doesn't know all this stuff? The challenge is in effective implementation. But, it starts with actively and constantly thinking in this manner. When you are caught in no man's land like today, then it is much harder to pinpoint an exact place to get out, or a good strategy of what to do next, which is why, at this stage, I can only share the possible road map, as the best help I can offer.
I hope that this email has started you thinking about your own trading system. A good trading system is one where you can adopt a process of continuous improvement, possibly even incorporating quality management programs like Six Sigma into your decision making processes. If you do not have a systematic trading system to make decisions, how can you measure your own performance whether what you did was right or wrong? And how do you improve what you can't measure? In fact, how can you even know if you have improved, if you have not measured your performance?
Best wishes,
Ooi
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