Monday, January 21, 2008

Did We Catch a Break Today?

Quick rundown of world markets on Monday:

FTSE 100 INDEX -323.50 -5.48%

CAC 40 INDEX -347.95 -6.83%

DAX INDEX -523.98 -7.16%

NIKKEI 225 -535.35 -3.86%

HANG SENG -1,383.01 -5.49%

Ouch. These are the update final numbers from Monday and all of these indexes closed near their lows, which probably signals more selling tomorrow. Perhaps the U.S. markets caught a huge break today with the MLK Jr. holiday. With world markets being down 4-7%, I think if our market would have been open today, the outcome would be quite obvious – a huge, panic-type down move that could quite possibly be the capitulation that I have been talking about. I still think there is a good chance of this happening Tuesday – it will be interesting to see how world markets react tomorrow as well. If they all bounce tomorrow, then maybe we avoid this scenario. On the other hand, if the selling continues worldwide tomorrow, Tuesday will be even uglier. Either way, I am going to prepare for this possibility and look to cover my shorts into this rush of selling. No need to get greedy right now. I don’t know for sure that this is going to happen, but I want to be prepared nonetheless.

With the market hitting oversold levels on the T2108 and close to extreme levels on the Market Monitor, I am also going to try and go long here if the above opening scenario happens Tuesday. How? I am going to try and be as mechanical as I can be as to not put emotions into play, especially in a panic-type environment. I don’t think I am a good enough trader to throw myself right into the middle of a crash-type sell off and just try to react to what I see, so I plan on setting some “ridiculous” limit orders on very oversold stocks that I think will put in very strong bounces of a week or two if we do indeed have the capitulation bottom. I said “ridiculous” because they will be quite far away from prices right now, but at possible lower-term support levels. Basically, I am going to take the attitude that if they hit these extreme levels and I get filled, great, because I will pick points that are very, very low-risk with extremely high upside in the short-term. The chances are probably good they won’t get to these levels and I won’t get filled, but that is OK too. You never know what will happen if we get true panic selling. I will have covered my shorts and can sit back and relax for a week or two and wait to reshort the bounce. I would like to try and play a bear market rally if possible, but not unless I can control my risk. We shall see what happens. I put some charts below that I will be looking at and where I am looking to buy. There are some others I will look at but I have to see what the market is going to do on Tuesday first. Good luck tomorrow, and please be careful out there! It may be an extremely difficult day, and depending on the action we see, I may scrap these plans and just wait things out. I don't think it's smart to try to be a hero on either the short or long side of the market.

Charts from Telechart2008, Courtesy of Worden Brothers, Inc.

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