I’ve never been so happy a weekend has arrived.  Before that weekend starts, let’s take a look at the 1,000 point intraday swing in the Dow and other insights from the intraday trading for October 10, 2008.

$INDU 5-minute chart:

Folks, a 1,019 point Dow intraday range is nothing to sneeze at - it is absolutely remarkable and worth further attention.

The global markets fell roughly 10% each, and the US Equity Futures were off around 5% with the equity markets opening roughly in line with the futures, selling off, then sharply rallying… only to drift slowly lower all day… until the final hour where miracles happened (or curses for the short-sellers) into the close.

Are technicals valid in this environment?  They provide and identify structure and probabilities and allow snap-analysis of risk-management points as well as possible price targets.  It’s just that this environment is driven far more by emotion and news than anything, so while technicals can be helpful, they are not, and will never be absolute or infallible.

Nevertheless, price did respect the falling 20 period EMA and made a series of ‘clean’ lower lows and lower highs all day until the positive momentum divergence ‘caught up’ with price and then the index violated the 50 period EMA, shifting to a bullish breakout from consolidation and resistance.  That sharp 8-bar rally up underscores why it’s difficult for both longs AND shorts - if you were short and didn’t take a stop-loss, you could have endured a sudden 800 Dow Point rally against you, potentially destroying a small (overleveraged) account.

Price stopped at 8900 - the 200 period SMA before falling back into the close - how wonderful (for the bulls) would it have been to have achieved a positive close this Friday?  It wasn’t meant to be (in the Dow).

With 8 consecutive down-days in the Dow, where does that leave us on the Daily chart?

$INDU Daily Chart:

Price made a new low well beyond where most people expected - it was absolutely brutal.  People tried to catch bottoms along the way but it also wasn’t meant to be.

Price has now formed a ‘doji’ which could be a reversal signal but you don’t need to bet the farm on anything in this environment - stay small and heavily risk-controlled.

Print and annotate multiple stock charts and analyze them this weekend - it will be a helpful exercise that will add some perspective, as well as enhance your pattern recognition.  Plus, this kind of persistent down-moves aren’t likely to occur often (so we hope) so it could be interesting to observe them while the exist.

Bloomberg offers a look at the charges flying on both sides of the snafu:

The sterling is dropping on the FX market against the euro, dollar and the yen.

See Also

• A Look at Currencies on the FX Market
  Forex trading information
• U.K. Pound in Forex Trading
  Currency trading on the FX market

Things are changing in favor of the won, however. The government is saying it is going to crack down, and the rumors that speculators are going to be able to keep the won down are drying up. The Forex Blog reports on how the international community is reacting to the South Korean won in currency trading now:

See Also

• South Korean Won in Currency Trading
  Forex trading and Asian currencies

Right now, the yen is headed for a weekly gain in FX trading as investors make safe haven moves. MarketWatch reports on the yen’s new status in currency trading:

See Also

• More on Risk Aversion and the Declining Carry Trade
  Japanese yen in FX trading
• Japanese Yen in Forex Trading
  FX trading with world currencies

Right now, as commodities waver in the financial market, and as investors head to the dollar as a safe haven, the Canadian dollar is sinking in FX trading. Action Forex reports on where the USD/CAD rally is headed:

See Also

• Canadian Dollar in FX Trading
  Currency trading on the FX market

As global markets decline, the U.S. dollar gains in currency trading. Once suffering from weakness, it is apparent that even with the U.S. economy in its current state, the greenback is one of the stronger currencies on the FX market right now.

Against the euro in forex trading, the dollar is gaining ground again after a very brief respite yesterday. And CNN Money reports that recession is considered all but a foregone conclusion for the eurozone:

See Also

• The Pressure is on for G7 Action
  Markets want more from world leaders
• U.S. Dollar in Currency Trading
  Forex trading with world currencies

The US stock markets are in a free fall, the commodities are crushing and the adversity to risk are taking the carry trades lower. Amid this unprecedented crisis, the major currencies continue to have a divergent behavior. The dollar should decline against the yen and advance versus the European currencies. The US trade should not matter and all eyes will be on the G7 meeting at the weekend.

Euro/dollar

The euro/dollar struggled higher on Thursday, as expected, but the upside is limited. In the medium term, the pair remains in a declining channel support. 

Immediate support is at 1.3500. The next level is 1.3443. Distant support looms at 1.3350.  

Resistance comes at 1.3620.  The next level is 1.3750. Above 1.3775, the euro/dollar retains resistance at 1.3857. Distant resistance follows at 1.3980.

Oscillators are mixed.

NEAR-TERM: Slightly bearish
MEDIUM-TERM: Bearish
LONG-TERM: Bearish

Dollar/yen

Dollar/yen collapsed to below to a new low for the downtrend and remains below the neckline of an irregular head-and-shoulders pattern. The downside is favored today.

Initial support comes at 98.25 from a 50-point pivot, which targets 97.75 and 98.75. Distant support follows at 97.30 from another 50-point pivot, which targets 96.80 and 97.80.

Immediate resistance is at 99.25 from another 50-point pivot, which targets 98.75 and 99.75. Distant resistance is at 100.25 from a 50-point pivot, which targets 99.75 and 100.75. 

Oscillators are bearish.

NEAR-TERM: Slightly bearish 
MEDIUM-TERM: Bearish
LONG-TERM: Mixed

Sterling/dollar

Sterling/dollar fell to a new low for the downtrend. The outlook remains bearish.

Immediate support is seen at 1.6910.  The next support follows at 1.6705.

Initial resistance looms at 1.7070. The next level is 1.7270. Above 1.7395, distant resistance is at 1.7455.
 
Oscillators are bearish.

NEAR-TERM: Slightly bearish
MEDIUM-TERM: Bearish
LONG-TERM: Bearish

Dollar/Swiss franc

Dollar/Swiss franc consolidated into early Friday. Mixed trading is favored in the short term.

Immediate support remains at 1.1210. Below 1.1140, support is seen at 1.1085. Good support follows at 1.097.
 
Initial resistance is still seen at 1.1325. Above 1.1390, distant resistance comes at 1.1490

Oscillators are declining.

 
NEAR-TERM: Mixed 
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

]]> http://blog.dcforex.com/rss/forex-market-commentary-for-october-11-2008-by-cornelius-luca/feed/ http://blog.dcforex.com/rss/the-two-prior-7-day-declines-in-the-dow-since-2000/ http://blog.dcforex.com/rss/the-two-prior-7-day-declines-in-the-dow-since-2000/#comments Fri, 10 Oct 2008 10:00:08 +0000 admin http://blog.dcforex.com/rss/the-two-prior-7-day-declines-in-the-dow-since-2000/ I thought it might be helpful to look back since 2000 to show the two previous times the Dow Jones Index was down seven consecutive days in a row.  The next two charts show the before, during, and aftermath of these instances for you to see for yourself.

The first time it happened since 2000 was just before and after the September 11th terrorist attacks in the USA.  The Dow had declined three days prior to the attack, and the market was closed for a week after the attack.  Here is what the chart looked like then:

(Note:  I programmed a strategy to identify these times and as an exit, I programmed a 16 day time exit - you may ignore the green bar - I don’t discuss it.  16 was an arbitrary time-based exit I chose).

The market actually fell for 8 days in a row before recovering sharply back to the 10,000 level by the end of the year.  Price ultimately went lower, bottoming at 7,200 almost exactly a year later in 2002.

If you are astute, you notice the red highlighted price bar “8,579.”  That’s TradeStation’s way of saying “This is what the currently symbol you’re looking at closed at most recently-” in other words, the Dow Jones is currently very near the price levels achieved on the 9/11/01 attacks - let that sink in for a moment.

Ultimately, price peaked at 10,600 in March, 2002 before heading lower to bottom in October.

The next time it happened was in mid-2002 in the throes of the Bear Market a few months prior to the actual bottom.

If you look closely, you see my strategy (buy at the next open after a seven-day consecutive decline occurred) fired actually in the middle of the consecutive move.  There was a white (up-day) candle in the middle, and were it NOT for that solitary up-day, price would have closed for 12 days in a row - remarkable.  I label the down days, excluding the single up day.

Price ultimately “snapped back” but not before plunging 1,000 more Dow points before a reversal.  Even then, the ’snap-back’ reversal only took price to 9,000 before plunging down to 7,200, marking the Bear Market bottom (price ultimately retested this low in March, 2003 before beginning the Bull Market that ended just a year ago - October 2007).

So now that the Dow Jones index has declined 7 days in a row, which will it be? A snap-back rally or a continuation?  We can go back further to test, but since 2000, a seven-day consecutive price decline has happened only two times, and for both times, a divergently different outcome resulted.

Be safe, guard your capital, and don’t expect a rally “simply because it is due.”  It may happen; it may not.  Either way, price is likely to move violently, quickly, and (perhaps) erratically.  If you’re on the wrong side, you will lose capital quickly.  It might be better to wait until the waters calm down a bit before stepping back in.

NOTE:  If you are a TradeStation user, here is the simple code I programmed to run this study.  You can use it to test different indexes over longer time periods.  Simply add more days or subtract days (in the close[7] lines) for more analysis, including possible exit/stop-loss strategies:

if close<close[1] and
close[1]<close[2] and
close[2]<close[3] and
close[3]<close[4] and
close[4]<close[5] and
close[5]<close[6] and
close[6]<close[7] then

buy next bar at open;

S&P 500 Weekly Chart (compressed):

To say the ferociousness of the recent price swing down was unexpected (in its magnitude) is perhaps an understatement.  Many of us - myself included - did have price targets beneath S&P Index value 1,000 (some even down to the 2002 lows near 750) but I don’t know of anyone who had the targets being achieved this quickly - it was stunning and remarkable.

Notice how the market was making lower swing lows and lower swing highs in an orderly fashion - that is the ‘rules of the game’ and normal conditions.  The trajectory (trend) is clearly down but it is peppered with stable, salient retracements (usually to key Fibonacci levels such as 50% of the prior decline).  In this current swing (which - as of this writing - is not over yet), there wasn’t a pause or breath - it fell like a rock, blinding many fundamental, technical, and quantitative analysts.  “This isn’t normal.”

But it is what it is - Mark Douglas said it best:  “Anything can happen [in the market]” and “Every moment in the market is unique.”  I thought of his quotes immediately when the government banned short-selling on Financial stocks - did anyone see that coming… or even as a conceivable possibility?  Even if you did, could you have foreseen the ramifications of that decision?

So we’re in a new world with perhaps new rules - what worked in the past doesn’t seem to be working (in terms of long-term investing or short-term/position trading when it comes to ‘buying what’s overextended’ for a ‘reversion to the mean’ style trade).  It is what it is.

Anyway, let’s look at today’s 7% index decline as distributed across the AMEX select Sector SPDRs.

The intraday Sector Performance:

The Energy and Financial sector were hit hardest, with - surprisingly - the Technology sector holding its own (Apple - AAPL - though it closed slightly lower, did well for the day and could be starting a counter-retracement up along with RIMM - but that’s another story).

Let’s zero-in on the Financial Sector.

XLF Financial Sector:

The major culprit behind the recent ‘crisis’ stems from past practices with Financial related companies.  The financial sector - and investors in it unfortunately - have suffered dearly for those mistakes.  Banks are in serious trouble and are seizing up - credit is no longer lubricating the US Economy as freely as it had in the past - banks are afraid to lend and no one’s exactly sure when the next shoe will drop or how much ‘toxic debt’ is still on the books.

So what is the expected play now?

You’ve heard it 100 times now - the market is so overextended that a rally is due.  But the next day brings more selling, so the sentiment grows more urgent:  “Well, we’re certainly due for one now.”

My response?  Absolutely, and it’s probably going to be a quick rally - but it seems like the government is doing everything it can to start that rally (cutting rates, giving speeches, passing the Bail-out bill, etc).

But it hasn’t happened.

Let the professionals play in this market.  Let them catch the falling knives - somewhere (perhaps here), price will hit valuations that fundamental (and even technical) traders will find unbelievably attractive and they will begin buying - perhaps aggressively.  But as long as fear and panic rules the day, it’s uncertain when that time will come.

Whatever you choose to do, your #1 goal should be capital preservation - be it taking smaller positions, trading more selectively (not just jumping at anything that moves), going away from stocks temporarily and only trading ETFs (perhaps even Index ETFs), or even just sitting in cash while avoiding the market altogether - it’s your choice.

But don’t think you’re going to make a killing when everyone is getting killed.

The dollar continued its divergent behavior on Thursday, surging against the European currencies and declining versus the yen, as de-leveraging continued.  The euro suffered the brunt of the losses, after ECB President Trichet was a bit more dovish than expected and admitted that policy makers had discussed cutting interest rates.  Given the need for dollar funding, Friday should see the major currencies continuing their recent pattern. However, take your cues from the two key factors: the House vote on the TARP (not a sure dunk) and the nonfarm payrolls, and expect exceptional volatility.

Euro/dollar

The euro/dollar sank aggressively for the fourth consecutive day, dropping nearly 300 pips and reaching a four-month low. My model remains short.  Once again, I like holding short positions but remain uneasy opening fresh ones at these levels. The medium-term outlook remains negative.
 
Immediate support is at 1.3745. The next level is 1.3615. A distant support is in the 1.3495 area.
   
Above 1.3885, resistance is now seen at 1.3940. The next level is 1.4155. Distant resistance now pegged at 1.4275.

Oscillators are declining.

NEAR-TERM: Slightly bearish
MEDIUM-TERM: Bearish
LONG-TERM: Bearish

Dollar/yen

Dollar/yen reversed early gains and closed lower on Thursday. The slide was aggressive enough to turn my model short. Given the choppiness in this pair, I don’t trust this weakness much. Thus, the short-term outlook remains mixed.
 
Good support is now seen at 104.50 by a 50-point pivot, which targets 104.00 and 105.00.   

Immediate resistance is at 105.60 from a 50-point pivot, which targets 105.10 and 106.10. The next level remains at 106.75 from another 50-point pivot, which targets 106.25 and 107.25.

Oscillators are mixed.

NEAR-TERM: Mixed 
MEDIUM-TERM: Mixed
LONG-TERM: Mixed

Sterling/dollar

Sterling/dollar fell for a fourth straight day on Thursday, reaching a three-week low, and my model remains short.  Again, the downside remains only mildly favored, as the pair is heavily oversold. 
 
Initial support is now at 1.7550. Below a pivot low at 1.7448, distant support is at 1.7265.
 
Initial resistance is at 1.7710. Strong resistance remains at 1.7875. Above 1.7915, distant resistance is at 1.8085. 

Oscillators are falling.

NEAR-TERM: Mixed to slightly bearish
MEDIUM-TERM: Bearish
LONG-TERM: Bearish

Dollar/Swiss franc

Dollar/Swiss franc surged to the second high of the uptrend and my model remains long. The initial bias is bullish, but the pair remains overbought and some risk remains on the downside.  
 
Initial resistance now comes from a pivot high at 1.1417.  Above 1.1490, distant resistance is seen at 1.1580.
 
Immediate support is at 1.1290. Below 1.1190, support is now pegged at 1.1135. Distant support is at 1.1000.
 
Oscillators are rising.

 
NEAR-TERM: Mixed to slightly bullish
MEDIUM-TERM: Slightly bullish
LONG-TERM: Bullish