Do you guys remember the bear market we had back in 2008?  Yes, the one that had a “V” bottom in March of 2009.  Well, let’s look at the chart below:

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It is very easy to identify the sharp selloff we had and the rally that followed, but what I want you to see is that the rally stopped just short of the 62% retracement of the original move down.  What is also interesting is that the selloff from the high at 1564 accounted for a 57.4% decline in the S&P 500 Index, while the rally was good for an 83% move up from the bottom at 667. Not too bad for a bear market rally.  Now, let’s look at the road signs that gave us the warning before the latest selloff.

The first sign, or should I say red flag should have been raised by the simple fact of a 62% retracement rally.  It is a good profit target to start feeding the public some of the shares that were bought at much cheaper prices.  While so many people perceive technical analysis to be a useless tool, I feel that it really charts the psychology of the market.  I have identifies some points on the chart below, and I offer my interpretation of the data as I see it. 

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 Remember that day when the Dow was down like 1000 points, and there were some very lame excuses made about what really happened that day.  Well, that is Point A on the chart above.  The short squeeze that followed served as the perfect opportunity to short the rally at the 50 Day moving average.  This is Point B on the chart.  A great trade in hindsight is to take a short position at 1170-1174 with a stop a few points above 1175-1178.  The price target of the previous low of 1065 would have given the trader a great reward to risk ratio.  But of course hindsight is 20/20 and the media told us that the selloff that sent the Dow down 1000 was a “fluke” hmm….

Let’s move on to Point C.  This is the first time since the rally began and the market closed above the 200 day moving average (red line) that the market closed below the 200 day moving average.  This is a bearish confirmation, and the market indeed sold off and made a lower low at Point D.

My favorite point on the chart is Point D, well the second arrow which held the price of the low on a retest.  This was the perfect long trade, and the perfect exit out of that trade would have been in hindsight selling the bull trap breakout -the penetration over the purple horizontal line just before we hit Point E on the chart.  Oh, I bet many traders are licking their wounds from falling in this breakout trap… I’m sure it won’t be the last one.

The classic pattern that we have now suggests to me a continued downward move.  The selling began on one crazy day of Dow down 1000, and trades being broken and excuses made.  Now, we see that market manipulation (well poker game) is just as strong today as it ever was.  A misdirection move in soccer, football, basketball, also known as head-fake took place several times, and it suggests that gravity will be pulling this market lower. 

Lastly, Point F on the chart is just as weak as it can be.  However, the RSI is at 28, so we may be short term oversold and a dead-cat-bounce can take place with a short squeeze, but I believe that this market will trade lower, the question is how low?

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Well, the easy way to forecast the price drop is to use the fib levels, and by doing so, I see a 67% chance that 945 will be hit at some point in the next six weeks.  The 33% chance that it won’t happen is earnings are due this month.  The 880 level which seats at the 62% retracement is at 40% chance in the next 6 weeks, but if guidance is terrible, I expect it will get hit before September ends or even starts.

One last thing, after trading for a living full time for 23 years, I went and got my Real Estate license, and I developed an “Oz Scanner” for Real Estate Deals.  Well, the scanner is made mostly out of good people on my team, but I had to balance my life with something else as I was getting really burnt out.  I do some personal coaching now (trading), and as far as real estate is concerned, I help people stay in their homes, sell their homes, and I find homes and investment properties for my buyers and investors.  All in all, my passion for the stock market is coming back, but I am also getting really good in real estate. 

I hope you learned something valuable from this newsletter, if you have any questions or comments please do not hesitate to contact me.

PS: If you are going to play for a bounce here, I suggest the futures markets with overnight stops rather than stocks, so you can protect against a limit down gap down.  Just my two cents.
Trade Smart!

Proper risk management for online trading is a must.  “We teach our students the importance of smart stock trading, with proper risk management,” said Jodi Paris, a managing partner at Stock Trading School LLC.

If you’re using a direct access broker which offers level 2 quotes, you may want to use the most advanced software that is available today for stock trading such as a real time stock screener.

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