Relief rally, not a game changer yet.

Yesterday it was nice to have such a strong bullish move and relieve some of the bearish pressure.  Unfortunately, the relief rally was not a game changer.  The indexes closed the day below resistance levels and continued to remain under the current downtrends.   The Bulls still have a lot of work to do if they are to regain control and I suspect the Bears still have some fight in them.

A mistake I used to make was to focus too closely on the hard right edge of the chart.  Yesterdays, bullish move would have me tossing caution to the wind, and I would buy stocks with both hands severely over trading the market condition.  If the market turned, I would suffer big losses damage not only my account but also crush my confidence as a trader.  My suggestion, if you do trade, consider smaller than normal positions to control the risk.  Also be mentally prepared to exit trades quickly should the market begin to turn against you.  Be willing to take small gains and cut off losses quickly if you suddenly find yourself on the wrong side of the battlefield.

On the Calendar

The hump day Economic Calendar kicks off at 9:45 AM with the PMI Composite Flash report.  The consensus is expecting a moderate but constructive growth with services continuing to outpace manufacturing.  At 10:00 AM we get the latest reading on New Home Sales which forecasters are expecting to remain flat at the July 610K print.  10:30 AM the very important EIA Petroleum Status Report.  The last reading showed a decline in inventories, but crude continues to struggle under selling pressure.  There is no forecast for this number, so all we can do is wait and hope it will continue to decline and supporting prices.

The Earnings Calendar has just over 50 companies reporting 3^rd quarter results.  There are several details in the list today with LOW being the most notable and heavily watched.  LOW will report before the bell.

Action Plan

Yesterday all the major indexes caught a relief rally that was quite strong and leaving behind an open gap.  The DIA, SPY and QQQ’s, all left behind a candle pattern loosely interpreted as a Morning Star.  As good as that would seem the indexes are still not out of danger.  First, this pattern requires follow-through. Price action to be valid.  Secondly, all the indexes closed below. Short-term down trends as well price resistance.  The questions now, will the Bulls have the moxie to push through the resistance?  I suspect the Bears will have something to say about that mounting a defense.  It should be an interesting battle.

Currently, the futures are pointing to a lower open which is not a surprise after such a big move.  There are a lot of good charts flashing buy signals after yesterdays move.  While I am long the market, I want to remain very cautious.  For me, that means I want to be careful to not over trade during this market condition.  I will normally begin with smaller than normal positions to reduce my risk.  I will also be prepared to take any profits much faster should the overall market show clues of failure.  If the Bears happen to regain control, a very quick sell off is possible, so plan accordingly and remain focused on the price action after the open.

Trade Wisely,

Doug