Market Diary 1-7-08
One of my New Year’s resolutions is to start blogging consistently about technical trading, which takes up much of my time these days. I’m thinking of two lines of posts: One will be a simple diary about what the market did and what it’s likely to do. The other will explain what technical trading is, how it works, and how you can use it to develop a trading system that will make you far more money in the market than any mutual fund.
But in this age of litigation, obviously I cannot recommend that you make any particular investment. In fact, my official advice is that you view technical trading merely as a hobby to be done with virtual money and make-believe trades. Your actual money you should keep under your mattress or in a clean, dry mayonnaise jar. If you choose to enter the stock market with real money, be aware that this is a big, mean game in which very smart people will take your entire life’s savings without a moment’s hesitation, if you’re foolish or careless enough to let them.
Many of my readers will have no interest in any of this, so I plan to hide it all behind More links, so that readers who prefer my posts on politics, philosophy, and theology can still find them without undue effort.
Today we had an excellent example of support at work. For those not familiar with the term, support is a point at which we expect a price moving down to turn and start moving up. Support can come from a variety of sources, but today we had plenty of the easiest kind: horizontal.
Let’s consider the Dow Jones Industrial Average, just because it gets the most attention. MSN Money has the best free stock charts that I have found so far, though this particular chart omits 1-2-08 for some reason. It’s just another big down day that neatly fills the gap between 12/31 and 1/3. If you have an online brokerage account, they can probably get you better charts.
Look at the chart around November 26. Then as now, the market had been going down decisively for several days in a row. But during the four trading days from 11-21 through 11-27, the price couldn’t break below 12,750. Then the price started moving back up, and gained about a thousand points before it started turning back down. This creates a support area. Because the price bounced at this point before, we expect it to bounce there again.
The price did something similar in August 15-17. We had one day of panic selling on the 16th, but it closed back at the support area. This also suggests the significance of 12,750. And if you can find a decent full-year chart (the MSN Money chart isn’t helpful because its one-year chart only shows weekly bars) you’ll also see that 12,750 was the peak of a seven-month bull run from mid-July of 2006 through mid-February of 2007. When that level acts as a ceiling it is called resistance, and one of the most basic rules of technical trading is that old resistance usually forms new support, and vice versa. Since 12,750 was a ceiling back in February, we shouldn’t be surprised that it has been acting as a floor, and we should expect it to do so again.
This isn’t to say that the Dow is going to roar back to new highs. The four most recent highs in the Dow (10/10, 10/31, 12/10, and 12/26) form a pretty tidy downward slope, so this time around I don’t expect the Dow to break 13,250. But it should be enough of a bounce to give some short-term profit.
While this support level is likely, I don’t yet consider it tradeable. I plan to wait until the close on Tuesday, and maybe even through Wednesday, to confirm the bounce before I trade it.
And for those of you who don’t have the slightest idea what I just wrote: Be patient. Soon I will break down and explain the basics of technical trading, and some day you’ll be able to look back at this post and roll your eyes at how dull and obvious it all is. And if anybody can find a better publicly available stock chart, lemme know about it.