|The market has found some support but is still trading under its 200-day simple moving average (SMA), which is a bearish characteristic for any market, and is likely to continue until next year. For now, more bad news is seeping in from overseas, as Germany and France have met recently to discuss how to save the euro from collapse as well as the European Union (EU) itself. So far, their suggestions were that member states work toward balanced budgets and debt reduction as well as recommend a new tax on financial transactions, and urging that the members have regular meetings.|
Many analysts were hoping they'd announce a new eurobond to finance the bailout of their weakest members and largest banks, while others forecast that they might extend the European version of our TARP -- another way to save the banks.
|While no one is arguing that balancing the budget, debt reduction, and a discussion on tax reform is a bad thing, the problem is that it sounds flat on its delivery to an already tone-deaf crowd.|
The EU has no history of taking those suggestions seriously, given the armageddon-like disaster that they are facing, which is unfortunate to those huddled masses who are going to be massively affected when the banking crisis in Europe reaches a fever pitch and finally send a tsunami of financial destruction rippling throughout the global markets and, unfortunately, washing up on our shores.
Having said all that, you need to have a tool set of trading strategies that can adapt to the market, and there is a large potential price reversal underfoot with an emphasis on bear market trade setups that can reveal when the trend's bias is leaning downward, as things may get very ugly for the bulls.
|FIGURE 1: BAL. On June 6, 2011, BAL traded below its 200-day SMA before experiencing a brief rally to test it, presenting the opportunity to enter a short position as BAL trades downward.|
|Graphic provided by: www.freestockcharts.com.|
|One of the most effective methods of determining the market's directional bias is the 200-day SMA (Figure 1). There is a saying on Wall Street that "bulls live above the 200-day SMA and bears live below it." The 200-day SMA underwent an intensive study by Larry Connors of the Connors Research Group and author of the book "How The Markets Really Work," a quantitative analysis of key technical factors that can improve your odds of successfully trading the markets.|
Connors detailed how stocks and the markets themselves had a directional bias downward when price was trading below the 200-day SMA on a short-term basis, as price went on to make new lower highs and lower lows.
|At a glance, then, you should be able to easily determine where the directional bias lay depending on which side of the 200-day SMA it is trading.|
In addition, when price first breaks below the 200-day SMA, it has a tendency to snap back before trading lower. This pattern is common, as long-term traders have their stops in place slightly below the 200-day SMA and get triggered as price hits those levels, causing a brief rally before resuming lower.
The key is to watch for price to rally slightly after trading below the 200-day SMA and then entering the move as it trades below the previous significant price low and ride the price lower.
|A lot of stocks are still trying to hang on above the 200-day SMA, but as weakness enters equities, this will be short-lived. Prepare a hit list of stocks trading along or near this moving average and then prepare for their descent. Oddly, the strongest stocks that struggle to stay aloft will fall the hardest once the inevitable occurs and the trading herd begins to flee the stock like moviegoers trapped in a burning movie theater, so be prepared, since it will be a a frighteningly fast move once it materializes.|
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