Jan
20
2009

  Will There Be A Market Retest Before A Rally?

The Dow closed below $8,000 today, which generally pleases me. I think that the market is going to have to retest the low 11/20/08 closing price ($7,552.29) before the market can really have a tradeable rally.

It's even possible that the low at the restest will be "the" low for this cycle, and the start of another bull market. But I'm not confident of that. I have a feeling that there is going to be a lower low to deal with before we're out of the bear market. But if there is a successful retest of the 11/20 close (meaning stocks trade at or below that level during the day, but close higher), it could signal the start of a bear-market rally. Which is all well and good for me, as a trend-trader, but not particularly useful for the long-term investor. I'd be delighted to get in on a rally, since it would probably last a few months (my guess would be it would peak in May) and deliver some quick and tidy profits (following historical trader guidelines to "sell in May then go away"). But if it tanks, it could really tank. Think Dow $6,600.

Of course, if there is a decent rally (and the odds are reasonable that it will happen) all the talking heads on CNBC etc. will be declaring that the bear market is over, happy days are here again, and everyone should take their cash out of the bank and get it back into stocks and mutual funds ASAP. And people all over the country will do that, and they'll feel better until May, and then it will be tragic since they'll all stick it out through the crash to follow over the summer, which will probably be even worse than the November '08 low.

Now, the alternative is that we hit the November lows and immediately go lower. Then who knows what will happen? Bounce and rally, scuttle along the new bottom, begin a slow recovery. It will take awhile to discern what new pattern is developing if that happens.

Regardless, now that the Dow is below $8,000, I've got to start paying attention to the market daily. I used deMark indicators to buy USO and XLF last week, but it appears that their buy signals are "recycling", meaning that they are going to go lower before they go higher. Which is annoying, especially since I messed up the USO trade and missed the stop-loss exit point. Which basically means that my USO is now an "investment" instead of a trade (the definition of investment in this case being a mistimed trade). I still haven't hit the stop-loss number for the XLF, which while it doesn't mean I won't lose money on that trade, at least I will have stuck within the parameters of the trading system I'm using.

The whole prospect of having a baby has really thrown off my trading. I haven't spent nearly as much time as I used to keeping up with the trading-talk, learning how to use new indicators, charting securities, and looking for prospects to diversify our portfolio. I'm going to have to try to focus now, especially before the baby arrives, since I anticipate it will be even more difficult once I'm feeding a baby every two to three hours. The especially bad thing is that there is no stopping the market-- if there is significant market action in April and May (which I think there will be), it's not like I can just sit it out. Actually, I could, but then I risk not making enough profit for the year to cover our household expenses.

I've still got a few months to figure out how I'll manage. Terry can't take over the trading because he's just not very good at it. My best guess is that I'll have to do as much advance work as possible, so that all my charts will be in place, all my selections and watch-lists for diversification will be ready. I can probably create some spreadsheets into which I can just drop in the relevant prices for a trade and it will automatically calculate the target price, stop-loss price, and maximum risk level. Then I won't have to rely on a clear head to do all the math involved with every individual trade (which I'm currently doing). I imagine it would be way too easy to make math errors if I was trying to trade while overly tired. Better to have a spreadsheet that I trust to do the math correctly.

Plugging in the numbers IS something Terry could do, and he could place the trades under my direction. Although that's still an iffy proposition, since he is very bad at filling out online forms. He has trouble ordering things online since he just can't seem to pay attention to what is in his "shopping cart" and all the shipping and payment details. So he has to call up and get things corrected, or return items, whatever. You can't be making those kinds of mistakes when you're trading, or you could be out thousands of dollars. You can't just "return" a stock you didn't really mean to buy.

No, I'm going to have to figure out some way to do this on my own, even while I'm sleep-deprived. But even if I can't work it out, the worst-case scenario isn't so bad. So we miss out on some profits, so we might have to dip into our savings to pay for household expenses, it's not that big a deal. We've got a sizeable nest egg, dipping into it for half a year isn't the end of the world. If Terry really gets his panties in a knot about it, he can always pick up a consulting gig and work for a month or two. But I anticipate once we have a baby, we won't care so much about a few dollars here and there. I'd have to be out of commission for over a year to have a huge impact, and I don't see why that would be necessary. Once the baby is eating just every four hours, I should be able to get back to working several hours per day at least. And for the most part, that's all I need to do a good job. Ten to twenty hours per week, a little more to keep up with the reading but that's easy since I read fast and during coffee breaks, etc. The main thing is that I can't be skipping entire days like I have been. I've got to get back in the habit of checking the market every single day it's open.