The Day that Was - August 22nd 2007

Today was mid term exam time. The major indices all had a test today and they all stopped right at the limit. The limit in this case is resistance. In any recovery there are incremental upward moves followed by another downward move. This sequence plays out until the market enters into an area which restores confidence and brings more money into the markets. The volume the past few days has still been uncomfortably light. Says that there is not much in the way of institutional money yet behind the moves. When the down volume is greater than the up volume you have to keep moving with caution.

In my nightly report I receive from John Murphy he provided a very interesting comparison of previous market 'corrections' vs the bear market that started in late 2000. That comparison was on the activity of the T-Note yields. We all know that bonds become a place of safety during turbulent times however the relationship of when we see the yields begin to rise vs the stock market was the interesting analysis he provided. We need to watch the 10 year T-note yield for signs of an increase in the flight to safety or a movement back into stocks. The recent few days of upward movement in the markets have not been matched with the same movement in the yields, actually the flight to bonds has increased while we have been moving up a bit this week on the stocks.


Buying stocks today would have been adding risk to a trade. When you enter any swing trade you have to say to yourself "is the risk vs reward" in my favor". With the indices getting closer to significant resistance levels then the answer is no. The risk is higher than the reward. If resistance is directly overhead then trying to buy a stock when the indices are running into a closed door is too risky and the chances of a loss are increased.


I did not enter any long positions today because the stock market was walking right up to the closed door with little power (volume). It was not worth the risk. The market we are in now there are some good day trades during this turbulent period but I'm about swing trading. And swing trading (even holding a stock overnight can be considered swing trading). But buy and sell on the same day is 'day trading'. And so far that has been the safest way to trade at the moment. But I don't want my readers and subscribers who may be just getting started in the markets to try and day trade. Day trading requires a lot of skill that comes from years of successful swing trading and such. You must also be able to be at your computer during the entire market to react in an instant. Trying to swing trade in this period is dangerous and puts at risk a significant amount of your portfolio if you try to take on too many positions and then there is another gap down reaction to news or other events.


Risk vs reward is always important and you should never lose sight of it when you make a trade. Ask yourself "is this a good time to take the trade?" , "Is the upward potential far greater than the downward potential?".. See what I mean.


Also, overnight tonight the Bank of Japan will be releasing their equivalent to our FOMC statement. So with news as significant as that hanging over the market today that is one more item in the "risk list" against us. Why take a trade when there could be a potential negative impact from the Asian markets overnight. Of course something good could come of that and then we will benefit from it. But can we say for sure that the news from Japan will be favorable to us? Of course we can't, that is why it is 'risk'. And lets leave risk to playing the slots in Vegas. In the stock market we can control our risk by knowing when to trade and when not to.

Charts: