Contrarian Swing Trade Commentary 02/06/13


As I mentioned in the Morning Update is that “The Test Is Always At The Top”. I refer to that saying every time I contemplate a trade when the market is approaching new highs.I new on Monday that the probability of a continuation move lower on the markets was unlikely due to the volume. A contrarian indicator was the dozen or so Trade Coach inquires on  whether to short or not after Monday’s down action. My reply, NO! Why? Volume or more to the point the lack of down volume… Now could there have been a continuation rally with rising up volume? Yes, but it is the norm to see a counter trend rally and what we want is CONFIRMATION visa vie a lower high and topping action to open your trade and then a lower low to confirm the trend. What does that get you? A good risk to reward entry point assuming that you use a stop just above recent highs.
So, after my opening what did we see today. Well we saw a rally which confirmed my first point that you don’t short in a bull market on a down day with low volume. Why?  It takes institutions to keep the sell off going and they didn’t participate Monday. Back to Tuesdays close. The first index I want to discuss is my 2013 nemesis the Russell 2000 which on a daily basis closed higher on the day. How does it look on the daily chart? Well O.K. until you take note of the topping tails and maybe you can overlook it but take a mental note. However, what really stood out on the ever exciting big almost 1% rally in the Russell 2000 was the incredibly light volume. So, now I have topping tails and a big up day on light volume on my mind.
I obsessively drill down into the 30 minute chart in search of weakness and man the weaknesses abound. What they did was they rallied the Russell 2000 up to fill Monday’s gap and sold it off into the close. The 30 minute chart shows a lower high and if we close down below $89.12 would be a confirmed breakdown. If they rally the markets on Wednesday morning I will look to add to our short position.  I will send out an alert to members. If you are not a member sign up for the 14 Day Free Trial.
What will cause this market to drop? Write these numbers down. 79.75 and then  80.25. What those numbers represent are resistance levels for the US Dollar which although down Tuesday was very volatile implying some indecision at a support level. Why does this matter? The US stock market trades inversely of the US Dollar and we are in the midst of a currency war which is heating up. The Germans are huge exporters and the Japanese and the US are in the process of currency destruction and it is only a matter of time before the Germans / EU  begin to devalue the Euro to compete.