Market Correction: What Do You Do?

Market Correction

Market correction.  Do you know what to do when the market corrects?

Market correctionA market correction has been on everyone’s mind lately.  I was interviewed by US News & World Report on how to handle a market correction.  Because of global events in Greece and China that could affect the markets, US News & World Report sought my and others’ perspective on what to do before a correction gets underway.

Market Corrections Present Opportunities

We’ve known from the earliest writings by Richard Wyckoff that one of the biggest mistakes long-term Market Correctioninvestors make is getting out of the stock market at the wrong time. They have a tendency to panic during market corrections and sell when stock prices are down, locking in losses.  We see this in a selling climax.  I address this, emotions and having an investment process that allows you to buy great companies at cheap prices when others are selling in panic.

You can read the article here: 6 Strategies To Steer You Through A Market Correction

 

Reading Trading Volume

Reading Trading Volume

Reading Trading volume can be a key analytical skill, though few traders bother to learn it. Although we read much from price action, sometimes it can be useful to look carefully at the volume, especially in certain trading situations.  One of those situations is occurring now.

Reading Trading VolumeWhen the market was trading around its recent highs of 2134 in mid- to late May, volume to the upside dried up. We see classic no demand at the top.

Reading trading volume since then gives us a picture of supply.  I’ve colored the down bars in red and up bars in green.  Whenever the market has sold off for the day, volume increased, indicating supply.  On the rallies, there was lesser volume.  We would generally interpret this as selling dominating buying.

The pattern of the price bars also reflects this.  We see generally lower highs, an inability to close above the 2119 level, and a lot of overlapping price bars in an area where volume has increased.

Unless the market can muster its buyers to make a concerted effort to hold the recent lows and push prices higher, the 2057 level would be the next target.

Reading trading volume can give traders an extra edge in unclear market situations.  Even with this knowledge, we want to see the market first tip it’s hand.  The lows are still holding (though just barely).  We may see another rally.

 

Triangle: US Stock Market

Triangle: US Stock Market

Triangle: US Stock Market.  The US stock market is forming a triangle or apex.  This is the kind of market that drives people (me included) crazy!

Triangle US Stock MarketLet’s take a look at the daily to see the triangle in the US stock market.  Last week on Tuesday, the market fell hard to 2096 after a week of flirting with going higher, but unable to do so.  It looked like we were headed lower, but because Tuesday was oversold, going lower was likely a day or two off.  A relief rally was expected. The relief rally occurred, but the rally was stronger than expected, putting the close back up above 2119.75.  This led to the expectation of a push higher, but we saw no follow through.  The market then came down on Friday, but held today.  The market is wrong-footing a lot of traders and frustrating many.

US Stock Market: Last Four Days in a Triangle

Note that the last four days have traded inside last Tuesday’s range.  The market is coiling into a triangle or, what we refer to as an apex or hinge in Wyckoff’s terminology. It doesn’t matter what you call it, we’re coiling. You can see this clearly on the 240 minute chart.

I have always found apexes difficult to suss out.  You can see on both the daily and the 240 that the downside volume is larger, suggesting a downside break from the apex.  We have also been slip-sliding down below the 2119.75 level, further indicating weakness.

My reading is that we will break and go lower, yet, we continue to hold.  So, I hold the idea of breaking and going lower very lightly.  That’s my bias, but I will be quick to change it if need be.  What I am confident in is that we are coiling and we can expect a drive out of that coil with good trading very soon.

Constructive Day in the S&Ps

Constructive Day in S&Ps

Constructive Day in S&Ps TodayIt was a constructive day in the S&Ps today. Although it didn’t completely erase all of the selling from yesterday (today painted an inside bar), we see solid price action and good volume come back into the upside.

We had several days with narrower ranges last week, so volatility has naturally picked up.  We may see some additional volatility over the next day or two as the week comes to a close.  Because today was a constructive day in the S&Ps resolving volatility to the upside, the coming employment and GDP reports may serve as a catalyst for additional volatility and upside potential.

Today’s Action

We expected the rally today, though truthfully, it ran higher than what was anticipated.  We can never be perfect in our trading, and especially in foreseeing what the market will do next.  That is the nature of trading.  It can be difficult to be operate in so much ambiguity, there is no doubt about that.  It’s one of the reasons I find mindfulness to be of such value.  We have to keep our minds in the moment, and not let what we think the market will do have too great an influence on our trading actions.

What’s Likely After a Constructive Day in S&Ps

Tomorrow is likely to rise higher since the buyers took back control today.  Look for a pullback to the 2115-13 area where there has been lots of back and forth over the recent past.  If the pullback is weak and price action in that area suggests support, it could be a choice point for a long opportunity.

A deeper pullback could take the market back down to around the 2106 level, or slightly higher.  If the market closes below this level tomorrow, sellers are saying they haven’t given up.  I think the odds of that occurring are rather low, though, given the current structure.

Anticipating A Day Trade

Anticipating A Day Trade

I always like to be anticipating a day trade.  Usually, anticipating a day trade is easiest early in the US morning session.  It is a major reason to create a game plan the night before.  In last night’s post, I indicated that the S&Ps (ES) were likely oversold by yesterday’s strong downside action.  We could therefore anticipate a rally or pullback.  I marked the 2113 level as a good target, based on market structure.  I was hoping the market would get a little more oversold by going underneath yesterday’s low this morning, but the markets don’t usually comply exactly with my wishes. That’s really no matter.

Anticipating A Day Trade: The Context

Anticipating a Day TradeComing into the US morning session, the first thing to notice was that the S&Ps had moved up off the lows of yesterday.  The idea of buying a weak dip underneath yesterday’s low for the first trade of the day was immediately nixed.

Two other things were noteworthy: First, there was little supply seen on reactions since the lows were made yesterday.  Second, the market made a higher high (B) over yesterday afternoon’s swing high (A).  In the backdrop of being oversold, this context suggested higher prices this morning.

Anticipating a Day trade: The Setup & Exit

The reaction back to C drew downside volume, but the volume didn’t produce a new low.  Instead, price held the demand line and gave clear price bar behavior it would rally.  A few minutes later, it tested the trend line and drew no supply with more confirming bullish price action.  Either location offered long trade initiation.

As anticipated last night, the 2113 level was a reasonable target for a nice day trade.