Key to Trading the Toughest Market in Years

Stocks continued to frustrate investors Thursday by failing to conform to what is considered to be normal trading patterns. After opening lower on light volume, the S&P 500 sagged until noon, and then spent the remainder of the session clawing its way back up and closing with a loss of 0.1%.

The early selling was attributed to a 6.5% sell-off on the Shanghai Composite, which resulted from an increase in margin requirements by Chinese brokerages and the People’s Bank of China draining cash from the financial system.

And Greece was again at the forefront of Europe’s attention. The managing director of the International Monetary Fund was quoted by a German newspaper as saying that it is possible Greece will exit the eurozone. Confusion reigned when Spain’s economy minister said that a deal between Greece and the bankers was still possible. The newspaper, the Frankfurter Allgemeine Zeitung, quickly retracted its story.

In the United States, initial jobless claims increased slightly more than forecast, and pending home sales for April rose to their highest level in nine years.

Today, a revised GDP for Q1 will be reported, and analysts expect that a prior increase of 0.2% will become a contractionary -0.8%.

Crude oil rose 0.3% to $57.68 a barrel, and gold closed up 0.2% at $1,188.80 an ounce. The U.S. dollar rose 0.2% against the yen and was up slightly against a basket of currencies.

At Thursday’s close, the Dow Jones Industrial Average fell 37 points to 18,126, the S&P 500 lost 3 points at 2,121, the Nasdaq fell 9 points to 5,098, and the Russell 2000 was up 1 point at 1,253.

The NYSE’s primary market traded 690 million shares with total volume of 2.9 billion. The Nasdaq crossed a total of 1.7 billion shares. On the Big Board, decliners outpaced advancers by 1.4-to-1, and on the Nasdaq, decliners led by 1.1-to-1.

NYSE Chart
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Chart Key

Despite the annoying lack of momentum and follow-through after hitting a new high, the NYSE Composite looks stable. It has consistently held above its 50-day moving average, now at 11,090, and is above its intermediate trendline and 200-day moving average.

But MACD issued a short-term sell on Tuesday when the index fell under the resistance line at 11,143.

Dow Jones Transportation Average Chart
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I almost refrained from including a chart of the Dow Jones Transportation Average again since we’ve discussed it and economists’ reliance on it as a forecasting tool many times. But it is really so bad that I must again warn our readers that it casts a cloud over the entire market.

A death cross was issued on Tuesday, and the MACD indicator sank more deeply into the bear zone. Together, these two technical events are very negative.


On Thursday, one of our readers commented that this has been the “toughest market I have seen in 40 years of trading.” And another said, “It’s all rigged up when fundamentals don’t apply.”

There is no question that the high volatility with prices thrashing around in a tight zone of breakout/breakdown is enough to wear out the toughest of traders. Even chief investment strategist of Raymond James Financial, Inc. (NYSE:RJF), Jeff Saut, a veteran of many tough markets, is having his share of “wrong” trading ideas. But Jeff made an excellent point Thursday when he said, “The trick is to survive.”

What he is saying is that everyone makes mistakes and to be the hottest trader one year is usually followed by disaster in the next. The truth is that none of us know the future, but successful traders hang in year after year.

The key is to limit losses as quickly as possible. There is nothing wrong with you or the market when you take a loss as long as you limit the size of that loss and learn from the experience.

Yes, it is a tough market — one of the most difficult I’ve seen in many years. But it is not “rigged” and still provides both traders and investors the opportunity to make a positive return as long as he or she has an investment plan that accounts for the losses. Mistakes are inevitable and the wise trader acknowledges this and addresses them as part of an overall trading plan.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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