When thinking about your market view, it is important to be very clear on your timeframe. As most of us know all too well, it’s very common to be right on one timeframe, but to lose on the timeframe you’re trading. From a longer-term perspective, there is a very high probability that this market is a buy for at least a retest of the highs. So far, the only evidence that contradicts this is that a lot of market leading stocks are falling pretty hard, but this is also the nature of those kinds of stocks. “High fliers” tend to get hit first and hardest on any decline. Also, from a longer-term perspective we are seeing the beginnings of what could be real weakness in China and Brazil, so caution is warranted for investors (to differentiate from traders) in those markets.
None of this matters for daytraders who live and die between the two bells though. We are coming into a market that has been weak for two days, and that weakness comes in the context of a market that is fairly severely overextended to the upside. With this setup, it is completely reasonable to expect protracted consolidation on the daily timeframe, so spend some time thinking about how that will carry over to intraday. When the dailies are consolidating, we usually have a lot of crosscurrents and generally lower volume (and liquidity) on intraday timeframes. This is not to say that the market will not trend intraday, (in fact, some of the best trends come in higher timeframe consolidation) but the nature of those trends is usually kind of specific — these types of trends are usually sharp and sudden, and are usually driven by a lack of liquidity on the other side. In other words, downtrends are driven by lack of buying rather than strong selling conviction. There is also a lower probability of second leg followthrough, which frustrates traders depending on that typical market structure.
This morning we are coming in to find a market that has had overnight downside followthrough around the word. (Switzerland, in fact, is the only developed market currently in the green.) The US Dollar is also slightly stronger, which has further muddied trends in commodities this morning. I will be watching Healthcare, Financials and Oils today, but will generally be trading lightly and trying to focus even more on in play stocks than usual. This is probably not a day to be trading constantly — pick your spots and focus on only the best and clearest opportunities.
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