Biotech Trader Midweek Market Update

The News – Last week’s stock market decline extended into Wednesday and several reasons were given for the decline. For example:

News had come out that a nurse in Dallas had contracted the Ebola virus and this was supposedly a “clear” factor weighing on sentiment as trading began on Monday. These fears then supposedly deepened Wednesday after reports that another nurse had been infected.

Personally, I doubt it, unless of course one believes that the entire financial world stopped worrying about Ebola mid-way through the day on Wednesday and for the following 4 days. And don’t forget, the market had already been selling off for almost a month prior to last week.

I contend that markets sometimes sell off. And all sell offs end. These things don’t always have, nor need, a reason.

The Market – The market’s sold off to start the day last Wednesday but turned around sharply by the end of the day. Wednesday’s reversal signaled higher prices to follow, and that is what has happened ever since. Let’s start with the S&P.

The S&P came within just a few points of testing its channel support and turned around from there. The index has pushed through the 1st two levels a resistance in the 200-day MA and the prior short-term support. As of now, the path of least resistance remains up.

The 3-year wedge breakdown illustrated in last week’s writing implies more selling to come. A lot more. However, false breakdowns certainly can happen.

The DOW tested its channel support on Wednesday and again on Thursday. Like the S&P, a “straight up” rally has ensued. The DOW has pushed back through its 200-day MA, and seems to be headed towards its prior wedge support. That support should now act as resistance and send the market back down. A break through that resistance would certainly put the forecast for an overall move lower in jeopardy.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

Good luck!

Christian Tharp, CMT

@cmtstockcoach

Posted to The Biotech Trader on Oct 22, 2014 — 8:10 AM
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