Rev Shark: Trade the Trend
07/02/2010 7:00 AM
"Never awake me when you have good news to announce, because with good news nothing presses; but when you have bad news, arouse me immediately, for then there is not an instant to be lost."
-- Napoleon Bonaparte
The million-dollar question this morning is to what degree has the market priced in a bad jobs report. The report is due out at 8:30 a.m. EDT, and it is expected to show a loss of about 150,000 jobs. With weekly unemployment claims and the ADP employment report coming in worse than expected, however, many market players are expecting worse.
The good news is that this market has undergone a significant correction over the past two weeks. If there is bad news out there, much of it has already been priced in, which makes the chances of a rally on a poor jobs report fairly good.
Once we are past the initial emotional response to the jobs news, trading becomes very tricky very fast. If we do have a relief rally on the news, we run into the first technical overhead resistance at around 1,050 of the S&P 500. If we can cut through that level, then the next area of chart congestion is around 1,067-1,070.
The No. 1 thing to keep in mind is that the market is in a downtrend. There is a good setup for an oversold bounce on the jobs news, but it would be a mistake to conclude that the worst is over and that the market is going to go straight back up. A significant number of trapped bulls have been riding this move down and would love to escape some positions if they can sell into strength and reduce their losses. Also, plenty of emboldened bears will be looking to aggressively remount shorts as we bounce into technical resistance. If you go through charts of individual stocks, you'll find a lot of stocks ready for dead-cat bounces, which will offer excellent short setups once they are not quite so oversold.
I believe the best way to approach this market is to require the bulls to prove themselves before you trust them. Many market players prefer to try to call the bottom, but my experience has been that it is far safer and more profitable to wait until there is some good evidence that the trend is changing. You can play oversold bounces and bear market spikes if that is your style, but just make sure you have the appropriate time frames and are using good money management to control risk.
The way to make money in the market is to trade in the direction of the trend. It can be more difficult than it sounds, especially when we have a constant chorus of voices telling us why conditions are about to shift. If you block the noise, stay open minded and aren't overly anticipatory, however, it can mean more for your investment returns than anything.
We'll see what is in the jobs news and then we'll go from there. Good luck and go get 'em.