Stock Market Early Morning Insights – September 29, 2016

Yesterday was another reversal day for the major market indexes due to the fallout from the vulnerability of Deutsche Bank. We all remember Lehman in 2008, and if the leverage for Deutsche Bank is anywhere near, and I have read that it is even higher, than Lehman Brothers in 2008, this could precipitate another major market selloff.

As I have mentioned several times in the past, risk is very high on the long side, but every time it looks like a major selloff is imminent, buyers step in to absorb the selling. Smart money may be propping up the market in order to unload positions before a precipitous fall, but this is just speculation on my part. If you have read Wyckoff, Tom Williams who is a Wyckoff disciple, or Anna Coulling, it is not uncommon for large players to keep prices propped up as long as possible to get the best price for their inventory.

The public wants to get in on the action on the long side of the market because they see it going up. Consequently, the public often buys when they should be selling, but we just don’t know when the inevitable collapse will occur. This is why risk management is so critical and is the main component in trading that we should be concerned about, but it is not often discussed. More time is spent on looking for magic indicators than on anything else.

Risk should always be the number one consideration when getting into a trade. After a position is sized according to your risk parameters, a stop should go into the market. Go back and read Wyckoff and Jesse Livermore and you will see that they always used stops. I often hear the excuse that market makers are going to drive the price down just to your stop level to take out your 500 lot trade. I don’t think that’s true, because why would they care about your 500 shares if there are hundreds of thousands of shares above your stop level? Do you really think that they have the power to arbitrarily drive supply and demand enough to go down to take out a small lot stop?

Even if they did, I would much rather be in a stress free position with a stop in place rather than staring at a monitor and hoping I can execute when my level is hit. I would rather lose a predetermined amount according to my risk parameters and trade worrying about every tick in my positions. I used to trade that way, and I made a lot of bad decisions over the years, so now my decisions are made before I enter a position. This is what I will be teaching when I begin my new webinar series in a little over a month.

Getting back to the market, yesterday was a news driven day, and a great deal of fear entered the market, and the shorts chased it down or initiated positions mid-day found themselves with losses at the end of the day. This morning, they are confronted with a market that looks like it wants to go up. If it rises at the open, the premium paid for long puts will evaporate almost immediately. This market is so choppy, traders are getting whipsawed day-to-day. In environments like this, it is best to trade small if you’re going to trade, and make sure it your risk is under control.

Money flowed into Exploration and Production stocks for the second day, but oil is still not trending. Crude light features are trapped in a trading range but the daily chart is forming a W formation. Crude light will have to get above $50 for the W to be complete and for the uptrend to be established.

Semiconductor stocks are strong yesterday because in NXPI is in talks with Qualcomm to be acquired. The weakness was primarily in the Healthcare Sector with Biotech and Specialty Pharma stocks taking the biggest hit.

Have a good weekend, and preserve your capital until we get a better sense of market direction..

STOCK MARKET EARLY MORNING INSIGHTS

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