Hello Ya’ All,

How about those markets?  Were you ready for the fall?  I have had numerous conversations today asking me what happened to the markets?  Why are they falling? Why are the down candles so big?  Is this the next crash or is it just a correction like we saw in February.  The answer is no one really knows for certain.  If we look at February 2nd, we see that the S&P 500 dropped very significantly and less than two weeks later it was back up towards the eventual all-time highs that we have seen recently.  The issue is that we didn’t know for sure that it was going to head back up.  So as traders how do we deal with this uncertainty?  Here is the answer that my mentor gave to me when I asked him that very question, the first time.  He told me that we need to watch the clues that the markets leave for us and then act accordingly.  If we are able to do this effectively then not only will we be able to react when the markets get funky but we will also be able to ready ourselves before the markets turn and be in a position to take full advantage of these inevitable moves.

Let’s take this recent fall, for example,  there was a clue for us from the market that things were going to change at least in the very near term that the S&P 500 was ready to turn.  We saw a double top in the index, this is clue number one that maybe things are changing.  This clue would not give us the full story of what we are seeing happening now but there were other clues.  The next clue was the break of support at 2920 level, this added to the story but again may not have given us the full picture.  Low and behold we were given another clue a short time later and that was the break of the 2900 level.  When this level broke we started to see real cracks in the foundation.  This was the forming of another pattern that we look for and that was the M for murder pattern, this typically signifies that bearish times are abound.    If we missed all these signals we still got one, the break of the 2875 level in the futures contract was the launching pad for the big rundown of today.

This is easy to see after the fact but how do we prepare in advance for these moves.  That is where history comes to the rescue.  We can look at the charts and see that these levels were important when the stock was rising.  We can set alerts to warn us when these levels are broken and thus tuning into the clues that the market gives us.  We have to do this in advance of these moves and this is where the real work in trading comes in.  We cannot predict the future but if we study our past we can at least prepare for the future.  So if you want to move on from your rookie status and become a rockstar trader then you need to put in the time to get in tune with the markets.

Happy Trading!