Thursday, February 02, 2012

NASDAQ Closes off its Highs as Volume Slides, but Above Average

The market ended off the highs of the session, but with volume coming in lower we avoid a day of stalling. Russell 2000 small cap index raced higher tying the NASDAQ composite for the top index of the day. Interestingly, enough both indexes have yet to have the golden cross yet continue to lead the entire market higher. Bernanke’s testimony on the hill helped spark some buying, but as the testimony wore on sellers began to take over. We continue to play in overbought conditions, but this rally is healthy and remains that way. Tomorrow’s job report will certainly set off fireworks. At this very moment, we have a healthy rally that is a bit over-extended.

The unemployment rate will be the key statistic the market pundits will be paying attention to. Last month’s surprise move to the downside for the rate helped spark some confidence for the market in general. However, the denominator, the total employment pool continues to shrink driving down the percentage of people out of work. It is very difficult to measure unemployment, but judging by the U-6 figures as well as the number of people on food stamps our situation remains weak. Why else would the Federal Reserve hold rates steady near zero percent all the way out to 2015? If employment was actually improving there would be no need to continue to hold rates down. Enough of the economic talk, it’s about the trend.

Trend following is not an art form and trading based upon gut feel is not our style. Disciplined trading, rule –based trading is our game; it’s our edge to outperform the market. I know we harp this one lesson: CUTTING YOUR LOSS SHORT. It is vital, letting losses run ruins capital and ruins traders. Breaking your rules is another major flaw. Jesse Livermore would often break his rules only to see his net worth crumble. If you find yourself in this situation, what separates the best from the rest, the best rise again!

Have a great weekend!

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