Stocks traded lower on Monday, with volume drying up as we head
into the Labor Day holiday. This put the market into the hands of
traders who in very thin trading ignored takeover deals and rumors,
and instead focused on economics.
Personal income for July increased 0.2% and spending increased
0.4% - income was slightly less than expected and spending just a
bit more. But core personal consumption expenditures increased just
0.1%, and that was slightly less than expected. The big jobs report
for August is due on Friday, and several economists said they felt
that the unemployment rate would jump to 9.6% from 9.5% in July,
and that's what the market focused on yesterday.
Several deals made headlines Monday, including the offer by drug
) of $18.5 billion in cash for
). Genzyme rejected the deal saying that it was "inadequate." GENZ
rose 3.4% and SNY fell 1.1%.
And the battle for the acquisition of
) heated up when 3Par said that the offer by
) at $30 was superior to
) offer of $27 that it had already accepted. HP was the only Dow
component to rise yesterday, up 1.5%, as it enjoyed the impact of
an announcement during the weekend of a $10 billion buyback of its
own stock. DELL gained 1.1%.
The U.S. dollar rose 0.3% against a basket of currencies. And
Treasuries climbed with the 10-year note's yield at 2.53%.
At the close, the Dow Jones Industrial Average was down 141
points to 10,009, the S&P 500 lost 16 points to 1,049, and the
Nasdaq was off 34 points at 2,120.
The NYSE traded 817 million shares with decliners over advancers
by 3-to-1. The Nasdaq crossed 447 million shares with ahead by
Crude oil for October delivery dropped 47 cents to $74.70 a
barrel, as energy supplies are reported to be the highest in years
due to the slow-growth economy. The
Energy Select Sector SPDR
) fell 76 cents, closing at $51.34.
December gold rose $1.30 to settle at $1,239.20 an ounce, and
PHLX Gold/Silver Sector Index
) fell 1.28 points to 182.86.
What the Markets Are Saying
Traders who yesterday jumped on board the long side of the
market on the opening were probably delighted to have a quick gain.
But the problem was that the gain lasted for only several minutes
before the longs were squeezed by short-sellers in a low-volume
environment where just a relatively few traders can control the
market for a day or so.
Those who trade stocks for a living are very familiar with the
high volatility that accompanies a pre-holiday week, and they use
that to their advantage.
Yesterday was the fifth consecutive day that the S&P 500
traded within the narrow zone of 1,040 to 1,065. Yesterday's high
was 1,064.4 and its low was 1,048.79.
Where then should a trader try to position longs if the evidence
is for the near-term trading trend to be bullish?
Here is the answer from yesterday's
Daily Market Outlook
, "Why do I mention the 1,040 support line again after harping on
it for at least two weeks? Because some of our readers wondered
why, after being on the bearish side of the market since late July,
I should suddenly (in their minds) turn bullish and call for a
trading bounce. The reason is very simple: Support lines usually
support and resistance lines usually resist. And they function best
when the majority of the public ignores their significance and goes
with the near-term trend."
With the spread of 1,040 to 1,065, the "smart trader" who is
operating in a volatile market will try to position at some point
below the halfway mark of the established daily spreads and not "at
the market, on the opening." Trades should be entered at no more
than 1,052 with a stop-loss at under the two daily reversals at
1,040 - say at 1,037. And only limit orders, not market orders,
should be entered when opening trading positions.
Why do I bring this up today? Because I read the e-mail
responses to the Daily Market Outlook, and it seems that some of
you jumped on the long side yesterday at the opening, at the
If you trade, you must have some basic rules, and yesterday
provided a great lesson in trading discipline.
Here are some basic trading rules:
1. Determine the trading spread in a volatile market and only
take long positions that are priced below the halfway point of the
spread (shorts are the opposite).
2. Always use a limit order. Never initiate a new position with
a market order.
3. Always enter a fixed stop-loss order at a point below the
daily spread or support line that, if violated, could mean that the
near-term trend has changed.
One of the best traders once told a class of trainees, "your
first lost is your best loss." That's true only if those who day
trade learn from their mistakes.
For the remainder of the week, I'll cover some other basic
trading techniques. Tomorrow's topic will be how to learn from
To see the support zones and resistance zones of the S&P
Today's Trading Landscape
Earnings to be reported before the opening
China Gerui, Dollar General, DSW, Energy Conversion, Isle of Capri
and K-Sea Transportation.
Earnings to be reported after the close include:
ABM Industries, Accuray, Applied Signal, Concurrent and Danaos.
Economic reports due:
ICSC-Goldman Sachs store sales, Redbook, S&P Case-Shiller Home
Price Indices, Chicago PMI (the consensus expects 56), consumer
confidence (the consensus expects 51), State Street Investor
Confidence, FOMC minutes and farm prices.
If you have questions or comments for Sam Collins, please
e-mail him at
The Secret to Banking Giant Options Gains
- If you're ready to make serious money, we're talking about
100%-5,300% profits, read our just-released trading guide online
now. In it we reveal the money-doubling secret we were banned
from sharing, plus two free trades to get you started.
Get your FREE copy here!