The stock markets continue to pullback today. Our job as traders is to evaluate this price action as it occurs. Things to watch for are: Does the trend change? Where is price relative to the 20 period moving average and which direction is the 20 MA pointing? Where is price relative to support? How strong is support? All these things are visible clues as to where the market may go.
Many traders will trade pullbacks by shorting appropriate stocks as they pull back on smaller time frames. Even though a daily chart can be in an uptrend its 15 or 60 minute chart can be in a downtrend. For a stock to pullback signifcantly the smaller time frames will be in downtrends. This is a dicier way to trade though as these traders are trading the counter trend (against the trend).
A good time to enter stocks on pullbacks is when a smaller time frame reverses tend back to the direction of the daily. While buying pullbacks makes sense from a risk and reward standpoint it is usually a bit scarey for new traders. But then the markets are not set up to reward comfort. To trade the counter trend with confidence traders must have control of their targets and stops. Having a stop set on a smaller time frame should mean a smaller loss should it stop out and a larger gain should it go on to make new highs.
Other traders will simply stand aside and wait for the trend to reassert itself or change before they place new trades.
The biggest news today was a crescendo of concern in European debt problems, specifically Ireland as they try to negotiate for help. With the Euro dropping the US dollar is going up and that has been a problem for stocks for some time now. Commodity stocks are falling and bond yeilds are rising. Overall there was not many places to hide from the sell off.
Retail stocks perhaps the only mixed bag today but a nice increase in October retail sales has helped Aropostale (ARO), Urban Outfitters (URBN), Ross Stores (ROST), WalMart (WMT), Home Depot (HD) and Lowes (LOW) advance. Automobiles were strongest since last April (+5%), and helping the1.2% rise in total retail sales. Only .5% was expected.
Caterpillar Inc. (CAT), agreed to buy Bucyrus (BUCY) on Monday at a 30% premium to Fridays close. BUCY gaped up yesterday and is holding well. Other stocks in the same space like Joy Global (JOYG), got a shot in the arm too but are selling off today. The 30% premium to the trading price speaks to many about possible low valuations the stock market has placed on some stocks.
The Labor Department today said that the Producer Price Index rose 0.4 percent last month, the same increase as September and August. Wall Street analysts had expected a larger increase.
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