Traders Beware As Stocks Whipsaw Within A Range
************************
Traders Beware As Stocks Whipsaw Within A Range
By TOMI KILGORE
A DOW JONES NEWSWIRES COLUMN
If you've ever been stuck in the mud, then you know that spinning your wheels will only make it worse.
The same goes for the stock market. The difference is, when the market is volatile, but remains stuck within a trading range, Wall Street traders can lose a lot of money. It's called getting "whipsawed"--selling the low, then buying the high, rinse and repeat. Basically, every drop seems like a breakdown and every rally looks like a breakout. Traders beware, because it looks like the market's wheels are still spinning.
Jobless-claims data disappointed again, credit-rating agencies warned Greece that it could face further downgrades, and yet another snow storm has hit the Northeast. In addition, Federal Reserve Chairman Ben Bernanke said the Fed is looking into some derivatives deals that Goldman Sachs Group (GS) and other companies made with Greece, suggesting Wall Street bankers may face even more scrutiny.
With the Dow Jones Industrial Average dropping sharply early Thursday, it looked like the market was on the precipice of a tumble, just like the ones seen in mid-January and earlier this month. If you take a couple steps back, however, you see that despite all the weakness and negative news, the Dow was still above the middle of a trading range--10000 to 10500--that it has been stuck in for more than three months (outside of a brief breakout in early January and an even briefer breakdown in early February).
The Dow was down as much as 188 points early Thursday but pared its losses to close down just 53 points at 10321.
There's a Wall Street saying that when you have trouble following the market, stop, and let the market come to you. Granted, the downside looks a bit more vulnerable than the upside, since the Dow failed to hold onto gains above its 50-day simple moving average this week. But rather than bet that the next move down will be the big one, it's better to wait until the actual breakdown occurs, like another close below 10000, before placing any new bets. Or risk getting whipsawed. |