Friday, March 16, 2007

 

The running of the stops

A stop-loss order is a market order that is placed to buy, above the market, or sell, below the market. What you saw in the stock market on Wednesday was a classic spike to support levels, around 12,000 in the Dow Industrials, a triggering of stop-loss sell orders then a quick rally after the stops were triggered. This is a market technicians dream. What you have are two very good levels above and below the market which, once broken, will determine the trend. However there is an opportunity here for a trade with a high degree of success.

The move of the most recent high is at least a correction of the rally which lasted from June of 2006 until last month. A correction of a trend that lasted 8 months should last at least longer than the one month we have had so far. Here is the beautiful part. If it isn't a correction of this trend then it might be a correction of a bigger trend. Maybe the trend that started in October of 2002. Trend (a) is 2100 points and trend (b) is 5400. Pricewise the amount of loses, roughly 800 points, is big enough to say its over. A correction of trend (b) will take us below 11,000. So what is your risk? The most recent high! 12,821! Allow the market to rally to 12,400 or 12,500 and you are risking 400 points to gain 1,500.

Running stops is an old trick used by floor traders to screw screw the off floor customerss who would use the stop-loss orders as protection in case the market moved against a position they held when they were not watching. Sometimes the brokers who held the stop-loss orders would tip off the traders who would collectively buy or sell to the price where the orders where triggered. All very dirty stuff. The floor traders and brokers wondered why those who used their markets embraced electronic trading so quickly. Shenanigans like this are the reason.

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