Tomorrow the employment numbers come out and expectation are that unemployment will come in just below 10%. How will the market react? Will the Dow hold 10,000 or sell-off?

The Psychological Effect

The psychological effect of the unemployment number crossing 10 percent could have a significant impact on trading tomorrow. If the number comes in higher than expected, the market will probably sell-off. A correction would not necessarily be a bad thing now, as the markets have come a long way since the March bottoms.

Market Looking For Direction

Recently, the market volatility has increased along with the market swings. The Dow 10,000 looks toppy and if the number comes in worse than expected, expect a quick loss in the markets. If the number comes out better than expected, the market will probably continue higher. Those who are short the markets get out of the way until the next source of bad news or lose big.

Be Prepared To Jump In Or Out

You can make a lot of money trading economic new but prepare yourself to get out quickly if the trade does not go your way. If you are trading the employment numbers, please remember your stop orders. The unemployment numbers will move the markets tomorrow. I do not recommend trading economic numbers. If you do so, play it safe and take profits or stop losses.

I recall watching CNBC when the DOW crossed 10,000 a little over a week ago. What was it that made the traders and investors on the floor cheer? Why is the 10,000 milestone so important? What makes this time different from the first time the DOW passed the 10,000 mark 10 years ago?

The Decade That Flat-lined

To me, the DOW crossing 10,000 means nothing fundamentally and technically it is another whole number to trade off. The DOW crossing 10,000 did not create any new jobs, nor did it help the declining dollar. As I mentioned earlier, the DOW crossed the 10,000 milestone 10 years ago. If you had put your money into an index fund 10 years ago, it has done nothing…not counting dividends. Dividends that, if reinvested, have lost value and taxes you paid on them probably wipes out anything you might have gained.

Dow 10,000 – The Second Time Around

With a decade of no performance, where do we really stand? Well, 10,000 today is not the same 10,000 as it were 10 years ago. Thanks to inflation, your investment in an index fund that tracks the DOW might have returned you the same dollar amount as you invested but it gave you a dollar with a significantly weaker buying power. Want to know more about the loss in your buying power? Head over to ZeroHedge.com and read an article called “DOW 10,000!!!! OhWait, Make That 7,537.”

Investing In Index Funds

If you are investing in index funds think about this post. Ten years of no gains and loss of buying power will make anyone poorer than they were 10 years ago. Do not get me wrong, I am not saying that index funds are a terrible investment. I am saying that the buy and hold theory should be history. A decade of losing 25% of your buying power and no investment gains is an obstacle you do not want in a retirement account.

Sell in May and go away, a slogan referred to when traders and investors go flat (hold no positions) over the summer. If traders and investors took part in the sell in May and go away theory this year, many would probably have some catching up to do as they are lagging the indexes.

I traded the failed head and shoulders pattern in July, but quickly reversed the trade after breaking up through and holding the neckline. Too many people were shorting the head and shoulders pattern in July and when a few people stepped in to buy; those who were shorting got stopped out. With September around the corner, is it time to sell?

As the market seems to keep going higher, some stocks are getting ahead of the underlying fundamentals. So, why have we not seen a pullback? Whenever the market looks like it wants to pull back, fund managers, retail investors, and others are piling in with hopes of catching up to the indexes. Afraid they will miss the next move higher. The current market just doesn’t want to sell.

Looking at the chart below, the S&P 500 volume is thinning out while making new highs. Recent volume has been concentrated in just a few companies.

Although the S&P 500 is in a nice upward trend, many others and I think there will be a correction. The $64,000 question is when and how much? One thing I learned quickly in trading is that if most investors and traders suspect it, then most likely it will fail. How many times did investors and traders call a bottom on the way down to the March lows? I think the head and shoulders pattern failed because it was a one sided trade…everyone was short, including myself.

While I think a pullback is near, I remain bearishly long. My trading portfolio is currently flat while my income portfolio is loaded with preferred stocks and junk bonds. However, as the markets continue to rise, so do my stop loss orders. Maybe, September will show us what is next to come.

One of the most popular technical patterns is the head and shoulders pattern. The head and shoulders pattern indicates an uptrend’s reversal and is a reliable pattern with a high success rate. Does it mean that it will work every time? No, does any indicator or pattern work 100% of the time? I trade trends and the head and shoulders pattern is not a pattern I choose to trade against, as the pattern tends to be correct more times than not once confirmed. What is a head and shoulders pattern and how do you trade it?

Head And Shoulders Pattern

A head and shoulders pattern is one type of reversal pattern that indicates an end to an uptrend and a beginning to a new downtrend. Look at the picture below (current S&P 500 chart with a head and shoulders pattern) before I explain a head and shoulders pattern and how to calculate where, based on the pattern, the market, stock, or futures, etc. is going.

Head And Shoulders Pattern Explained

The left shoulders forms in a natural uptrend as the stock makes new highs then falls back (or corrects to what will be called the neckline, this will be the first point of the neckline) before pushing higher to make new highs (head).

After making new highs, the security then falls back from the head to previous lows where it finds resistance. This resistance is from the prior pull back.

The security will start to push higher, and will be unable to make new highs. It is as this time you will notice the formation coming into play. This upward push is the beginning of the right should and is unable to get through the highs created in the left shoulder. It is at this time that you need to connect the two pullback points to create the neckline.

Confirmation of the pattern comes when the security passes through and holds the neckline. Traders will start getting into short positions at this time. As you can see from the chart above, the S&P 500 has not yet broke the neckline. The upcoming week will be an important week as to whether the uptrend is over.

How To Calculate The Potential Move

In an equation, it looks like the follow:

Neckline – (High Point in Head – Neckline) = Price Target

Using the image below (DOW Head and Shoulders Patter), take the high point of the head which is roughly 8,800 and the neckline which is about 8,200. In short, you can expect to see a 600-point move to the downside.

8,200 – (8,800 – 8,200) = Price Target

This gives a price target of 7,600 on the DOW. I recommend that you get out before taking out the target unless the markets or a security (whichever you are trading) is falling apart.

Things To Keep In Mind

• The volume is normally highest in the left shoulder. As the stock reaches new highs (in the head), it is usually not supported by volume.
• The neckline does not have to be perfectly horizontal, it can slightly move up or down.
• Shoulders should peak around the same price.
• You do not have to get short positions but should at least lighten up your holding(s) and buy them at cheaper levels.
• Head and shoulders patterns can be used with all types of securities, whether an individual stock or index futures.

Looking at the markets today, five technical indicators may show the market is headed down but do not be too quick to pile in on short positions.

Looking at the chart below you can see five technical indicators that may signal the market is heading lower. Here is a list of the five indicators and why they might be saying to get out of long positions as the markets heads toward a possible correction.

1. Stochastics – looking at the daily chart below, you can see the stochastics have turned over. I like the slow stochastics but needs confirmation from other indicators.
2. Resistance – the S&P 500 is stuck around 950 for about 2 weeks now and is unable to close above 950. The market is currently in a range with 950 as the upper number. No a reason to go short but a good reason to sell long positions and look for a better entry level.
3. Volume – has slowly decreased as the market headed higher. As the market reached the 950 level (resistance mentioned above), volume is declining which is an indication that traders do not want to buy at these levels.
4. Trend Line Broken – the current uptrend line dating back to March is broken.
5. 200 Day Moving Average – this is probably one of the most important indicators on a daily chart. Although the S&P 500 has yet to break down through the 200 DMA, it may be coming. The S&P 500 just broke through the 200 DMA to the upside about 2 weeks ago and maybe in a retest of the 200 DMA; which is one reason not to get short, right yet. If the S&P 500 breaks through the 200 DMA, you may want to start hedging or placing shorts.

Is The Market Headed Lower?

DISCLAIMER: Please use your own research. This post is for informational use only and not a recommendation to buy/sell any securities.