For 8 years, between 1998 and 2006, I spent 7 hours a day, every day trading in the Dow futures pit. When it was busy, and before the onset of computerized trading, it was a market full of risk and also reward. In my opinion, it’s an over looked market by a lot of traders who concentrate on the S&P. However, the indexes give great opportunities even today for technical trades. There are also healthy spread opportunities for the quick and the nimble. If you are disciplined and trade within tight size limits, you can pull some good profits out of this market. Moving on to the present situation in the Dow. Specifically Dow Sep Futures. For the past 7 months we have been mired in a 1000 point trading range bounded roughly by 18,000 and 17,000, give or take 200 pts. The high tick for the contract came in May. That’s right, just 3 months ago, we had a high tick of 18,250. I have decided to use that as the benchmark for whatever “correction” we end up with. At that level, a 5% move is 912 points. Most “rational” analysts understand that moves of 5% or less are just noise. In other words, it’s the percentages that count, not the flat price change. Every time I’m asked to comment on the stock indexes, I try , seemingly unsuccessfully , to remind the TV audience that , while 300 points may seem “exciting” and “scary” and therefore generate ratings excitement, the reality is that it’s the percentages that matter. So, with action over the past week, I think the most important thing to look at is what are the big, fat targets to be cognizant of when looking at trading opportunities in the Dow futures. Its basic math. It’s very simple. It’s not fool proof. However, these are levels which may provide pauses, and therefore opportunity. 5% off the contract high in Sep Dow? 17,338. You might notice that we paused at that level about 4 times over the past 2 weeks. Today, that level failed. What’s the next round number? Well, round numbers create interest, so I’d expect to see some consolidation around 17,000. If that fails I think the next logical level the market will explore is a full 10% correction from the high which is 16,426. Most analysts agree that a 10% correction is not the end of the world for a bull rally, and that’s why, in the past, 10% corrections have been met with initial buying interest from traders looking for opportunity. Most analysts agree that a 20% correction is deemed a “bear” correction. Over the history of the Dow, these 20% corrections have occurred periodically. I’ll leave it up to you to go back through the long term charts and see where those occurred. To be clear, I wrote this to point out potential technical points on the charts which MAY give opportunity. If you’ve read anything I’ve written in the past, you know that in my opinion, trade management once you are long or short, are the key. You can be right and lose money if you don’t stay disciplined. With the HFT traders with their algorithms in play, you are guaranteed no matter if you are right or wrong on your trade idea, you will take heat. Unless you buy the stone cold low, or sell the stone cold high, you’ll take heat on your position. The key is managing that position once you’re exposed to the risk that any trade represents.
