A Daytrader’s Market?

Earlier this week, stocks came perilously close to a freefall. But instead of breaking down Monday morning, small-cap stocks � along with the market at-large � showed signs of life when it counted:

The jury�s still out as to how this will eventually play out. But for now, stocks have avoided total collapse once again by testing support (blue line) and moving higher.

The worst thing that could happen right now would be a breach of this relatively new support level, followed by a re-test of August lows (red line).

This does not mean we�re out of the woods just yet. In fact, I still consider this to be a daytrader�s market. The moves of the major indexes have been so erratic over the past several days on an intraday view that it has been virtually impossible to get a handle on what will happen next.

So today, in the spirit of this chop-fest, I offer you the cold, hard truth about trading during one of the most difficult-to-read markets in recent memory.

First, it�s important to realize that any financial journalist, pundit or talking head who has recently attempted to offer a short-term market prediction has been dead wrong. It�s not because they�re stupid or misinformed � it�s because the market just doesn�t give a damn what anyone thinks. At any given moment, stocks will surprise just about everyone, regardless of education or status. The edge that all traders need right now is virtually nonexistent.

This back-and-forth action we�re seeing � in which the market�s close one day has virtually no connection to how it will open the next � is downright frustrating. There�s so much information for the market to absorb related to the world economy that it�s impossible to say what potential events are priced in to stocks, and what news could shake stocks even lower…

Also, you need to realize that most traders attempting to play these back-and-forth moves are getting taken apart. Cash is king when the tape gets weird � so unless you�re a day trader looking to make a quick buck, I would not recommend trying to play this market. There will be opportunities, but they will be fewer than we would see under normal market conditions.

What�s important right now is for you to assume a defensive stance. Preservation of capital is key. If you are going to trade, you must be willing to accept numerous small losses, knowing that your winning trades, although fewer in number, will more than make up the difference. Getting greedy, hopeful or just anxious is always bad for your trading account. You have to let the market come to you…