Why the markets could go much lower

Monday's session was indeed a continuation of Friday's afternoon decline. The selling was rather orderly, muted and contained... in a week filled with events that usually spawn large-range days and sometimes big directional moves.

ES (+$50 per index point)

S&P 500 futures opened on sell signals just below the pivot point and dropped more than 4pts in favor of shorts right from there. It then coiled sideways in undecided fashion, where we've seen so many upside program-slam bursts lately. Not this time. Sell programs broke it lower just past 1:00pm EST, for nearly +10pts from sell signals to subsequent lows.

After those two directional moves, the rest was merely sideways coiling and noise.

ER (+$100 per index point)

Russell 2000 futures played the same way: short signals off the bell, short signals near 1:00pm EST and scalper's wiggles in between. Mostly a program-trade driven day.

ES (+$50 per index point)

As we noted in yesterday's report, the 50dma did attract price action near the lows on Monday. That mark and then 1273 are widely watched by dipsters who view each trip downward as the next hot buying opportunity. Maybe, maybe not this time around. In any event, 1273 may not break with ease if it does break at all.

ER (+$100 per index point)

The most recent low-high swing grid for Russell 2000 places initial expected support near the 723 level, followed by 50pma near 719 just below. Small Caps and Mid-Caps (not shown) have been the bull's preferred playground for years now. Both continue to hold relatively higher than their bigger capped brethren.

Summation
As Rob Hanna noted inside his report last night, it's been years since the S&P has corrected even -10% from any peak. That is a long time... longer than many if not most of today's retail traders have been around. Think about that for a moment. Most of today's active traders only know that buying dips every time markets come in = the only way to trade. Have (GOOG | Quote | Chart | News | PowerRating) and (CME | Quote | Chart | News | PowerRating) players been rewarded for that mindset? How about oil stocks, gold stocks... many stocks?

A few of us have been around long enough to know that eventually the market begins to dip and there is no bounce to follow. Just another dip after the last, which precludes a lower dip still ahead. In my opinion, stock markets are going to be roiled and volatile, perhaps very volatile when price action begins the inevitable, normal, healthy correction process.

Heck, even a -20% drop for the S&P off its highs would still be around 1050... a higher low than the 2002 bottom. I personally have no idea whether markets will dip -5%, -10% or deeper. No one else on Earth knows, either. I do know that markets will correct eventually, and a new crop of bull-market traders will learn the inevitable lessons of a two-way street.

For now I'm very content to play the intraday game, book solid profits week over month and not worry about a thing. Eventually we'll be in trending markets again, and that opens up potential for other styles of directional trading, too. Not a matter of if lower-trending markets will happen, merely a question of when.

Trade To Win
Austin P
www.CoiledMarkets.com
(Online video clip tutorials... open access)

Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures, equity options and commodity markets.
Mr. Passamonte's trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York.