A Stock Market Move Called (sort of)

This post would be a lot more impressive if I had posted it Friday or Saturday, as planned, but perhaps it still has value.

Tuesday May 26 was a wild ride on Wall Street. The market plunged at the open , traded down hard most of the day (about 3%), then at the end of the day rose just as hard as it fell. Some of the indexes closed up a reasonable amount for a normal trading day. The Dow Jones Industrial Average closed down less than a half percent.

I had watched the market a little during the day, casually, since I didn't have any stocks in my account. But I didn't hear about the late day rally until driving home. I thought from the report, "The market made a hammer today. Better look at charts tonight."

A "hammer" is a candlestick pattern of a price variation, such as a stock, a stock index, or really any commodity whose price varies. Candlesticks are a way to display price variation so it is easy to read the important information of a security's open, high, low, and close for the period. Any period actually. Candlesticks can be drawn minute by minute, for half-hours, hours, days, weeks, months, or even years. Any time period you want. Different types of traders use different time frames. I was thinking of a hammer candlestick on the daily chart.

So I studied the stock index charts that night. All the major indexes had indeed made a hammer of one type or another. I came upstairs from the Dungeon and told Lynda it looked as if the market was about to go on a run to the upside.

So what happened? Wednesday and Thursday saw strength in the market. While many indexes went down on Wednesday, they closed well above lows of the previous session. Thursday was up strong. At some point on Wednesday, when the market was strong at midday, I told Lynda, "I nailed it."

She reminded me that you can't claim to have nailed it unless you put some money behind your prediction. And I hadn't. Knowing the busyness of the next few days at the office, I knew I couldn't watch trades, so I didn't place any on Tuesday night. Had I done so, and managed the trade according to risk-reward rules, I would have made a few percentage points on a trade over two or three days. I could have accepted that. The movement, of course, may be rather short-lived, as the market today closed below the close of last Tuesday. It's still above the lows of the 26th, so the movement may not be over yet.

Lynda did take a position on a stock on Thursday, based on my prediction, and made 1.5% from Thursday to Friday, closing out then. I'd take 1.5% overnight any day.

So, I guess I'll keep watching stock price and volume patterns, trying to figure out where the money is moving, and what is happening, spotting the trend, making 1.5% every few days. Maybe, just maybe, I can make some money with all this training I've received.