Friday, 5 September 2008

Dow Jones Contrarians

If your style of trading is to be a "Contrarian", I would recommend, if you are an index trader who happens to trade the Dow Jones, S P 500, Nasdaq etc Do Not rush to open any trading positions as soon as the index you're trading has dropped or gained only 2% or less in either direction, unless you're just scalping for a few points.

The nature of the US Indices recently has proved that in the case of days where there are a bunch of good or bad news, they seem to over-react to the situation.

Let's analyse yesterday's US market actions as an example:

  • The ADP Employment figure came in as 33k which was a shade above the forecast.

  • The Initial Claims was 24k worse than the estimated forecast.

  • The Productivity-Rev did come in better than it was forecasted.

  • The ISM Services was above 50 and better than consensus.

Taking all the above factors into account, "one" would not have expected for the "Dow Jones" to have dropped 344 points (nearly 3%) and for all other indices "S P 500" and others to have done the same. So we can see how the market over-reacted negatively to the Employments News.

I wrote this article specially for the beginner investors, who may use margin accounts for trading. As by having studied their way of trading, I see a lot of them falling into the trap that if an Index or an stock sheds 1% it's time to buy that stock or Index!

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