On Monday, the stock market slid after weaker-than-expected economic data was released from Germany (Europe’s largest economy). Europe’s economy is already weak, so people were concerned that if Germany slows down, what will happen to the rest of Europe?
In the US, much of the weakness was focused on biotech and small cap stocks. The Russell 2000 index, which is the common benchmark for small-cap stocks that you can see at the end of this article, fell after encountering resistance near its recent highs. HOWEVER, that is perfectly normal AND healthy.
The bulls welcome the major averages pausing for a few days or weeks so that the market can blast off again!
At this point, the action in the market and by leading stocks looks perfectly normal as the major averages are extended from logical areas of support, and are way overdue for a nice pullback.
Market Hours versus After/Pre-Market Hours:
As we sit back and wait for the pullback to help us launch the bull market forward, it’s important to tackle some important questions many people have.
We received quite a few emails asking what we do when a stock trades higher or lower in after- or pre-market session. For The Midas Wave Alerts service, all our orders are based on normal market hours, not pre or after hours. Many times, especially during earnings season, you will see wild action in the after/pre market and my research shows there is very little to no correlation between those hours and what happens during normal market hours. It is a spurious correlation at best.
I have witnessed several big after/pre-market moves (up and down) completely erased by the next trading day. Additionally, the only data that shows up on the chart is normal hours trading and since we analyze market hours, we prefer to focus on normal market hours (barring some huge unforeseen reason, of course).
As we enter earnings season, we will likely see several big gaps (up and down). A gap occurs when the stock opens significantly higher or lower than the prior session. For example, if the stock closed at 10 and then opens the next day at 11, that would be gap up. Conversely, if the stock closed at 10 and then opened at 9, that would be a gap down.
The question that is often asked is, “How do we handle gaps?” Meaning, what happens when a stock gaps above our buy stop or below our sell stop. The answer is that we respect the gap and enter or exit at the first available price (in or out). For example, if we have a buy stop to enter at 100 and the stock opens at 102, the buy stop becomes a market order and we are filled at the first available price. The same is true for our sell stops; we want to get out at the first available price (if the stock gaps down below our pre-determined sell price, we want out). This is the first week of earnings season so we felt the timing of this message is important and can help you make your way through the always-fun earnings season. If you want this done for you, see if you qualify to join MidasWave.com now.