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May 24, 2010 (FinancialWire) — In his May 19th article featuring the Russell 2000 Index ETF (NYSE: IWM) and the S&P 500 SPDR ETF (NYSE: SPY) entitled “Backdoor Bailouts, Other Sinister Deals Could Eventually Hurt The Market” (at http://www.financialwire.net/2010/05/19/joe-duarte/), Dr. Joe Duarte noted several signs of cautionary behavior in the stock market. Over the weekend, we caught up with Dr. Joe:

FW:  Joe, We’re watching a very volatile market these days. What’s behind it?

JD:  No one really knows. But there are some interesting theories. One of the more interesting ones is that there is so much computer trading going on that the inmates are now in charge of the asylum.

FW:  You mean that things could get crazier?

JD:  Yeah (Laughing). Think of it this way. A bunch of guys program their super fast computers with all the potential technical analysis information that they can think of. Then, they give the computers instructions as to what to do when certain things happen.  When these conditions are in place, the computers start trading, based on their instructions.

FW:  So why is that different now, Joe?

JD:  Because there seems to be more of it going on than ever.

FW:  So, is it bad?

JD:  I guess it all depends on which side of the trade you’re on. If you own stocks and the conditions programmed into the computers say to buy, then it’s a good thing, especially if the computers buy stocks that you own. If the conditions tell the computers to sell, you better hope that you’re on the short side of the market, where you make money when stocks fall.

FW:  How do position yourself for something like this, Joe?

JD:  You can’t. But you can become a more technically oriented trader, which means that you have to understand support and resistance. Support is where stocks stop falling as buyers appear. Resistance is a chart point above which sellers appear and stocks drop.  It looks as if the computer trading is built, at least partially on those key concepts.

FW:  Should the average investors, say those who hold mutual funds do this kind of thing?

JD:  What’s ironic is that some mutual funds are actually doing a good bit of this kind of trading now.

FW:  Really…

JD:  Yeah, so much for long term value investing.

FW: So where is this going?

JD: It looks to me as if we’re going to have more volatility for a good while. There are too many unanswered questions about Europe, the global economy, and what the U.S. government wants to do to Goldman Sachs and now the banking system.

FW: So, you see some scary times ahead?

JD: You’ve got it.

(Go to http://www.financialwire.net/2010/04/22/about-duarte/ for more about Dr. Duarte.)

(Go to http://www.financialwire.net/?s=joe+duarte to see more commentaries by Dr. Joe Duarte.)

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