Good luck!
Tuesday, December 29, 2009
What an Opportunity...
We all know what happens to rising wedges that build with low volume. They collapse. Just look at this daily chart for the March ES. I highlighted the volume for the last seven sessions. This classic pattern that is fairly reliable.
Good luck!
Good luck!
Monday, December 28, 2009
Let the games begin...
We are at the end of the year. S&P has pushed to it's 2009 highs - trading at 1127 as I post - yet, we all know that this amazing 9 month rally is changing. It is tired - running on fumes and built on low volume. The fundamentals are not in place, the government is now faced with a tremendous debt burden and has much more to finance going forward. For those of you who have not read the news this morning, a very important signal has been sent to the market by El-Erian - get out of equities.
El-Erian of Pimco
Having placed my short equity bets early, I have an especially difficult challenge. My first target for the S&P is around 960 followed by 880. My average short position is slightly above 1000. The risk reward profile of this setup is a horrible and in retrospect, I should have abandoned the position three throw backs ago. The question now is how to maximize profits as this corrects. The answer is leverage and the solution is the ES. I will be matching 1 ES contract to every 500 shares of SPY in an effort to compound my gains and/or mitigate loss. This is a dangerous solution as it involves leverage.
I will be trading in a 20 point range based on a core short position, scalping to keep in the money when needed. I have been using this technique for the last 10 sessions and I have managed to build my core short position at 112250 - with no losses recorded. This is important as I opened my core position much earlier at a much lower level and have scalped to effectively raise my entry more than 15 points.
Though I could have waited until the first week of January to enter this position - avoiding some of the hard work scalping - who is to say that a sell-off is not in the cards before Jan. 1? The technicals sure suggest it is possible.
The fact of the matter is that calling a top or bottom is a losing game. You can wait and miss it. You can jump all in too soon and lose it all. To succeed in a trade such as this, you need to anticipate change and scale into play - fighting as hard as you can against the tide to be in position when it moves your way. That is where I am right now - and it is where I trade my best.
So, let the market drift higher on low volume as the VIX starts to perc. I'm trading in lock step, building substantial potential energy in my positions. This will break soon and I will profit from the big move soon enough. Bring it on baby!
Good luck out there...
El-Erian of Pimco
Having placed my short equity bets early, I have an especially difficult challenge. My first target for the S&P is around 960 followed by 880. My average short position is slightly above 1000. The risk reward profile of this setup is a horrible and in retrospect, I should have abandoned the position three throw backs ago. The question now is how to maximize profits as this corrects. The answer is leverage and the solution is the ES. I will be matching 1 ES contract to every 500 shares of SPY in an effort to compound my gains and/or mitigate loss. This is a dangerous solution as it involves leverage.
I will be trading in a 20 point range based on a core short position, scalping to keep in the money when needed. I have been using this technique for the last 10 sessions and I have managed to build my core short position at 112250 - with no losses recorded. This is important as I opened my core position much earlier at a much lower level and have scalped to effectively raise my entry more than 15 points.
Though I could have waited until the first week of January to enter this position - avoiding some of the hard work scalping - who is to say that a sell-off is not in the cards before Jan. 1? The technicals sure suggest it is possible.
The fact of the matter is that calling a top or bottom is a losing game. You can wait and miss it. You can jump all in too soon and lose it all. To succeed in a trade such as this, you need to anticipate change and scale into play - fighting as hard as you can against the tide to be in position when it moves your way. That is where I am right now - and it is where I trade my best.
So, let the market drift higher on low volume as the VIX starts to perc. I'm trading in lock step, building substantial potential energy in my positions. This will break soon and I will profit from the big move soon enough. Bring it on baby!
Good luck out there...
Wednesday, December 23, 2009
Stick to the Swing Trade...
I hope everyone is ready for the holidays. Despite the terrible end of year performace of my accounts, I am very content and looking forward to the food, wine and company of my family. I am also comfortable with my positions - though I am getting a bit sick and tired of waiting for a correction. Seems like the administration, through the FED and media, will do everything necessary to promote the equities markets and spin the economic realities into fantasy. Eventually, things to square away - but it is disturbing for a technical analyst to trade in this environment.
Open the 60 minute candlestick chart of the March ES futures contract.
As you know, I maintain a small short position which (through quick scalping) remains about flat as of this posting. It seems obvious to me that we are at the top of a channel and about to head south. I see only two levels of support standing in the way of a trip down to 094. Those are about 111150 and 110275.
I note that we missed the top this morning following the consumer spending news. I suppose the gross miss on the GDP also contributed to a tame X-Mas rally. The technicals reflect that this puppy is puffed and ready for a throwback.
The rising pattern is very, very weak - completely unstructures and has a volatility diamond dead center. The RSI is clearly diverging over the last three peaks and the volume is rolling opposite to the price (meaning as the price declined volume increased and while price rose volume declined). These are signals to reduce long and shift short.
Let's see what happens today. Barring a breakout to the topside, I will ride my current swing to 094 - but due to the holidays, I will not add to my short position. I simply do not want to carry any stress into the weekend.
Good luck out there and Happy Holidays!
Open the 60 minute candlestick chart of the March ES futures contract.
As you know, I maintain a small short position which (through quick scalping) remains about flat as of this posting. It seems obvious to me that we are at the top of a channel and about to head south. I see only two levels of support standing in the way of a trip down to 094. Those are about 111150 and 110275.
I note that we missed the top this morning following the consumer spending news. I suppose the gross miss on the GDP also contributed to a tame X-Mas rally. The technicals reflect that this puppy is puffed and ready for a throwback.
The rising pattern is very, very weak - completely unstructures and has a volatility diamond dead center. The RSI is clearly diverging over the last three peaks and the volume is rolling opposite to the price (meaning as the price declined volume increased and while price rose volume declined). These are signals to reduce long and shift short.
Let's see what happens today. Barring a breakout to the topside, I will ride my current swing to 094 - but due to the holidays, I will not add to my short position. I simply do not want to carry any stress into the weekend.
Good luck out there and Happy Holidays!
Monday, December 21, 2009
Swing Trade...
X-Mas rally? What a funny thought. Amazing to me that this dominated the headlines - as if it has any merit. They say 12 of the last 15 years we rallied into the New Year. The logic is that "odds favor a rally". Funny as heck. In fact, I once flipped a coin 10 times to humor myself. It turned heads 7 times out of the 10. I guess that means that odds favor heads in that game.
Anyway, here is a very simple closing line chart for the last 30 days of the S&P. One rule comes to mind - trade a channel until it breaks.
I opened a short line on the ES - one (1) contract - just as a humorous test to see if we stay in the channel and extend back down the range. I am in at 1108.25. I have an OCO (order cancels order) trade in play with my stop loss at 1112 and my target at 1094. This is about a 4 point risk for about a 14 point gain. The risk-reward profile fits - let's see if the range from the last 30 days stays in tact.
Ho, Ho, Ho...
Anyway, here is a very simple closing line chart for the last 30 days of the S&P. One rule comes to mind - trade a channel until it breaks.
I opened a short line on the ES - one (1) contract - just as a humorous test to see if we stay in the channel and extend back down the range. I am in at 1108.25. I have an OCO (order cancels order) trade in play with my stop loss at 1112 and my target at 1094. This is about a 4 point risk for about a 14 point gain. The risk-reward profile fits - let's see if the range from the last 30 days stays in tact.
Ho, Ho, Ho...
Sunday, December 20, 2009
Quick Post on VIX
I was curious to see the latest with the VIX. The VIX as you know is a measurement in the volatility of the S&P options. It is really a measure of sentiment and a rise in the VIX usually accompanies declines in the SPX. The VIX reaches it's lowest levels when participants become complacent - our confident in their positions. Many folks put a lot of stock in this reading as a contrarian indicator - meaning if the VIX is at it's lowest levels, we should not be surprised by a down move in the index.
This is really an over simplification and I think a bit dangerous. The reality is that folks rush to options to protect and/or profit from sudden market moves. The VIX measures sentimental reactions to market moves - it is really not a leading indicator. Having said that, we should always keep an eye on the VIX and see what it can tell us.
The chart I put up with this post maps the VIX and the SPX over the past 120 days.
The VIX is the line chart (based on closing values) and the candlestick chart is the SPX. The 200d SMA for the VIX is in white and the 10d SMA is in red (bounded by a 10 period bollinger band). I have added very basic trend lines for both instruments.
Looking at the SPX bottom trend line, we see that the VIX shows a reaction high at each of the related reaction lows of the SPX. This is to be expected - however notice how the spike in the VIX in each reaction high is INCREASING. This indicates that the level of anxiousness with each SPX throwback is increasing. In fact, if you look at the last 20 days or so, you will see that even though we are near our lowest levels on the VIX, the bottom levels of the VIX are also RISING.
If we were to follow the VIX top trend line we can expect a MAJOR spike in the VIX very soon - to levels above 30 - which is a 50% increase from where we are today. A spike in the VIX of 50% would imply about a 10% throwback in the SPX. (You can do the extrapolation from the prior three VIX spikes and SPX reaction lows).
This simple calculation seems to jive with many of the other observations and levels that I have calculated in recent weeks. I may consider playing the VIX along with my short positions. This quiet period may be the best time to take a position.
Enjoy!
This is really an over simplification and I think a bit dangerous. The reality is that folks rush to options to protect and/or profit from sudden market moves. The VIX measures sentimental reactions to market moves - it is really not a leading indicator. Having said that, we should always keep an eye on the VIX and see what it can tell us.
The chart I put up with this post maps the VIX and the SPX over the past 120 days.
The VIX is the line chart (based on closing values) and the candlestick chart is the SPX. The 200d SMA for the VIX is in white and the 10d SMA is in red (bounded by a 10 period bollinger band). I have added very basic trend lines for both instruments.
Looking at the SPX bottom trend line, we see that the VIX shows a reaction high at each of the related reaction lows of the SPX. This is to be expected - however notice how the spike in the VIX in each reaction high is INCREASING. This indicates that the level of anxiousness with each SPX throwback is increasing. In fact, if you look at the last 20 days or so, you will see that even though we are near our lowest levels on the VIX, the bottom levels of the VIX are also RISING.
If we were to follow the VIX top trend line we can expect a MAJOR spike in the VIX very soon - to levels above 30 - which is a 50% increase from where we are today. A spike in the VIX of 50% would imply about a 10% throwback in the SPX. (You can do the extrapolation from the prior three VIX spikes and SPX reaction lows).
This simple calculation seems to jive with many of the other observations and levels that I have calculated in recent weeks. I may consider playing the VIX along with my short positions. This quiet period may be the best time to take a position.
Enjoy!
Saturday, December 19, 2009
Holding Pattern or Clever Distribution?
Though I have not been posting, I have been trading lightly in the range. All of my core short equity positions remain in tact and I have been range trading the ES with steady success. The holiday season gives us all a good reason to proceed lightly and with less stress. I like to take this time to enjoy what we have - which is family, friends, and good wine.
At the same time, I keep an eye on the broader market to make sure it doesn't drift too far from it's current holding pattern. The market is behaving like drivers in a NASCAR race during the lap after an accident. Weaving side to side, but no major moves allowed. At some point, the pacer is going to leave the track and all hell will break loose!
I actually think some of the big boys are cheating a bit. Most of the real action has been on the sell side. I see no conviction to support a break-out to the top side. The momentum has consistantly faded at the reaction highs and the relentless push higher just isn't there anymore. Add to this that the most optimistic of fund managers are calling for a 10% gain in the S&P in 2010. The risk is much lower today for shorts than it has ever been during this rally.
Looking again at the hourly candlestick chart for the S&P - we see our all too familiar trading range.
I have made some very minor adjustments to the top and bottom horizontal trend lines. The levels have been adjusted to the most recent intraday high and low respectively. These values are 1116 and 1089 respectively. I did this because these levels are breakout targets. I expect that when we break from this rectangle, we will gap (up or down) through these levels. These extreme range levels are the last points of resistance and support - therefore they do not help us during intraday action.
For this reason, I have added two more trend lines on top and bottom. (Note color coordination GREEN on top RED on bottom). These trend lines reveal inner triangles that are forming more aggressively within the broader rectangle. Eack trend line servers as an early warning for a potential breakout. If price is going to break out to either side, it must first break out of the inner most triangle then the outer most triangle. It is relatively early in these formations, so as time moves on and price action becomes more constricted, these lines will validate themselves.
So, we closed pretty darn close to the center of the broad range. Where are we headed? Let's try the bull case:
1. We are headed higher because we have bounced off the bottom trend line of the inner-most triangle.
2. We are headed higher because we saw price reversal occur as the 20p MA dropped down through the 50pMA.
3. We are headed higher because price action is about to break up through the 20pMA.
4. We are headed upwards because we successfully penetrated the 38% retrace level of the last down thrust.
5. We are headed upwards because the RSI showed a slight divergence as price action reached the floor.
6. We are headed upwards because there is a gap to fill from 12/16.
Let's explore the bear case:
1. We are headed lower because though price action rebounded at the end of the session, it failed to break out above the the three bar range following the gap down. (This range is surrounded in a box on the chart). This failure statistically suggests a continuation in the direction of the gap - which is down.
2. We are headed down because price action did penetrate the bottom of the three bar range twice during the day and statistics suggest that further declines are likely.
3. Though we bounced off of the bottom trend line of the inner most triangle, this triangle has not yet officially formed and therefore is only a possible support/resistance boundary. The rectangle has been predictable for almost 20 sessions and a test of the lower rectangle boundary at 1089ish should be expected.
4. Price action has yet to recover to the 50% retracement of the latest down thrust. The 50% level is a level where price action reverses direction to follow the original trend.
5. The 50% retracement level is below the gap - which was not filled during the session. The longer it takes to fill a gap the greater the chances of the trend to continue in the direction of the gap - down. Reversal at the 50% retrace level will strengthen the gap.
6. The 20p MA is below the 50p MA and heading south into price action. This tends to put resistance on price action and can cause reversal in price direction.
7. The 50p MA is below the gap and is a natural point for price action to stall.
8. The RSI divergence, though present, is minimal and did not occur in "Over-Sold" territory. Divergence is more reliable when it occurs in over-sold or over-bought territory.
9. The run-up at the end of Friday's session was preceeded by a substantial sell impulse - which triggered momentum traders to go short. That initial impulse exhausted quickly, and as is customary at the end of a session (and end of a week) substantial short covering kicked in. This warrants caution in the closing levels - which failed to reach the HOD.
Funny enough, the analysis is a bit of a toss up. I will look to the futures on Sunday to assess reality. Generally, Mondays have been "gap-up" days so we will see.
The most important areas to watch are the 50% retrace at 1105 and the gap between 1106 and 1108. If we fail to reach and close the gap in the early session Monday - I expect price action to continue down and test the 096. Failure at 096 followed by a break of 093-094 would be a strong signal to short. If we fill the gap - I expect a test of 1110ish where we get confirmation or rejection of the inner triangle. A break out above this level would invite a test of the highs - with an increased chance of an upside breakout. (The reason being that this would be the third major test of the highs with the the latest reaction low failing to reach the bottom of the range).
One final note, though I rely on the technicals as much as possible, "feel" is also important. If "feel" does not confirm your technical analysis - apply it with caution. If it does confirm - APPLY IT WITH MORE CAUTION! For whatever reason, I feel distribution at the tops.
Enjoy the holidays folks!
At the same time, I keep an eye on the broader market to make sure it doesn't drift too far from it's current holding pattern. The market is behaving like drivers in a NASCAR race during the lap after an accident. Weaving side to side, but no major moves allowed. At some point, the pacer is going to leave the track and all hell will break loose!
I actually think some of the big boys are cheating a bit. Most of the real action has been on the sell side. I see no conviction to support a break-out to the top side. The momentum has consistantly faded at the reaction highs and the relentless push higher just isn't there anymore. Add to this that the most optimistic of fund managers are calling for a 10% gain in the S&P in 2010. The risk is much lower today for shorts than it has ever been during this rally.
Looking again at the hourly candlestick chart for the S&P - we see our all too familiar trading range.
I have made some very minor adjustments to the top and bottom horizontal trend lines. The levels have been adjusted to the most recent intraday high and low respectively. These values are 1116 and 1089 respectively. I did this because these levels are breakout targets. I expect that when we break from this rectangle, we will gap (up or down) through these levels. These extreme range levels are the last points of resistance and support - therefore they do not help us during intraday action.
For this reason, I have added two more trend lines on top and bottom. (Note color coordination GREEN on top RED on bottom). These trend lines reveal inner triangles that are forming more aggressively within the broader rectangle. Eack trend line servers as an early warning for a potential breakout. If price is going to break out to either side, it must first break out of the inner most triangle then the outer most triangle. It is relatively early in these formations, so as time moves on and price action becomes more constricted, these lines will validate themselves.
So, we closed pretty darn close to the center of the broad range. Where are we headed? Let's try the bull case:
1. We are headed higher because we have bounced off the bottom trend line of the inner-most triangle.
2. We are headed higher because we saw price reversal occur as the 20p MA dropped down through the 50pMA.
3. We are headed higher because price action is about to break up through the 20pMA.
4. We are headed upwards because we successfully penetrated the 38% retrace level of the last down thrust.
5. We are headed upwards because the RSI showed a slight divergence as price action reached the floor.
6. We are headed upwards because there is a gap to fill from 12/16.
Let's explore the bear case:
1. We are headed lower because though price action rebounded at the end of the session, it failed to break out above the the three bar range following the gap down. (This range is surrounded in a box on the chart). This failure statistically suggests a continuation in the direction of the gap - which is down.
2. We are headed down because price action did penetrate the bottom of the three bar range twice during the day and statistics suggest that further declines are likely.
3. Though we bounced off of the bottom trend line of the inner most triangle, this triangle has not yet officially formed and therefore is only a possible support/resistance boundary. The rectangle has been predictable for almost 20 sessions and a test of the lower rectangle boundary at 1089ish should be expected.
4. Price action has yet to recover to the 50% retracement of the latest down thrust. The 50% level is a level where price action reverses direction to follow the original trend.
5. The 50% retracement level is below the gap - which was not filled during the session. The longer it takes to fill a gap the greater the chances of the trend to continue in the direction of the gap - down. Reversal at the 50% retrace level will strengthen the gap.
6. The 20p MA is below the 50p MA and heading south into price action. This tends to put resistance on price action and can cause reversal in price direction.
7. The 50p MA is below the gap and is a natural point for price action to stall.
8. The RSI divergence, though present, is minimal and did not occur in "Over-Sold" territory. Divergence is more reliable when it occurs in over-sold or over-bought territory.
9. The run-up at the end of Friday's session was preceeded by a substantial sell impulse - which triggered momentum traders to go short. That initial impulse exhausted quickly, and as is customary at the end of a session (and end of a week) substantial short covering kicked in. This warrants caution in the closing levels - which failed to reach the HOD.
Funny enough, the analysis is a bit of a toss up. I will look to the futures on Sunday to assess reality. Generally, Mondays have been "gap-up" days so we will see.
The most important areas to watch are the 50% retrace at 1105 and the gap between 1106 and 1108. If we fail to reach and close the gap in the early session Monday - I expect price action to continue down and test the 096. Failure at 096 followed by a break of 093-094 would be a strong signal to short. If we fill the gap - I expect a test of 1110ish where we get confirmation or rejection of the inner triangle. A break out above this level would invite a test of the highs - with an increased chance of an upside breakout. (The reason being that this would be the third major test of the highs with the the latest reaction low failing to reach the bottom of the range).
One final note, though I rely on the technicals as much as possible, "feel" is also important. If "feel" does not confirm your technical analysis - apply it with caution. If it does confirm - APPLY IT WITH MORE CAUTION! For whatever reason, I feel distribution at the tops.
Enjoy the holidays folks!
Tuesday, December 15, 2009
Taking a Break...
I know folks have been wondering where my posts have been lately. Well, I am here and somewhat inactive. It is that time of year and I, like many others, am taking a breather from the rigors of trade. Judging from the hourly, we remain range bound as it seems and I have little confidence that the market is going to make a major move either way between now and the New Year.
All my analysis now focuses on my accounts and how to best realize gains and losses for tax purposes. I am also in the process of an "end year review" to see exactly how well (or poorly) I traded.
A much more important activity is celebrating my son's acceptance to SUNY Geneseo for the fall of 2010. Geneseo, a well kept secret, is ranked as one of the nation's top public colleges - and one of the most selective. He plans to study physics and mathematics in pursuit of a career in research and teaching. He is a bright and warm person who deserves nothing but the best. May he never be tempted to apply his analytics to the markets!
For the rest of us, let's keep an eye on that 1113 level. A break above would invite the run to 1120. Let's hope the break down below the 20p MA on the hourly leads to a more aggressive run through the 50p MA and all the way down to the final break of support at 085ish.
Good luck folks!
All my analysis now focuses on my accounts and how to best realize gains and losses for tax purposes. I am also in the process of an "end year review" to see exactly how well (or poorly) I traded.
A much more important activity is celebrating my son's acceptance to SUNY Geneseo for the fall of 2010. Geneseo, a well kept secret, is ranked as one of the nation's top public colleges - and one of the most selective. He plans to study physics and mathematics in pursuit of a career in research and teaching. He is a bright and warm person who deserves nothing but the best. May he never be tempted to apply his analytics to the markets!
For the rest of us, let's keep an eye on that 1113 level. A break above would invite the run to 1120. Let's hope the break down below the 20p MA on the hourly leads to a more aggressive run through the 50p MA and all the way down to the final break of support at 085ish.
Good luck folks!
Wednesday, December 9, 2009
Not the best second step...
So, we did not get the follow through that I was hoping for - however today's price action was very helpful in terms of the developing picture. Let me also say that I have been trading very poorly this week and have essentially "struck out" with the bases loaded these last two sessions. The sad part about it is that I had profits in both sessions, but failed to maintain discipline and gave it all back - plus the trading fees. I know that is not what you come here to read, but I had to get it off my chest. Here is the hourly candlestick chart:
So, why was today so important and clarifying. First, for those of you who doubted that we are range bound at the top - stop doubting it. On my charts, the 085ish area is the bottom of a rectangle tat we have been trading within for the last 20 sessions. We touched 086 today - which was good thing. The bad thing is that we bounced up off that level and did not follow through at the retest. So 086 became the LOD.
The 086 LOD. combined with the closing stick helped us to define a down channel on the hourly. This down channel, which is bounded by the thin pink lines (and labeled), is formed from the reaction highs and lows since December 04. We closed with a throw back from that top trend line near the 097 area. (Note I spoke of the 096 area a few posts ago - I believe it will be a pivotal point in this battle).
You may also note that the fib fan blades (resulting from a drag from 12/04 high to today's LOD) show the 50% retrace blade in almost the exact position as this top trend line. This is important as both lines serve as resistance. Ideally, we will see rejection at this point and price action will resume it's channel descent. Unfortunately, I am not so confident. You see, these trend lines and fib blades also represent points notorious for GAP UP. In fact, if you look at the ascent off the last two reaction lows of this top, you will see big GAP moves up. Those gaps happen to align pretty nicely with fib fan blades (not show here for clarity).
Though a gap up is possible tomorrow morning, I would like to highlight the obstacles in the battle zone. In order to move up from here, price action must break the 20p MA, the down channel top trend line, the 50% fib fan blade, and the 38% retracement level of the main fib grid. It is going to be tough - but possible.
Also, a quick glance at the ES hourly chart suggests that we may be finishing a S-H-H-S pattern. We are of course at the right shoulder now - meeting resistance at the 096-098 area. If resistance holds, expect a drop off to the Thanksgiving low of 069ish.
Back to the SPX. A less than encouraging down thrust is on the mirror side of our current price point. This kind of recent price action suggests that the ascent could be rapid to the 50% retracement level near 1102ish - and the 50p MA. If we get there quickly, I would start planning on a test of 1110 - following price action down around the 62% fib arc (look at the mirror side to get an idea of what I am suggesting).
One final note, though fib tools don't always work, they often do. A fib time series suggests that next next reversal will sometime in the morning session. Pure crystal ball stuff! Perhaps we gap up to the 1110 area - roll over and fall back down into the down channel.
I am flat tonight on the futures - still short equities.
Good luck tomorrow.
So, why was today so important and clarifying. First, for those of you who doubted that we are range bound at the top - stop doubting it. On my charts, the 085ish area is the bottom of a rectangle tat we have been trading within for the last 20 sessions. We touched 086 today - which was good thing. The bad thing is that we bounced up off that level and did not follow through at the retest. So 086 became the LOD.
The 086 LOD. combined with the closing stick helped us to define a down channel on the hourly. This down channel, which is bounded by the thin pink lines (and labeled), is formed from the reaction highs and lows since December 04. We closed with a throw back from that top trend line near the 097 area. (Note I spoke of the 096 area a few posts ago - I believe it will be a pivotal point in this battle).
You may also note that the fib fan blades (resulting from a drag from 12/04 high to today's LOD) show the 50% retrace blade in almost the exact position as this top trend line. This is important as both lines serve as resistance. Ideally, we will see rejection at this point and price action will resume it's channel descent. Unfortunately, I am not so confident. You see, these trend lines and fib blades also represent points notorious for GAP UP. In fact, if you look at the ascent off the last two reaction lows of this top, you will see big GAP moves up. Those gaps happen to align pretty nicely with fib fan blades (not show here for clarity).
Though a gap up is possible tomorrow morning, I would like to highlight the obstacles in the battle zone. In order to move up from here, price action must break the 20p MA, the down channel top trend line, the 50% fib fan blade, and the 38% retracement level of the main fib grid. It is going to be tough - but possible.
Also, a quick glance at the ES hourly chart suggests that we may be finishing a S-H-H-S pattern. We are of course at the right shoulder now - meeting resistance at the 096-098 area. If resistance holds, expect a drop off to the Thanksgiving low of 069ish.
Back to the SPX. A less than encouraging down thrust is on the mirror side of our current price point. This kind of recent price action suggests that the ascent could be rapid to the 50% retracement level near 1102ish - and the 50p MA. If we get there quickly, I would start planning on a test of 1110 - following price action down around the 62% fib arc (look at the mirror side to get an idea of what I am suggesting).
One final note, though fib tools don't always work, they often do. A fib time series suggests that next next reversal will sometime in the morning session. Pure crystal ball stuff! Perhaps we gap up to the 1110 area - roll over and fall back down into the down channel.
I am flat tonight on the futures - still short equities.
Good luck tomorrow.
Tuesday, December 8, 2009
Good First Step...
Today was a good first step towards the ultimate goal - which is to see the SPX correct before year end. Yesterday I published a closing daily line chart for the SPX and highlighted the wedge forming at the tops of this last rally leg. I called for a break of the bottom wedge line at 096 and stated that we needed a close below that level to have confidence that this rally leg was reversing. That did happen and I am confident that we will see continued weakness tomorrow.
Presently, the SPX is finding a great deal of support at the 088 level. That is our next target. I suspect that it will be taken out overnight in the futures trading. If we can clear 088 we get our test of 082 - which is the 38% retrace of the last leg. It is also close to the 50day MA. If we are going to bounce back early, it will be there. If we break support at 082ish - then look for 074-071.
Don't want to jinx it, so let's keep it simple tonight. Here is the ES hourly chart.
Notice that the clossing congestion is very similiar to the pattern of Nov 26th - where the selling just kept coming and the ES fell 31 points in an overnight session. Judging from the action today I would not be surprised by a similiar sell-off tonight - or at least a test of 082ish. I have also highlighted the 067 area as a very reasonable short term target.
Cheers!
Presently, the SPX is finding a great deal of support at the 088 level. That is our next target. I suspect that it will be taken out overnight in the futures trading. If we can clear 088 we get our test of 082 - which is the 38% retrace of the last leg. It is also close to the 50day MA. If we are going to bounce back early, it will be there. If we break support at 082ish - then look for 074-071.
Don't want to jinx it, so let's keep it simple tonight. Here is the ES hourly chart.
Notice that the clossing congestion is very similiar to the pattern of Nov 26th - where the selling just kept coming and the ES fell 31 points in an overnight session. Judging from the action today I would not be surprised by a similiar sell-off tonight - or at least a test of 082ish. I have also highlighted the 067 area as a very reasonable short term target.
Cheers!
Monday, December 7, 2009
Sellers more anxions than buyers...
Keeping it short and to the point tonight. Open the Daily Closing Line chart for SPX.
Key technical features are:
What do we see? Well, we continue to roll over across the top - meaning we remain in the secondary channel and more importantly, in a wedging triangle. The triangle tells me that sellers are becoming more anxious than buyers. Note how the bottom triangle trend line is quite parallel to the bottom trend line of the secondary channel - yet the top line of the triangle angling downward. This means that sellers are waiting less time to unload shares on the reaction highs. Very simple, very clear. Buyers on the other hand seem content to pick at the lower line. So this is not 100% bearish, but it is certainly not bullish.
The fact that we have yet to close below the 20day MA is bearish. Every recent rally leg has resulted in a closure below this MA. I would expect a cross of this MA and a close at or below 096 is coming this week. I indicate 096 because this is close to the bottom trend line of the triangle. If we break that line, we could see a reasonable attack of the first the 38% retrace of this rally leg at 083. Failure at this level will likely result in a bump (or cross of the 50 day MA at 081ish. Let's assume an 082 test is in the cards short term.
This is a key level as there is very little support below it until the 072 level - which is the peak of the last rally leg and the 50% retrace level for the present rally leg.
We should not even talk about breaks of the bottom trend line of the main channel until these basic points are reached.
I am shorting all rallies, unless we get a close above the top trend line of the triangle.
Cheers.
Key technical features are:
- The fib grid across the high and low of this last rally leg
- The main channel trend lines in red
- The secondary channel trend lines in yellow
- The wedge like triangle trend lines in pink
- The red 20 day MA
- The blue 50 day MA
- The white 200 day MA
What do we see? Well, we continue to roll over across the top - meaning we remain in the secondary channel and more importantly, in a wedging triangle. The triangle tells me that sellers are becoming more anxious than buyers. Note how the bottom triangle trend line is quite parallel to the bottom trend line of the secondary channel - yet the top line of the triangle angling downward. This means that sellers are waiting less time to unload shares on the reaction highs. Very simple, very clear. Buyers on the other hand seem content to pick at the lower line. So this is not 100% bearish, but it is certainly not bullish.
The fact that we have yet to close below the 20day MA is bearish. Every recent rally leg has resulted in a closure below this MA. I would expect a cross of this MA and a close at or below 096 is coming this week. I indicate 096 because this is close to the bottom trend line of the triangle. If we break that line, we could see a reasonable attack of the first the 38% retrace of this rally leg at 083. Failure at this level will likely result in a bump (or cross of the 50 day MA at 081ish. Let's assume an 082 test is in the cards short term.
This is a key level as there is very little support below it until the 072 level - which is the peak of the last rally leg and the 50% retrace level for the present rally leg.
We should not even talk about breaks of the bottom trend line of the main channel until these basic points are reached.
I am shorting all rallies, unless we get a close above the top trend line of the triangle.
Cheers.
Saturday, December 5, 2009
The 10yer Weekly SPX Chart...
So, I ranted again last night. It felt good and I now have a great deal of confidence in my positions. I recently said that gut is important but technical analysis needs to confirm. I have also said that when you find price action becoming erratic and try to validate your positions in higher time frames. So with that in mind let's really step back and examine the 10yr weekly CLOSING LINE chart of the SPX:
First a word about the time frame. We live in a sound byte world dominated by short term trading and short term influences. I like to compare market action to the ocean. We are swimmers at the shore line, judging the waves as they come in. Looking for good ones to ride. The majority of swimmers spot a good one and go for it. Sometimes to find the wave is weak and not worth the energy. They find themselves in the ocean trying each successive wave with mixed results. They are singularly focused. The more experienced swimmer waits and studies the sets of waves that develop and moves into the water when he sees a good build. Riding several waves successfully and having a much better return on his investment. The seasoned swimmer is also keenly aware of the larger tides and currents in the ocean. In my younger more active years I trained for Ironman competitions - which involved ocean swimming. I am not the strongest swimmer and one day, swimming in the Atlantic off the coast of Rhode Island, I raised my head out of water to check my location against the shore. To my horror, I noticed that I had drifted 400 yards out to sea. I was alone, exhausted and caught in a very dangerous situation. You see the ocean itself moves in and out, side to side. For the most part, you can't even feel these deep shifts. The market is just like the ocean in this regard and we have to step back and determine where it is headed. Hence the 10 year chart.
First the technical features:
1. In very light grey I have overlaid a fib grid stretching from the August 2000 high down to the October 2002 low. This was the last bull market crash and since it is the most recent, it is a point of reference freshest in the minds and algorithms of traders and quants.
2. In color, I have overlaid a grid stretching from the October 2007 high to the March 2009 low. The grids do align closely - which will help give credence to any technical conclusions that can be drawn from the past. (Note that I make no statement about the differences in the fundamental economic conditions YET!)
3. In red is one possible down channel formed following the initial reaction highs and lows of the October 2007 crash. Note how all hell broke loose in September of 2008 and we plunged out of the channel dramatically.
4. The basic moving averages are in place, including the PINK 20p MA, the BLUE 50p MA, and the WHITE 200p MA.
5. Stochs and RSI accompany the chart on the lower panel.
Let's pretend this is a one minute chart for the day. Remember, price action and technical analysis is fractal - meaning it can be applied in any time frame with the same results.
If this were a one minute graph, would you go long or short? What are your reasons?
I see a possible double top with a major rejection at the second peak. I see the reaction low off the second peak descending well below the reaction low of the first peak. If you open the 20 year chart you'll see that these two peaks and two valleys define the SPX and we are smack in the middle of the action. In fact, we recently retraced to about the 50% level of the second reaction high. This is a classic pivot point and unless we bang right through it (as we did the 38% level) we are going to experience some pause, consolidation, or reversal.
How can we be more confident about that scenario? First we look at the key trends, resistance, and support levels. An argument can be made that we are at risk of continued down trend unless the market breaks the 1280 mark. Why? A major down trend is considered reversed when a succession of lower lows is interrupted and then confirmed with a higher reaction high. Technically this happened in early June of 2009 when the SPX broke and closed above 930. But, some argue that we are simply correcting for a hyper-extended sub-wave and have re-entered the down channel that I have indicated with red trend lines. If this is true, the argument can be made that the last reaction high of importance is bound by the major down trend line and appears to be the 1280 peak - right before she snapped and eventually hit that famous 666 number. We now have to run up and surpass the 1280 reaction high and set a new reaction low that does not violate 666. At that point, we will have officially reversed. How many of you are saying "that's ridiculous!"?. If you are, think of this as a 1 minute chart. Is what I am saying so ridiculous now? No, it is actual common sense. In fact, you would probably hesitate going long until you saw a break of the top channel line and a failed retest of that very line. The only difference is time frame. It is very hard for any of us to think in terms of months or years. But that is what we must do to avoid finding ourselves out to deep sea with no chance of getting back to shore.
(A side note - I would love to do a post on the fractal phenom of relative trending and try to suggest a view that may at first seem to contradict the 3 trend DOW theory model (primary, secondary, and minor), but in fact validate it at a higher level - it is really just an academic exercise but a think a good topic)
Back to the analysis. Are you still not a believer in the trend? Follow that red down trend line off the reaction highs down to our current price. We are smacking into right now. Look at the volatility over the past couple of months compared to the sharp linear rise in early months of this ascent. The tea leaves are clear - price action is hesitating. But is it simply a matter of the down trend line? The short answer is NO.
The red horizontal band across the 10 year price action is also critical. This is an area of resistance that was established from prior price consolidation during two periods. First, during the end of 2001 into early 2002 as prices tried to stabilize during the decline. Second, during early 2004 when the market was rising off of the major reaction low of September 2002. I circled the congestion of 2004 because it is most important in this analysis.
The 2004 congestion is important because, on the surface, it seems to look like what is happening today. After all, it is the 50% retracement of a violent down move. But after careful analysis, is it really the same? It is not.
Some fundamental differences exist - starting with the magnitudes and durations of the main down pulses that precede the congestion areas. The down impulse that started in 2000 lasted for 25 months. That is over two years of decline with relatively even spacing of the impulse sub waves. That two year decline included six reaction lows with the final low in October 2002. This most recent down impulse, which was triggered by much more fundamental economic concerns, has lasted only 18 months (so far) with five reaction lows - ending in March of 2009. The impulse sub waves were at first orderly, until the September 2008 panic selloff which cost market participants a full 400 points and was followed by an exhaustion sub-wave which shaved another 150 points to get us to the March low. These down impulse differ in magnitude and duration. The first lasted 26 months and cost approximately 700 handles, the most recent seems to have lasted only 18 months yet has cost roughly 900 handles.
Now let's examine each bottoming process. The 2002 bottom required approximately 8 months to confirm a reversal in May 2003 off the bottom set in September 2002. The reversal was confirmed after retracing 140 handles in that 8 month period. If the current bottom holds, the bottom will have been confirmed in a record 3 months (March to June) after retracing another record 270 points. That is twice the magnitude in half the time. Hmmm.
Finally, let's examine the magnitude and duration of the retracement levels. Starting with the 38% level. It took 14 months to retrace 275 points after the low in 2002. It took only 5 months to retrace 350 points in after the low of March 2009. That is a 30% greater magnitude gain in less that 33% of the time. Now compare the price action from the 38% retrace to the 50% retrace in both cases. In 2003 it took about 30 days to get 90% of the way and another 6 weeks to get the touch of the line. At that point we saw weakness and sinking consolidation for a full year which include retests of the 38% level. This is actually pretty normal and a healthy sign. The market rushed up through the 38% level and charged the 50% line - reaching it with only a small struggle in the final weeks. This was the early warning that things were going to cool off. Compare that to the recent run after darting to the 38% line price action has suddenly become much hindered. It has taken the world’s fastest rally almost 4 months to reach the 50% line and we still have not had a break or close of the line. Look how much the market is straining. Perhaps we now the market will take on a more normal pace. If so, we have every reason to expect consolidation between the 38% and 50% levels. That would be a 100 point range if the levels play out.
The thing is that I am having a hard time with the chart. I mean, yes it makes sense that we see resistance right now. But consolidation followed by a continued rally like we saw in 2004? Sorry, there is not a chart in the book that supports that price action. Price usually mirrors itself. If we were going to break through the 50% retrace - it would have had to be a clean shot right through to 1280. Look at the mirror side in the down pulse. Straight shot down through this range - no pause. This symmetry can be observed all on charts in all time frames, including this chart in the prior crash/recovery. The consolidation in 2004 was clearly mirrored by consolidation in the down pulse during 2001 and 2002. The lack of symmetry in the current price action raises doubt that we are going much higher and increases the probability in my calculations for a retest of the March lows. A retest of the March lows would give a proper bottom to this crash, enable price symmetry, and align more with the current economic conditions.
Looking back to 2004, why did the bull awake and drive the S&P to new highs? Was it record unemployment? Record foreclosures? The falling value of real estate? Huge deficit spending? Sinking corporate revenues? Well that is what we have going into the same technical pivot point. Again, price action is telling us something that we know to be obvious yet we see easily dismiss it all because of greed. (OK, no more rants...).
So we have a case for pause and consolidation from the fib grids, trend lines, and major resistance from past consolidation. We also have a possible issue of symmetry that suggests a possible retest of the March lows - which fundamentals seem to support as well. Can we add any further technical confirmation? Yes, the RSI.
I hate to sound like a broken record on this RIS oscillator - but it is the most reliable indicator I know off and one of the few that can actually predict price movement with fair accuracy. I have highlighted key areas where we see divergence in price with the RSI. The RSI is the red line running through the stochs. (Sorry if it is not super clear). Look at every major top and bottom that is highlighted in the pale yellow vertical strips. Each area shows divergence in the RSI - major divergence. Now look at the thinner orange vertical strips to the right of the chart. You will see divergence again. Look at the last strip. The last three reaction highs are feature RSI divergence. I challenge you to find one case where an RSI divergence existed, and price did not reverse direction. There is 10 years of data for you to examine. It has never failed.
A final note is about the major difference between the MA's of these two periods. In 2003-04, the 20p MA and 50p MA had managed to travel up to meet the 200p right when price action reached the 50% retrace. This bullish event helped the market from rejecting price action and eventually move on to the long bull rally. This bullish cross was in my opinion key.
Looking at the current situation, the 20pMA and 50p MA are both well below the 200pMA. This is by definition bearish. In fact, since the 20p MA, 50p MA, and price still remain below the 200pMA - many would consider this a bear market rally. Bear market rallies usually only rally up 35% or so, however the rallie is also directly related to the magnitude and speed of the down impluse wave. This wave was very, very powerful and swift. As you can see from my prior analysis, so has been the bounce rally. We have now reached 50% retrace and the technicals are starting to play out a bit more reliably.
Another important observation is that the 20p MA has gotten way ahead of the 50p MA. In fact the averages show a 110 pt. gap - which is 10% of the index. That is outrageous! Historically, the 20p MA and the 50p MA ride much tighter and often bounce off each other periodocally. Examine the chart and you will see that during the rally off the bottom of the 2002 low, the averages never got more than 50pts away from each other. That is half the gap we see today.
I hope folks got something from this post. Preparing it certainly helped me to feel more confident about the next several weeks/months. I reiterate, this may be the very best time to be short the market.
Good luck and have a great weekend!
First a word about the time frame. We live in a sound byte world dominated by short term trading and short term influences. I like to compare market action to the ocean. We are swimmers at the shore line, judging the waves as they come in. Looking for good ones to ride. The majority of swimmers spot a good one and go for it. Sometimes to find the wave is weak and not worth the energy. They find themselves in the ocean trying each successive wave with mixed results. They are singularly focused. The more experienced swimmer waits and studies the sets of waves that develop and moves into the water when he sees a good build. Riding several waves successfully and having a much better return on his investment. The seasoned swimmer is also keenly aware of the larger tides and currents in the ocean. In my younger more active years I trained for Ironman competitions - which involved ocean swimming. I am not the strongest swimmer and one day, swimming in the Atlantic off the coast of Rhode Island, I raised my head out of water to check my location against the shore. To my horror, I noticed that I had drifted 400 yards out to sea. I was alone, exhausted and caught in a very dangerous situation. You see the ocean itself moves in and out, side to side. For the most part, you can't even feel these deep shifts. The market is just like the ocean in this regard and we have to step back and determine where it is headed. Hence the 10 year chart.
First the technical features:
1. In very light grey I have overlaid a fib grid stretching from the August 2000 high down to the October 2002 low. This was the last bull market crash and since it is the most recent, it is a point of reference freshest in the minds and algorithms of traders and quants.
2. In color, I have overlaid a grid stretching from the October 2007 high to the March 2009 low. The grids do align closely - which will help give credence to any technical conclusions that can be drawn from the past. (Note that I make no statement about the differences in the fundamental economic conditions YET!)
3. In red is one possible down channel formed following the initial reaction highs and lows of the October 2007 crash. Note how all hell broke loose in September of 2008 and we plunged out of the channel dramatically.
4. The basic moving averages are in place, including the PINK 20p MA, the BLUE 50p MA, and the WHITE 200p MA.
5. Stochs and RSI accompany the chart on the lower panel.
Let's pretend this is a one minute chart for the day. Remember, price action and technical analysis is fractal - meaning it can be applied in any time frame with the same results.
If this were a one minute graph, would you go long or short? What are your reasons?
I see a possible double top with a major rejection at the second peak. I see the reaction low off the second peak descending well below the reaction low of the first peak. If you open the 20 year chart you'll see that these two peaks and two valleys define the SPX and we are smack in the middle of the action. In fact, we recently retraced to about the 50% level of the second reaction high. This is a classic pivot point and unless we bang right through it (as we did the 38% level) we are going to experience some pause, consolidation, or reversal.
How can we be more confident about that scenario? First we look at the key trends, resistance, and support levels. An argument can be made that we are at risk of continued down trend unless the market breaks the 1280 mark. Why? A major down trend is considered reversed when a succession of lower lows is interrupted and then confirmed with a higher reaction high. Technically this happened in early June of 2009 when the SPX broke and closed above 930. But, some argue that we are simply correcting for a hyper-extended sub-wave and have re-entered the down channel that I have indicated with red trend lines. If this is true, the argument can be made that the last reaction high of importance is bound by the major down trend line and appears to be the 1280 peak - right before she snapped and eventually hit that famous 666 number. We now have to run up and surpass the 1280 reaction high and set a new reaction low that does not violate 666. At that point, we will have officially reversed. How many of you are saying "that's ridiculous!"?. If you are, think of this as a 1 minute chart. Is what I am saying so ridiculous now? No, it is actual common sense. In fact, you would probably hesitate going long until you saw a break of the top channel line and a failed retest of that very line. The only difference is time frame. It is very hard for any of us to think in terms of months or years. But that is what we must do to avoid finding ourselves out to deep sea with no chance of getting back to shore.
(A side note - I would love to do a post on the fractal phenom of relative trending and try to suggest a view that may at first seem to contradict the 3 trend DOW theory model (primary, secondary, and minor), but in fact validate it at a higher level - it is really just an academic exercise but a think a good topic)
Back to the analysis. Are you still not a believer in the trend? Follow that red down trend line off the reaction highs down to our current price. We are smacking into right now. Look at the volatility over the past couple of months compared to the sharp linear rise in early months of this ascent. The tea leaves are clear - price action is hesitating. But is it simply a matter of the down trend line? The short answer is NO.
The red horizontal band across the 10 year price action is also critical. This is an area of resistance that was established from prior price consolidation during two periods. First, during the end of 2001 into early 2002 as prices tried to stabilize during the decline. Second, during early 2004 when the market was rising off of the major reaction low of September 2002. I circled the congestion of 2004 because it is most important in this analysis.
The 2004 congestion is important because, on the surface, it seems to look like what is happening today. After all, it is the 50% retracement of a violent down move. But after careful analysis, is it really the same? It is not.
Some fundamental differences exist - starting with the magnitudes and durations of the main down pulses that precede the congestion areas. The down impulse that started in 2000 lasted for 25 months. That is over two years of decline with relatively even spacing of the impulse sub waves. That two year decline included six reaction lows with the final low in October 2002. This most recent down impulse, which was triggered by much more fundamental economic concerns, has lasted only 18 months (so far) with five reaction lows - ending in March of 2009. The impulse sub waves were at first orderly, until the September 2008 panic selloff which cost market participants a full 400 points and was followed by an exhaustion sub-wave which shaved another 150 points to get us to the March low. These down impulse differ in magnitude and duration. The first lasted 26 months and cost approximately 700 handles, the most recent seems to have lasted only 18 months yet has cost roughly 900 handles.
Now let's examine each bottoming process. The 2002 bottom required approximately 8 months to confirm a reversal in May 2003 off the bottom set in September 2002. The reversal was confirmed after retracing 140 handles in that 8 month period. If the current bottom holds, the bottom will have been confirmed in a record 3 months (March to June) after retracing another record 270 points. That is twice the magnitude in half the time. Hmmm.
Finally, let's examine the magnitude and duration of the retracement levels. Starting with the 38% level. It took 14 months to retrace 275 points after the low in 2002. It took only 5 months to retrace 350 points in after the low of March 2009. That is a 30% greater magnitude gain in less that 33% of the time. Now compare the price action from the 38% retrace to the 50% retrace in both cases. In 2003 it took about 30 days to get 90% of the way and another 6 weeks to get the touch of the line. At that point we saw weakness and sinking consolidation for a full year which include retests of the 38% level. This is actually pretty normal and a healthy sign. The market rushed up through the 38% level and charged the 50% line - reaching it with only a small struggle in the final weeks. This was the early warning that things were going to cool off. Compare that to the recent run after darting to the 38% line price action has suddenly become much hindered. It has taken the world’s fastest rally almost 4 months to reach the 50% line and we still have not had a break or close of the line. Look how much the market is straining. Perhaps we now the market will take on a more normal pace. If so, we have every reason to expect consolidation between the 38% and 50% levels. That would be a 100 point range if the levels play out.
The thing is that I am having a hard time with the chart. I mean, yes it makes sense that we see resistance right now. But consolidation followed by a continued rally like we saw in 2004? Sorry, there is not a chart in the book that supports that price action. Price usually mirrors itself. If we were going to break through the 50% retrace - it would have had to be a clean shot right through to 1280. Look at the mirror side in the down pulse. Straight shot down through this range - no pause. This symmetry can be observed all on charts in all time frames, including this chart in the prior crash/recovery. The consolidation in 2004 was clearly mirrored by consolidation in the down pulse during 2001 and 2002. The lack of symmetry in the current price action raises doubt that we are going much higher and increases the probability in my calculations for a retest of the March lows. A retest of the March lows would give a proper bottom to this crash, enable price symmetry, and align more with the current economic conditions.
Looking back to 2004, why did the bull awake and drive the S&P to new highs? Was it record unemployment? Record foreclosures? The falling value of real estate? Huge deficit spending? Sinking corporate revenues? Well that is what we have going into the same technical pivot point. Again, price action is telling us something that we know to be obvious yet we see easily dismiss it all because of greed. (OK, no more rants...).
So we have a case for pause and consolidation from the fib grids, trend lines, and major resistance from past consolidation. We also have a possible issue of symmetry that suggests a possible retest of the March lows - which fundamentals seem to support as well. Can we add any further technical confirmation? Yes, the RSI.
I hate to sound like a broken record on this RIS oscillator - but it is the most reliable indicator I know off and one of the few that can actually predict price movement with fair accuracy. I have highlighted key areas where we see divergence in price with the RSI. The RSI is the red line running through the stochs. (Sorry if it is not super clear). Look at every major top and bottom that is highlighted in the pale yellow vertical strips. Each area shows divergence in the RSI - major divergence. Now look at the thinner orange vertical strips to the right of the chart. You will see divergence again. Look at the last strip. The last three reaction highs are feature RSI divergence. I challenge you to find one case where an RSI divergence existed, and price did not reverse direction. There is 10 years of data for you to examine. It has never failed.
A final note is about the major difference between the MA's of these two periods. In 2003-04, the 20p MA and 50p MA had managed to travel up to meet the 200p right when price action reached the 50% retrace. This bullish event helped the market from rejecting price action and eventually move on to the long bull rally. This bullish cross was in my opinion key.
Looking at the current situation, the 20pMA and 50p MA are both well below the 200pMA. This is by definition bearish. In fact, since the 20p MA, 50p MA, and price still remain below the 200pMA - many would consider this a bear market rally. Bear market rallies usually only rally up 35% or so, however the rallie is also directly related to the magnitude and speed of the down impluse wave. This wave was very, very powerful and swift. As you can see from my prior analysis, so has been the bounce rally. We have now reached 50% retrace and the technicals are starting to play out a bit more reliably.
Another important observation is that the 20p MA has gotten way ahead of the 50p MA. In fact the averages show a 110 pt. gap - which is 10% of the index. That is outrageous! Historically, the 20p MA and the 50p MA ride much tighter and often bounce off each other periodocally. Examine the chart and you will see that during the rally off the bottom of the 2002 low, the averages never got more than 50pts away from each other. That is half the gap we see today.
I hope folks got something from this post. Preparing it certainly helped me to feel more confident about the next several weeks/months. I reiterate, this may be the very best time to be short the market.
Good luck and have a great weekend!
Friday, December 4, 2009
Wake up bull herd!
Here comes a non-technical blog entry. (I'm entitled!)
The price action over this last rally top has been super erratic. This is a sign that we ain't in Kansas anymore. Conditions are changing and it is fundamental. The game is changing and the market is reflecting that change in volatility. I interpret the action as heavy distribution.
Yesterday, we saw a false breakout at the open. The event occurred at a key resistance level and that triggered both short covering and the momentum trade. But this breakout was different. It was empty and that was clear from the gappy pops in the thrust. Then there was the heavy selling that just didn't give up. Why should it? After months of conditioning the day trader to buy all dips there were plenty of buyers for the shares. Even the cautious bulls get roped in as they see the down waves stabilize and prices drifting higher - tick, by tick. It's too much to resist. They start buying in anticipation of their traditional reward. Just when the coast seems clear and folks are buying, the next violent down wave hits. This process can be repeated many times, in many time frames. There are enough bulls who are convinced that it will keep going up - just buy, buy, buy!
Take today. What a setup! Who in their right mind covered their shorts on this news! (If you did, please take no offense - just get back in there!). The jobs number, along with any other news item for that matter, is nonsense. It is simply a super short term momentum driver. A pivot point for short term traders. Again, prices rose on short covering and momentum chasers. The media pumping the good news, calling the blow by blow on Bloomberg. All sectors up! No end in sight to this rally. Job data was soo good! We are saved! Get in the market now! This is the greatest buying opportunity ever! Then again, maybe it is the greatest selling opportunity ever - as demonstrated by the big boys when they dumped and shorted this for another 20pts. Fool me once, shame on you. Fool me twice, shame on me. There are a lot of shamed folks out there with third degree market burns.
The problem with all traders - bulls and bears - is that we are impressionable and so easily conditioned. We are also arrogant and think that if we "know enough" we can rationalize the market. The truth of the matter is that there are very few things that we can rationalize about the market. The few things that we can conclude are generally concluded by everyone at once - when it is too late to act upon.
This is a big boys game and the sole objective is to feed off of the smaller guys. We need to be aware of the herd, just as a wolf is aware of his next meal. I also hope the herd can now smell the predators, because though it is too late for many of them, I am well positioned to profit from their panic.
I have no apologies for this position - as I know many of you have similar positions - plus it is a big boys game and folks should trade at their own risk!
Have a great weekend - and short the heck out of all rallies!
The price action over this last rally top has been super erratic. This is a sign that we ain't in Kansas anymore. Conditions are changing and it is fundamental. The game is changing and the market is reflecting that change in volatility. I interpret the action as heavy distribution.
Yesterday, we saw a false breakout at the open. The event occurred at a key resistance level and that triggered both short covering and the momentum trade. But this breakout was different. It was empty and that was clear from the gappy pops in the thrust. Then there was the heavy selling that just didn't give up. Why should it? After months of conditioning the day trader to buy all dips there were plenty of buyers for the shares. Even the cautious bulls get roped in as they see the down waves stabilize and prices drifting higher - tick, by tick. It's too much to resist. They start buying in anticipation of their traditional reward. Just when the coast seems clear and folks are buying, the next violent down wave hits. This process can be repeated many times, in many time frames. There are enough bulls who are convinced that it will keep going up - just buy, buy, buy!
Take today. What a setup! Who in their right mind covered their shorts on this news! (If you did, please take no offense - just get back in there!). The jobs number, along with any other news item for that matter, is nonsense. It is simply a super short term momentum driver. A pivot point for short term traders. Again, prices rose on short covering and momentum chasers. The media pumping the good news, calling the blow by blow on Bloomberg. All sectors up! No end in sight to this rally. Job data was soo good! We are saved! Get in the market now! This is the greatest buying opportunity ever! Then again, maybe it is the greatest selling opportunity ever - as demonstrated by the big boys when they dumped and shorted this for another 20pts. Fool me once, shame on you. Fool me twice, shame on me. There are a lot of shamed folks out there with third degree market burns.
The problem with all traders - bulls and bears - is that we are impressionable and so easily conditioned. We are also arrogant and think that if we "know enough" we can rationalize the market. The truth of the matter is that there are very few things that we can rationalize about the market. The few things that we can conclude are generally concluded by everyone at once - when it is too late to act upon.
This is a big boys game and the sole objective is to feed off of the smaller guys. We need to be aware of the herd, just as a wolf is aware of his next meal. I also hope the herd can now smell the predators, because though it is too late for many of them, I am well positioned to profit from their panic.
I have no apologies for this position - as I know many of you have similar positions - plus it is a big boys game and folks should trade at their own risk!
Have a great weekend - and short the heck out of all rallies!
Thursday, December 3, 2009
Hard Earned Profit...
These last rally legs have been very tough on me and not just because of my core short position which is in desparate need of correction. It has been tough because my timing has consistantly been just a bit early in all time frames. This includes my swing trades, day trades, and scalps. When you enter early, you have to endure a greater risk and worse, you tend to bail with a smaller reward - only to watch the setup complete according to analysis. I have been working on this during the last month, trying to improve my timing and endure longer when I do go in too early. I have been doing a nice job of it, but it is hard and stressful work.
Take for example the short position I took yesterday before the close on the ES. I took the position on gut - backed with substantial technical analysis. The initial position was smart but I should have scaled my position more conservatively. Without going into all the details, I built a full short too early and eventually traded 20 ES contracts and a number of dollar contracts throughout the evening and morning to scalp enough profits so that I could enter the open at my maximum $ risk level. Now, considering that the futures drifted fairly high last night and the blow-off at the open, I am quite pleased with how well I did. My wife on the other hand would prefer that I sleep. Anyway, the real problem with early entry is the tendency to exit prematurely at first signs of profit. I covered all of my positions in stages during the down move - with the last contract covered at 110225. This means that I left many points on the board - which translates into many dollars. At the same time, I have learned NEVER to complain about a profit. I earned about 3x my daily quota today - and for that I am thankful. Further, I am flat going into the jobs report - which will allow me to sleep peacefully this evening. (See my prior two posts for a more complete understanding of the setups)
What is in store for tomorrow? Jobs Friday. Expect volatility - but more importantly, the market will reveal it's direction. There are two paths, one is follow through on the sell side, the other is a breakout to new highs. I personally think we will see follow through on the down side. If you refer to my rectangle post, you'll see that the "Bull Zone" was entered and rejected after the false breakout at the open. This breakout, was a stop gunning exercise at a MAJOR resistance point to trigger a short squeeze and allow the larger participants to take positions in advance of the new trend (which will be down). The rectangle has a height of 30 pts - and anyone who got short during this squeeze expects prices to head down to 1084 at a minimum.
In addition to the false breakout, many bearish things took place from a technical standpoint:
The 1 minute chart is gruesome - with both the 20pMA and 50pMA passing down sharply through the 200p MA. The real chart to look at is the daily:
This last reaction high is really ugly and extremely volatile - suggesting something wicked is about to happen. Look how ugly this top is compared to the round smooth top of the prior reaction high. Statistics favor a cross of both the 20pMA and the 50p MA during this down wave. Tomorrow is SUPER CRITICAL as price action is confronted by the bottom trend line of the wedge and the 20p MA. Both points tend to cause price bounce. If we break out of the wedge and head to the 50p MA - we'll be at the 50% retracement level for the rally leg. I love 50% retracement levels - especially when I am short and they fail!
Sorry I can not do a better job tonight - way too tired.
Good luck out there!
Take for example the short position I took yesterday before the close on the ES. I took the position on gut - backed with substantial technical analysis. The initial position was smart but I should have scaled my position more conservatively. Without going into all the details, I built a full short too early and eventually traded 20 ES contracts and a number of dollar contracts throughout the evening and morning to scalp enough profits so that I could enter the open at my maximum $ risk level. Now, considering that the futures drifted fairly high last night and the blow-off at the open, I am quite pleased with how well I did. My wife on the other hand would prefer that I sleep. Anyway, the real problem with early entry is the tendency to exit prematurely at first signs of profit. I covered all of my positions in stages during the down move - with the last contract covered at 110225. This means that I left many points on the board - which translates into many dollars. At the same time, I have learned NEVER to complain about a profit. I earned about 3x my daily quota today - and for that I am thankful. Further, I am flat going into the jobs report - which will allow me to sleep peacefully this evening. (See my prior two posts for a more complete understanding of the setups)
What is in store for tomorrow? Jobs Friday. Expect volatility - but more importantly, the market will reveal it's direction. There are two paths, one is follow through on the sell side, the other is a breakout to new highs. I personally think we will see follow through on the down side. If you refer to my rectangle post, you'll see that the "Bull Zone" was entered and rejected after the false breakout at the open. This breakout, was a stop gunning exercise at a MAJOR resistance point to trigger a short squeeze and allow the larger participants to take positions in advance of the new trend (which will be down). The rectangle has a height of 30 pts - and anyone who got short during this squeeze expects prices to head down to 1084 at a minimum.
In addition to the false breakout, many bearish things took place from a technical standpoint:
- Crossing down through the 20p MA on the hourly chart
- Crossing down through the 50p MA on the hourly chart
- CLOSING well below both these MAs with heavy selling into the close
The 1 minute chart is gruesome - with both the 20pMA and 50pMA passing down sharply through the 200p MA. The real chart to look at is the daily:
This last reaction high is really ugly and extremely volatile - suggesting something wicked is about to happen. Look how ugly this top is compared to the round smooth top of the prior reaction high. Statistics favor a cross of both the 20pMA and the 50p MA during this down wave. Tomorrow is SUPER CRITICAL as price action is confronted by the bottom trend line of the wedge and the 20p MA. Both points tend to cause price bounce. If we break out of the wedge and head to the 50p MA - we'll be at the 50% retracement level for the rally leg. I love 50% retracement levels - especially when I am short and they fail!
Sorry I can not do a better job tonight - way too tired.
Good luck out there!
Wednesday, December 2, 2009
The Rectangle...
So, I have not stopped analyzing the SPX tonight. I am very curious as to what will happen next and I want to make a good money management decision with confidence. I'm looking for a high confidence setup where my risk is limited to under 25% of my potential gain ($1 to earn $4). I think the setup is present on the S&P now, and I took my position on instinct. My instincts are generally good - but often early in all time frames. For example, instincts told me to go short two rally legs ago - perhaps I could have waited...
When working with high leverage instruments such as the ES, I do not like to carry contracts too long. My time frame is less than 3 days - even when the setup is within the prevailing trend. Too many things can happen in an overnight session. I have lost many thousands through the incredible gunning activity that characterizes the hostile trading environment of today.
Anyway, whenever I find myself taking a position on instinct I like to spend extra time on the TA. Keep in mind that my instinct is based entirely on my technical analysis. It is the sum total of everything I study during the day and evening - released in a guttural action - such as shorting the ES at the end of the day when short covering is expected and jobs data is due to be released the next morning. No guts, no glory. But was it a smart move?
To answer that question, I had to spend some extra time calmly verifying the technicals. I will not bore you with everything that I have said in the past week regarding the RSI, trend lines, support levels, and volatility. All of it points to weakness and a possible top. I don't think there is a person on the planet that can produce a single shred of technical support for another rally leg. This is a thinly traded market fueled by a sinking dollar and zero cost liquidity. Period end of story. So what the heck can we do? What do we watch for? I'll try to answer.
We can divorce ourselves from the right and wrong, the fear and the greed, the justice and the injustice. We can simplify the present scenario into a future events, each predicted outcomes, timing and relative probability. Based on our assessments, and the potential profits implied by our probability profile, we can place our bets. It is as simple as that.
Open the chart:
This is again the hourly chart for the SPX. It shows the three reaction highs in the last rally leg - including the most recent reaction high which is of most interest to us as traders. Let's simplify. We have a RECTANGLE (also called a box) - which is a trading pattern bound by an upper horizontal trend line and a lower horizontal trend line. These trend lines are of course parallel. As I watched this form I thought of a square sinal wave - formed by the sudden and dramatic price thrusts up and down.
There are three ways we can play a rectangle.
1. Trade the range between the trend lines. (30 pts in this case)
2. Trade the break-out above the top trend. (Bull Zone)
3. Trade the break-down below the bottom trend. (Bull Zone)
To play the range, we short as close to the trend lines as possible. Remember, once the trend line is identified - the price action does not always have to rise/fall to touch it. It can rise/fall short of the mark - often providing the first signal as to where the action my head on exit. If it fails to reach the top line before heading south, this increases the likelyhood of a bottom side break down. If it fails to reach the bottom trend line before heading north, this increases the likelyhood of a top side break out. Right now, we are close to the top trend line - but not quite there. If we look at the prior two reaction highs, we see that price action head butts the top trend line over a period of 3 days. We have been up here for 2 days. Seems to me that we'll be hanging around one more session - with jobs data supplying the energy for a final attack at the top. The most conservative play would be to wait until tomorrows session to short - provided we do not break out.
Rectangles statistically favor a break out to the top side. Although the statistic can be questioned - as it was gathered during a broad bull market - it seems reasonable and believable - the more attacks at a top - the more likely price will break out. For many documented reasons, I feel 1120 is the top side target that if passed, I feel will result in a break out. Keep in mind that false break outs are common in rectangles - and I think we saw one today (upside) and one on thanksgiving (downside). Sadly, if we do break out to the upside, statistics indicate an 90% chance that we meet or exceed a target price increase equal to the height of the triangle. Thats about 30 pts on top of the 1120 break out level, or 1150ish. If we see a breakout tomorrow above 1120 - I will close a significant share of my short positions as planned.
Rectangles also break down to the bottom side. As I have stated in several of my prior posts - if we can get a close below 084 we are headed much lower near term. It was only four sessions ago that we tested that 081 area and if I am hoping that we head south one more time. All of the technicals suggest that I trip to the bottom is likely and considering that we have not yet touched the 20p MA during this reaction high - I'd say chances are high that we end the week at the bottom of the rectangle. I think that a break of 1080 is needed for a break down to occur. Statistics show that there is a 65%-75% chance of meeting or exceeding a target price decrease equal to the height of the rectangle. That would put us at around 1050 when all is said and done.
Looking at my current positions, I am short a number of contracts on the ES at around 110750. That is not the best price point. I would prefer shorts within the 111200-111700 range. So, I start with a 5 pt deficit and that is not good as I have a 7pt loss limit on the contracts. This gives me the 25% risk limit that I seek in this setup. My options are to either greatly increase my loss limit risk to accomodate for the early position - or scalp like mad overnight to get my average entry higher. Of course, I could close out my position entirely, and wait until tomorrow's session.
I'm not sure yet...
Good luck tomorrow.
Rectangles do break to the
When working with high leverage instruments such as the ES, I do not like to carry contracts too long. My time frame is less than 3 days - even when the setup is within the prevailing trend. Too many things can happen in an overnight session. I have lost many thousands through the incredible gunning activity that characterizes the hostile trading environment of today.
Anyway, whenever I find myself taking a position on instinct I like to spend extra time on the TA. Keep in mind that my instinct is based entirely on my technical analysis. It is the sum total of everything I study during the day and evening - released in a guttural action - such as shorting the ES at the end of the day when short covering is expected and jobs data is due to be released the next morning. No guts, no glory. But was it a smart move?
To answer that question, I had to spend some extra time calmly verifying the technicals. I will not bore you with everything that I have said in the past week regarding the RSI, trend lines, support levels, and volatility. All of it points to weakness and a possible top. I don't think there is a person on the planet that can produce a single shred of technical support for another rally leg. This is a thinly traded market fueled by a sinking dollar and zero cost liquidity. Period end of story. So what the heck can we do? What do we watch for? I'll try to answer.
We can divorce ourselves from the right and wrong, the fear and the greed, the justice and the injustice. We can simplify the present scenario into a future events, each predicted outcomes, timing and relative probability. Based on our assessments, and the potential profits implied by our probability profile, we can place our bets. It is as simple as that.
Open the chart:
This is again the hourly chart for the SPX. It shows the three reaction highs in the last rally leg - including the most recent reaction high which is of most interest to us as traders. Let's simplify. We have a RECTANGLE (also called a box) - which is a trading pattern bound by an upper horizontal trend line and a lower horizontal trend line. These trend lines are of course parallel. As I watched this form I thought of a square sinal wave - formed by the sudden and dramatic price thrusts up and down.
There are three ways we can play a rectangle.
1. Trade the range between the trend lines. (30 pts in this case)
2. Trade the break-out above the top trend. (Bull Zone)
3. Trade the break-down below the bottom trend. (Bull Zone)
To play the range, we short as close to the trend lines as possible. Remember, once the trend line is identified - the price action does not always have to rise/fall to touch it. It can rise/fall short of the mark - often providing the first signal as to where the action my head on exit. If it fails to reach the top line before heading south, this increases the likelyhood of a bottom side break down. If it fails to reach the bottom trend line before heading north, this increases the likelyhood of a top side break out. Right now, we are close to the top trend line - but not quite there. If we look at the prior two reaction highs, we see that price action head butts the top trend line over a period of 3 days. We have been up here for 2 days. Seems to me that we'll be hanging around one more session - with jobs data supplying the energy for a final attack at the top. The most conservative play would be to wait until tomorrows session to short - provided we do not break out.
Rectangles statistically favor a break out to the top side. Although the statistic can be questioned - as it was gathered during a broad bull market - it seems reasonable and believable - the more attacks at a top - the more likely price will break out. For many documented reasons, I feel 1120 is the top side target that if passed, I feel will result in a break out. Keep in mind that false break outs are common in rectangles - and I think we saw one today (upside) and one on thanksgiving (downside). Sadly, if we do break out to the upside, statistics indicate an 90% chance that we meet or exceed a target price increase equal to the height of the triangle. Thats about 30 pts on top of the 1120 break out level, or 1150ish. If we see a breakout tomorrow above 1120 - I will close a significant share of my short positions as planned.
Rectangles also break down to the bottom side. As I have stated in several of my prior posts - if we can get a close below 084 we are headed much lower near term. It was only four sessions ago that we tested that 081 area and if I am hoping that we head south one more time. All of the technicals suggest that I trip to the bottom is likely and considering that we have not yet touched the 20p MA during this reaction high - I'd say chances are high that we end the week at the bottom of the rectangle. I think that a break of 1080 is needed for a break down to occur. Statistics show that there is a 65%-75% chance of meeting or exceeding a target price decrease equal to the height of the rectangle. That would put us at around 1050 when all is said and done.
Looking at my current positions, I am short a number of contracts on the ES at around 110750. That is not the best price point. I would prefer shorts within the 111200-111700 range. So, I start with a 5 pt deficit and that is not good as I have a 7pt loss limit on the contracts. This gives me the 25% risk limit that I seek in this setup. My options are to either greatly increase my loss limit risk to accomodate for the early position - or scalp like mad overnight to get my average entry higher. Of course, I could close out my position entirely, and wait until tomorrow's session.
I'm not sure yet...
Good luck tomorrow.
Rectangles do break to the
Why I just shorted the ES...
So, it is around 3:15pm and I just shorted the ES again. Why? Well, I am speculating based on some TA. Perhaps it will be a mistake as we all know how the "specialists" conspire to paint the tape at the end of each day. At least, that has been the apparent case for the last 8 months. Anyway, from a technical standpoint there are many good reasons to short the SPX at 3:15PM. Open the chart:
First, a few features (as I write this the market pops!):
1. The fib grid stretches across the HOD and the current LOD
2. The fib fan does the same - providing us with several fan blade retracement lines
3. The Red Line is the resistance of the day (or it was until this last minute pop)
4. The yellow trend lines show a wedge that is rising off the LOD
My choice to short (which I stand by even as the market tests 11010) is based on several factors. First, the confluence of several technical resistance points should be able to contain price action. These include the 38% retracement, the red resistance line, and the wedge top line. These forces contained the rising price action twice at the key rejection points which I labeled.
Above these levels is the 50% retracement level for the down wave. To reach this level, price action must push through some congestion and surpass prior tops without experiencing a sell off.
Finally, the pattern is bearish - it can be considered either a bear flag, a rising wedge, or a consolidation triangle. In either case, in it's current location with respect to the last down move - this is bearish.
Baring a major short covering rally - which I think I am witnessing - this should break to the down side.
Good luck out there!
First, a few features (as I write this the market pops!):
1. The fib grid stretches across the HOD and the current LOD
2. The fib fan does the same - providing us with several fan blade retracement lines
3. The Red Line is the resistance of the day (or it was until this last minute pop)
4. The yellow trend lines show a wedge that is rising off the LOD
My choice to short (which I stand by even as the market tests 11010) is based on several factors. First, the confluence of several technical resistance points should be able to contain price action. These include the 38% retracement, the red resistance line, and the wedge top line. These forces contained the rising price action twice at the key rejection points which I labeled.
Above these levels is the 50% retracement level for the down wave. To reach this level, price action must push through some congestion and surpass prior tops without experiencing a sell off.
Finally, the pattern is bearish - it can be considered either a bear flag, a rising wedge, or a consolidation triangle. In either case, in it's current location with respect to the last down move - this is bearish.
Baring a major short covering rally - which I think I am witnessing - this should break to the down side.
Good luck out there!
Tuesday, December 1, 2009
Very Ugly Charts...
I can't tell you how sick and tired I am at being short. Ninety percent of the time I feel like a fool. Just look at all the people making money hand over fist - buy, buy, buy... The arrogance of the participants who say - "Fundamentals don't apply, technicals don't apply, the market is going up, up, up!" - and it does. Then there are those who are convinced that "they" won't let the market fall. "They" meaning the PPT, the specialists, and of course GS. Very disturbing.
Now here is the thing, there is no secret force controlling the market - at least not at the tick by tick level. No specialist can make the S&P close at exactly 1108.46 - GS can not control the herd when the herd is spooked by a news item - and the PPT does not work at a trading desk every day with the specific goal of screwing the shorts. All of this is emotional non-sense and it distorts analysis.
The fact of the matter is that the markets have grown tired and it is becoming much more difficult for a rally to maintain momentum. If you compare the last two rally legs to the prior legs since March, you will see what I mean. We are rolling over, volume is decreasing, RSI is weakening, and volatility is increasing as big money distributes across the top. This is normal, it is healthy, it is predictable. Until the market gets on with the correction it can not rally any further. A correction of 15-20% is what it will take to get the hesitant participant interested in the game. The problem is as the market corrects, participants (with the aide of the media) will have to analyze the fundamentals - which may not support the present (or corrected) price levels.
For those of you who doubt that we will see a correction, just look at the following Daily chart of the ES futures contract:
Let's start with the RSI divergence over the last three rally legs. When price increases as RSI decreases, a warning signal is generated to reduce your longs and consider shorting. The divergence is getting more and more dramatic. In fact, look at how the price and RSI diverge even within this last rally leg top. This single indicator has been extremely accurate in all time frames for me. I trust it implicitly.
Never, never, never make a TA decision with one indicator. Let's look at others, like volume. If you look at the prior two rally legs, the up segments were somewhat supported with periods of increasing volume. During the last rally leg - the most dramatic rally leg of the series - saw a divergence in the volume levels. Volume levels decreased while price increased. This is the second signal.
Now look at how volatile things started to get - particularly in the last two tops. Increased volatility is usually a sign that big money is shifting - usually distributions are being made by major participants and the "less informed" and "late to the gamers" are on the buy side.
Interesting enough, we did not make it to the top trend line of the up channel on this last rally leg. This is a sign of weakening - a process where the tops are rolling over. There have been SIX attempts at new highs in this topping process - SIX! After a while, things begin to breakdown. In fact, we saw what can happen to the downside on Thanksgiving evening. The futures market blew off 31 points. It has been a long time since I saw that kind of take down.
Now, I encourage folks to study SPX and you will see that we are currently at a double resistance level - one from the major down trend line formed across the tops since the October 08 crash and another from the up trend line formed across the bottoms of the March rally. We are also right about the 50% retracement level. All of these things contribute to my confidence in going short.
My advice - don't "personalize the market" and make it an enemy. The market is an object - a puzzle - meant to be solved, but also meant to be put down when it frustrates you. Don't try to be in every trade - you'll lose too often and you'll be ill prepared to take a chance when a chance is warranted.
Let's see if we rally tomorrow or reverse course. Either must happen as moving sideways does not seem to be an option! Look to the dollar for a clue!
Cheers.
Now here is the thing, there is no secret force controlling the market - at least not at the tick by tick level. No specialist can make the S&P close at exactly 1108.46 - GS can not control the herd when the herd is spooked by a news item - and the PPT does not work at a trading desk every day with the specific goal of screwing the shorts. All of this is emotional non-sense and it distorts analysis.
The fact of the matter is that the markets have grown tired and it is becoming much more difficult for a rally to maintain momentum. If you compare the last two rally legs to the prior legs since March, you will see what I mean. We are rolling over, volume is decreasing, RSI is weakening, and volatility is increasing as big money distributes across the top. This is normal, it is healthy, it is predictable. Until the market gets on with the correction it can not rally any further. A correction of 15-20% is what it will take to get the hesitant participant interested in the game. The problem is as the market corrects, participants (with the aide of the media) will have to analyze the fundamentals - which may not support the present (or corrected) price levels.
For those of you who doubt that we will see a correction, just look at the following Daily chart of the ES futures contract:
Let's start with the RSI divergence over the last three rally legs. When price increases as RSI decreases, a warning signal is generated to reduce your longs and consider shorting. The divergence is getting more and more dramatic. In fact, look at how the price and RSI diverge even within this last rally leg top. This single indicator has been extremely accurate in all time frames for me. I trust it implicitly.
Never, never, never make a TA decision with one indicator. Let's look at others, like volume. If you look at the prior two rally legs, the up segments were somewhat supported with periods of increasing volume. During the last rally leg - the most dramatic rally leg of the series - saw a divergence in the volume levels. Volume levels decreased while price increased. This is the second signal.
Now look at how volatile things started to get - particularly in the last two tops. Increased volatility is usually a sign that big money is shifting - usually distributions are being made by major participants and the "less informed" and "late to the gamers" are on the buy side.
Interesting enough, we did not make it to the top trend line of the up channel on this last rally leg. This is a sign of weakening - a process where the tops are rolling over. There have been SIX attempts at new highs in this topping process - SIX! After a while, things begin to breakdown. In fact, we saw what can happen to the downside on Thanksgiving evening. The futures market blew off 31 points. It has been a long time since I saw that kind of take down.
Now, I encourage folks to study SPX and you will see that we are currently at a double resistance level - one from the major down trend line formed across the tops since the October 08 crash and another from the up trend line formed across the bottoms of the March rally. We are also right about the 50% retracement level. All of these things contribute to my confidence in going short.
My advice - don't "personalize the market" and make it an enemy. The market is an object - a puzzle - meant to be solved, but also meant to be put down when it frustrates you. Don't try to be in every trade - you'll lose too often and you'll be ill prepared to take a chance when a chance is warranted.
Let's see if we rally tomorrow or reverse course. Either must happen as moving sideways does not seem to be an option! Look to the dollar for a clue!
Cheers.
Monday, November 30, 2009
Could be one of the last great shorting opportunities in 2009...
The market technicals are so weak that I can not see a strong rally to close the year. Any rally will likely be met with substantial selling. The year is ending and many fund managers have already been sneaking out the back door, and those that remain in the game have their eyes on the exit. I think it is time to short aggressively.
Looking at the hourly chart:
There is no change in the prognosis. The S&P has formed a double top, and is struggling in a resistance band formed by prior consolidation. Although there is ample resistance to contain a rally attempt, there is very little supporting the current price level - leaving the market vulnerable to a sell-off. I believe a fall below 1085-084 will start a mass exodus. I can see this baby unwinding down to our 1029 mark. Of course, the chart posted on Friday still applies, including support at 071ish, 061ish etc.
For now, I am focused on the 20p MA crossing down through the 50p MA at point A. I expect this to trigger some selling. On the flip side, I am concerned about the possible breakout above the top trend line at a retest of the channel bottom at B (1110). I say I am concerned, but I am not overly concerned.
Let's look at today's action:
The futures market was down, then up, then down, and up. What a roller coaster. Kind of like the open of SPX itself, down up, down, up, down, up, break away - total rejection. This is one weak market. Anyway, one of the oldest tricks in the book is to show signs of reversal right as we enter lunch. This is to bait the retail crowd and dump shares. This is not "conspiracy theory" or "tales of the specialist" - it is just fact. Look how the market found a double bottom and simultaneous strength in the RSI right before noon. A pop followed by a sell wave. After 15 minutes of healing, another pop followed by a sell wave. Believe me, there is quite a bit of distribution happening quietly on days like today. However, the best is always saved for last. Look at how hard it was to break the down trend line. I count 5 hits - each met with selling - but once it broke there was an obvious short covering rally. Note how the gappy price movement diverged from RSI each time it formed a peak. This was a clear signal to short this end of day pop - which I did and the ES sold off nicely after the close.
Anyway, today's session (and perhaps a few sessinos to come) may simply be some of the last "great" shorting opportunities on the S&P in 2009. Remember, when we start to fall, it will be fast and furious. I hope everyone is in position!
Cheers!
Looking at the hourly chart:
There is no change in the prognosis. The S&P has formed a double top, and is struggling in a resistance band formed by prior consolidation. Although there is ample resistance to contain a rally attempt, there is very little supporting the current price level - leaving the market vulnerable to a sell-off. I believe a fall below 1085-084 will start a mass exodus. I can see this baby unwinding down to our 1029 mark. Of course, the chart posted on Friday still applies, including support at 071ish, 061ish etc.
For now, I am focused on the 20p MA crossing down through the 50p MA at point A. I expect this to trigger some selling. On the flip side, I am concerned about the possible breakout above the top trend line at a retest of the channel bottom at B (1110). I say I am concerned, but I am not overly concerned.
Let's look at today's action:
The futures market was down, then up, then down, and up. What a roller coaster. Kind of like the open of SPX itself, down up, down, up, down, up, break away - total rejection. This is one weak market. Anyway, one of the oldest tricks in the book is to show signs of reversal right as we enter lunch. This is to bait the retail crowd and dump shares. This is not "conspiracy theory" or "tales of the specialist" - it is just fact. Look how the market found a double bottom and simultaneous strength in the RSI right before noon. A pop followed by a sell wave. After 15 minutes of healing, another pop followed by a sell wave. Believe me, there is quite a bit of distribution happening quietly on days like today. However, the best is always saved for last. Look at how hard it was to break the down trend line. I count 5 hits - each met with selling - but once it broke there was an obvious short covering rally. Note how the gappy price movement diverged from RSI each time it formed a peak. This was a clear signal to short this end of day pop - which I did and the ES sold off nicely after the close.
Anyway, today's session (and perhaps a few sessinos to come) may simply be some of the last "great" shorting opportunities on the S&P in 2009. Remember, when we start to fall, it will be fast and furious. I hope everyone is in position!
Cheers!
Friday, November 27, 2009
Hard to read the dollar...
Here is the daily Dollar Index chart.
If you recall, the red trend lines are the boundary of the main down channel. The pink lines are the inner wedge. Over the last month or so of trading, the dollar looked like it was strengthening (or at least finding a bottom). The lower channel of the main trend line hasn't had a visit for over 20 sessions. In addition, the upper trend line has been attacked three times in the same time period, if you include the remarkable reversal we had on Thanksgiving evening. I think the dollar is at a very critical juncture. We have had a test of the lower wedge trend line and a test of the upper trend line of the channel - all within 24 hours. That is a swing from 74.200ish to 75.700ish - or 1.5% in 24 hours! Think of the wealth creation and destruction with that swing!
We now sit with a nasty gravestone doji near the top of the upper trend line within the wedge and the equities markets are in a state of indecision. Where does the dollar go? Do we retest the bottom of the wedge or are the last two breaks of the upper trend line a sign that the dollar is going to breakout on a third attempt?
I wish I knew! I am inclined to believe that the dollar will sink - but until the equities market decide on a course, I will not take a heavy position either way. I am going to watch for a break down or bounce off of 74.750.
Good luck next week everyone!
If you recall, the red trend lines are the boundary of the main down channel. The pink lines are the inner wedge. Over the last month or so of trading, the dollar looked like it was strengthening (or at least finding a bottom). The lower channel of the main trend line hasn't had a visit for over 20 sessions. In addition, the upper trend line has been attacked three times in the same time period, if you include the remarkable reversal we had on Thanksgiving evening. I think the dollar is at a very critical juncture. We have had a test of the lower wedge trend line and a test of the upper trend line of the channel - all within 24 hours. That is a swing from 74.200ish to 75.700ish - or 1.5% in 24 hours! Think of the wealth creation and destruction with that swing!
We now sit with a nasty gravestone doji near the top of the upper trend line within the wedge and the equities markets are in a state of indecision. Where does the dollar go? Do we retest the bottom of the wedge or are the last two breaks of the upper trend line a sign that the dollar is going to breakout on a third attempt?
I wish I knew! I am inclined to believe that the dollar will sink - but until the equities market decide on a course, I will not take a heavy position either way. I am going to watch for a break down or bounce off of 74.750.
Good luck next week everyone!
Don't buy Dubai...
Thanksgiving - I time to give thanks for the blessings in your life. Those of us who live in the US are very lucky to enjoy the freedoms and opportunities that we have. It is very easy to take them for granted. For this reason, I made a conscious decision not to trade Wednesday night or Thursday - and it is funny that the markets decide to sell off exactly then!
Anyway, I am back at the desk and have quickly put some analysis together. I want to emphasize that the events of the last two sessions are very hard to interpret and this volatility can, and will, likely work in both directions. Also, I do not "buy the Dubai" story. There are bigger things happening on the currency front.
If this is part of the correction process, the hourly charts will help us understand what to expect. Open this chart - which includes the opening 30 minutes..
The chart features several technical studies, including:
1. The yellow up channel which has been in place during this last rally leg.
2. A fib grid showing the retracement levels for the last rally leg
3. The Overhang Supply Band in red which is formed from the price consolidation at the current reaction highs.
4. Key Support/Resistance levels in yellow and red
Before we get into the discussion, let's all watch volume. This is a holiday week and volume is extremely low. This does raise questions regarding the strength of the move (or reaction to the move).
OK, first we observe price action and look for any symetry and clues in the mirror side of the current move. One thing I notice is the completion of a double top that formed over the last 10 trading sessions. Not bad in terms of technical qualification. A double top forming over ten sessions with decreasing RSI - this is especially supportive of a correction when considering that this top is the fifth top in a weakening series that started in July. Further examination of the symetry suggests that we should find support at the 1085 area and have a pullback to the 1100 area. This also makes sense, as that would bring us back up to a retest of the bottom trend line of our up channel. It would also be the last line of resistance to the upside. I would not be surprise to see a test of the line - though the overhang supply is heavy and it may not happen entirely today.
Now, looking at the Fib grid, we see a 38% retrace would test the 1081 level at point A. We almost had that test in the open and are seeing an expected pullback. If we see another test of that level today, after a pullback to perhaps 1095, that would most certainly open the possibility of 1071 at point B by the close. I say this because there is very little congestion between the 081 and 071 levels and reversals after failing to move through overhang are often followed by panic selling. The road to 061 at C will be harder, as there is congestion there and we all remember the major buying and selling that occured at that level by institutions. The good news is that a break of 061 will bring the big test of the 029 level at D, which is the full retrace of this rally leg. This is a must for a trend reversal.
The real story is the currency market. Wednesday was absolutely insane. It included a massive spike in the EUR/USD, a massive dip in the USD, followed by an immense reversal. At the same time, Japan is likely intervening on the JPY. I am not sure what to make of these swings - but I can say the dollar is abiding by the major down trend line that I published several sessions ago. Amazing how it ran down to the bottom and back to the top in 2 sessions. Again, I am not sure how to read this - but that is the story, not Dubai.
Anyway, I am back at the desk and have quickly put some analysis together. I want to emphasize that the events of the last two sessions are very hard to interpret and this volatility can, and will, likely work in both directions. Also, I do not "buy the Dubai" story. There are bigger things happening on the currency front.
If this is part of the correction process, the hourly charts will help us understand what to expect. Open this chart - which includes the opening 30 minutes..
The chart features several technical studies, including:
1. The yellow up channel which has been in place during this last rally leg.
2. A fib grid showing the retracement levels for the last rally leg
3. The Overhang Supply Band in red which is formed from the price consolidation at the current reaction highs.
4. Key Support/Resistance levels in yellow and red
Before we get into the discussion, let's all watch volume. This is a holiday week and volume is extremely low. This does raise questions regarding the strength of the move (or reaction to the move).
OK, first we observe price action and look for any symetry and clues in the mirror side of the current move. One thing I notice is the completion of a double top that formed over the last 10 trading sessions. Not bad in terms of technical qualification. A double top forming over ten sessions with decreasing RSI - this is especially supportive of a correction when considering that this top is the fifth top in a weakening series that started in July. Further examination of the symetry suggests that we should find support at the 1085 area and have a pullback to the 1100 area. This also makes sense, as that would bring us back up to a retest of the bottom trend line of our up channel. It would also be the last line of resistance to the upside. I would not be surprise to see a test of the line - though the overhang supply is heavy and it may not happen entirely today.
Now, looking at the Fib grid, we see a 38% retrace would test the 1081 level at point A. We almost had that test in the open and are seeing an expected pullback. If we see another test of that level today, after a pullback to perhaps 1095, that would most certainly open the possibility of 1071 at point B by the close. I say this because there is very little congestion between the 081 and 071 levels and reversals after failing to move through overhang are often followed by panic selling. The road to 061 at C will be harder, as there is congestion there and we all remember the major buying and selling that occured at that level by institutions. The good news is that a break of 061 will bring the big test of the 029 level at D, which is the full retrace of this rally leg. This is a must for a trend reversal.
The real story is the currency market. Wednesday was absolutely insane. It included a massive spike in the EUR/USD, a massive dip in the USD, followed by an immense reversal. At the same time, Japan is likely intervening on the JPY. I am not sure what to make of these swings - but I can say the dollar is abiding by the major down trend line that I published several sessions ago. Amazing how it ran down to the bottom and back to the top in 2 sessions. Again, I am not sure how to read this - but that is the story, not Dubai.
Tuesday, November 24, 2009
Nothing to Analyze (or at least no desire to)...
Let's face it - this is a net sum zero proposition this week. We are moving to the right - with some ups and downs in-between. This is really a vaction week - and I personally do not want to work.
With that in mind - have a happy Thanksgiving everyone. Enjoy some down time with your family and friends (with only one eye on the market!).
Cheers!
With that in mind - have a happy Thanksgiving everyone. Enjoy some down time with your family and friends (with only one eye on the market!).
Cheers!
Monday, November 23, 2009
A bit higher than expected...
Most of us expected a rise in the market today (and this week). Seasonally, this is an up week. I think I read 80% of the time from one source. Regardless, the technicals all suggested a rise today though I was surprised to see an attack of the high of the year. In retrospect, perhaps it is reasonable. The short squeeze was in play and the volume is light. So what is the good news?
The good news is that there was no follow through on the buy side. Classically, when we have a strong thrust up at the open, followed by a sagging flag, it is a safe bet that we get a second rally. Not today. Even the close was just short covering. Look at the chart.
We blasted off, exhausted and just creeped lower. We seem to be bouncing along the 50% line. In fact, I was surprised that the inverted cup and handle did not cause a break lower - as I would have been happy to eat my words about the 1103.5 support level holding.
Anyway, the pattern seems to be playing out in the futures during the early part of the session. I have a position, but may close it out with a small profit. Not sure what to expect overnight and the morning.
I do believe that shorting every rally is a low risk scenario.
Good luck out there!
The good news is that there was no follow through on the buy side. Classically, when we have a strong thrust up at the open, followed by a sagging flag, it is a safe bet that we get a second rally. Not today. Even the close was just short covering. Look at the chart.
We blasted off, exhausted and just creeped lower. We seem to be bouncing along the 50% line. In fact, I was surprised that the inverted cup and handle did not cause a break lower - as I would have been happy to eat my words about the 1103.5 support level holding.
Anyway, the pattern seems to be playing out in the futures during the early part of the session. I have a position, but may close it out with a small profit. Not sure what to expect overnight and the morning.
I do believe that shorting every rally is a low risk scenario.
Good luck out there!
Thursday, November 19, 2009
Follow Through is Important...
Good day. Enough said on that.
I really wanted to see us close down under 090, but I knew it was not happending today. I called the LOD at around 089 and sadly I was correct. Having not closed below 090 is not a big deal. It just would have sealed the deal for this reaction high. Reason being that we would be sitting below a substantial layer of congestion - which is essentially supply. Now we sit on top of the congestion and it serves as support. Hopefully we will get follow through tomorrow. We are one sell wave away from a very nice breakdown.
I have two charts today. First the hourly chart, as I think it provides a good summary of why the price acted as it did today.
This chart was originally posted many days ago. In fact, the red support/resistance lines remain un-modified. I have added only one technical study, which is the fib grid traced from the low to the high. It is funny how well these things work. Note that the key retrace levels align nicely with specific support and resistance levels. The 38% level sits right around 085 and the 50% sits right around 072. Does anyone remember the significance of 072? That was the level that we saw some real selling. Funny how it becomes the 50% retrace point of the last rally leg.
Anyway, I have three color zones on the chart. The first is the "Overhang" in red. Based on today's closing price, this represents the supply that will keep further rallies in check. Now you know why I wish we fell below 090. That would add to the supply side of the equation. The next area I wish to highlight is the "Support Base" in green. This is the next area where we see consolidation (at least in the last 20 days). That is the 029 to 072 area. That is going to be an interesting 40 points if we reach it. The final area is called "Butter" and is appropriately represented in yellow. Note the lack of recent consolidation in this area. In theory, if we break 085, we should cut like a warm knife down to 072. Bread anyone?
So, can it happen? Sure. I like the fact that RSI is not oversold here. I also like the Bear Flag formation we have today. Further, the short covering at the end of the day failed to make a decent dent into the overhang. These factors, combined with a miss be Dell, falling financials, and a tech sector give-up are all pretty encouraging. How does OPEX fit? I don't know. All I know is that a technical case was built, price action seems to be following, and the surrounding "stuff" seems to align - except for the dollar index performance today.
Now let's step back and examine the daily chart.
This chart is also from the archives, with no modifications. The red channel was the main up channel that was violated a couple of weeks ago at the prior reaction low. That was a good sign, though it would have been much better if we got lower than the low set in early October. That said, we did break the lower main trend line and a new channel started. This channel, in yellow, was created by connecting the reaction lows of October and November, duplicating the line and placing the copy on top starting with the last reaction high. This gave us an idea of where the most recent reaction high would end. Sure enough, it did - though it burned a few of us as it formed.
So, we now "seem" to be heading south into the target zone that I have identified. And looking at this zone, it really is butter - provided we get below that white dashed line! Look back to every time we have approached the 20p MA (red line) - we have always crossed. This is to be expected on a daily chart. Now, look at the last four (4) reaction lows. See how each time we cross a bit further. Also note how the distance between the 20p MA and the 50p MA (blue line) has thinned over time. The last reaction low saw a break of the 50p MA - NICE! Now, the 20pMA is just above the 50p MA, price action is bearing down, and it looks like we'll easily break both. Low and behold - if we break both, doesn't that also break the red channel line? Sure does. If we break the red channel line - look out! The selling begins.
Let's take it a step further. If the selling begins, what will happen with the 20p MA? It will break down below the 50p MA. When that happens - wow. This is very, very bearish! Finally, if price decline accelerates, say hello and goodbye to the bottom yellow trend line and we may even get that break of 1029.
Wow, this may really happen folks!
Good luck out there - sorry I do not have a bull case for you tonight.
I really wanted to see us close down under 090, but I knew it was not happending today. I called the LOD at around 089 and sadly I was correct. Having not closed below 090 is not a big deal. It just would have sealed the deal for this reaction high. Reason being that we would be sitting below a substantial layer of congestion - which is essentially supply. Now we sit on top of the congestion and it serves as support. Hopefully we will get follow through tomorrow. We are one sell wave away from a very nice breakdown.
I have two charts today. First the hourly chart, as I think it provides a good summary of why the price acted as it did today.
This chart was originally posted many days ago. In fact, the red support/resistance lines remain un-modified. I have added only one technical study, which is the fib grid traced from the low to the high. It is funny how well these things work. Note that the key retrace levels align nicely with specific support and resistance levels. The 38% level sits right around 085 and the 50% sits right around 072. Does anyone remember the significance of 072? That was the level that we saw some real selling. Funny how it becomes the 50% retrace point of the last rally leg.
Anyway, I have three color zones on the chart. The first is the "Overhang" in red. Based on today's closing price, this represents the supply that will keep further rallies in check. Now you know why I wish we fell below 090. That would add to the supply side of the equation. The next area I wish to highlight is the "Support Base" in green. This is the next area where we see consolidation (at least in the last 20 days). That is the 029 to 072 area. That is going to be an interesting 40 points if we reach it. The final area is called "Butter" and is appropriately represented in yellow. Note the lack of recent consolidation in this area. In theory, if we break 085, we should cut like a warm knife down to 072. Bread anyone?
So, can it happen? Sure. I like the fact that RSI is not oversold here. I also like the Bear Flag formation we have today. Further, the short covering at the end of the day failed to make a decent dent into the overhang. These factors, combined with a miss be Dell, falling financials, and a tech sector give-up are all pretty encouraging. How does OPEX fit? I don't know. All I know is that a technical case was built, price action seems to be following, and the surrounding "stuff" seems to align - except for the dollar index performance today.
Now let's step back and examine the daily chart.
This chart is also from the archives, with no modifications. The red channel was the main up channel that was violated a couple of weeks ago at the prior reaction low. That was a good sign, though it would have been much better if we got lower than the low set in early October. That said, we did break the lower main trend line and a new channel started. This channel, in yellow, was created by connecting the reaction lows of October and November, duplicating the line and placing the copy on top starting with the last reaction high. This gave us an idea of where the most recent reaction high would end. Sure enough, it did - though it burned a few of us as it formed.
So, we now "seem" to be heading south into the target zone that I have identified. And looking at this zone, it really is butter - provided we get below that white dashed line! Look back to every time we have approached the 20p MA (red line) - we have always crossed. This is to be expected on a daily chart. Now, look at the last four (4) reaction lows. See how each time we cross a bit further. Also note how the distance between the 20p MA and the 50p MA (blue line) has thinned over time. The last reaction low saw a break of the 50p MA - NICE! Now, the 20pMA is just above the 50p MA, price action is bearing down, and it looks like we'll easily break both. Low and behold - if we break both, doesn't that also break the red channel line? Sure does. If we break the red channel line - look out! The selling begins.
Let's take it a step further. If the selling begins, what will happen with the 20p MA? It will break down below the 50p MA. When that happens - wow. This is very, very bearish! Finally, if price decline accelerates, say hello and goodbye to the bottom yellow trend line and we may even get that break of 1029.
Wow, this may really happen folks!
Good luck out there - sorry I do not have a bull case for you tonight.
Wednesday, November 18, 2009
S&P and Dollar Rolling...
Let's pretend you had no money in the market - long or short. Take a look at this daily chart of the ES and tell me what you see happening:
I see this rally rolling over. The thick red channel is the "master up trend" that has been in place for the last 8 months. The dark pink channel was formed over the prior two reaction highs (two months of price action). The light pink channel is forming now with the completion of the current reaction high. Note how the trend's slope dPrice/dTime is decreasing. We are rolling.
Now look at the dollar index and tell me what you see happening:
I see a similar phenom - obviously in reverse of the ES. Note the rolling of the bottom trend lines. The only difference is that the dollar index is actually wedging. Meaning the reaction highs are not breaking the top trend lines yet. At some point, the dollar and S&P will decouple. I spoke about this several weeks ago.
Anyway, this is my second post tonight. If you have not read my prior post, you might want to check it out. I talk about the action today and some of the trading decisions that I made.
I see this rally rolling over. The thick red channel is the "master up trend" that has been in place for the last 8 months. The dark pink channel was formed over the prior two reaction highs (two months of price action). The light pink channel is forming now with the completion of the current reaction high. Note how the trend's slope dPrice/dTime is decreasing. We are rolling.
Now look at the dollar index and tell me what you see happening:
I see a similar phenom - obviously in reverse of the ES. Note the rolling of the bottom trend lines. The only difference is that the dollar index is actually wedging. Meaning the reaction highs are not breaking the top trend lines yet. At some point, the dollar and S&P will decouple. I spoke about this several weeks ago.
Anyway, this is my second post tonight. If you have not read my prior post, you might want to check it out. I talk about the action today and some of the trading decisions that I made.
A day in the life...
Well, today was another good day for me - at least until this point. We'll see if my short ES contracts perform for me this evening (once all the last minute short covering is complete).
Today was a day-trading day. I was hoping it would be the start of the down swing - but no such luck. I guess a 10% decrease in housing starts when the economists were expecting 1.2% increase is really no big deal. So on days like this you have two options:
1. Sit out and wait for your breaks
2. Get in there are fight for every dollar
Since I am working to erase a terrible loss on Monday, I had to go to the front line. On such days, I only care about the 1 minute chart of the SPX and a variety of charts on the ES. I do not trade cash equity on these days - futures contracts only. Open the 1 minute on the SPX:
I have tried to highlight the features that I used to make trading decisions. First, my bias was that the market would see pressure during the day. I maintain this bias because all of the technical indicators suggest that we are at or near the top of this last reaction wave. This combined with the dose of reality from the housing starts data, in theory, should have resulting in a good deal of selling. With that bias, I took a short position ahead of the open. I actually took the position ahead of the report. For me, it was a low risk entry as the noise following reports always dampens in a few cycles and I entered with the intent of starting my swing position anyway. Anyway, here is the daily:
After a few moments we saw I quick pop followed by sell significant selling. In the process, a gap opened up "intra-day". Now, this is different than a gap that spans two sessions - however, it has similar effects on price action. Whenever I see such a gap, I immediately think of EWT theory and assume that the gap splits the price thrust in half. Hence, you see a fib grid dragged across with the 50% level bisecting the gap. As soon as we hit the bottom of the grid - I took my first profit for the day.
Of course, price did continue downward over the next 10-15 time slices - but it was choppy and the RSI was touching oversold and it was no longer making new lows. This made it clear for me NOT to enter short at that time.
Once price start to rise our attention must turn to above. Where will resistance be? Of course we watch the support points on the mirror side of the price action, but what big tests are there? For me, I like to watch price interaction with the MAs (moving averages) and the BBs (bollinger bands). In this case, we also had a GAP! When price only hiccuped at the 20p MA, all eyes to the 50p MA. By the time price reached the 50p MA, the 20p MA was already turning and we had already passed through all of the support levels on the mirror side of the price. That meant that the GAP was a likely target. The location of the 200p MA supported that theory.
We blew through the gap but price was met with some resistance at the top. This is a good sign - however it is important to let the price action fully explore the gap and decide what the heck it wants to do. In today's case, the price action re-tested the bottom of the gap and shot up - in bits and spurts. Whenever I see that kind of action (spits and spurts - short little price bursts) I get ready to short. Note how much stronger the price action was on the sell wave following the weak second thrust through the gap. I know it is hard to look at it on screen in static form - but if you traded the session today you know what I am saying.
At this point, I decided to start my first trend line - connecting the opening high with my suspected first reaction in a down trend. This line served me well throughout the day and was used in combination with the ES charts, volume and RSI to make most of my decisions. I will not go into each one as I traded 8 setups with 7 wins and 1 loss. I will say that the 7 winners occur ed prior to the trend change.
The trend change - ah yes, the trend change. It is funny that I spoke of the RSI yesterday and last week. Guess what tipped me to the trend change - in advance. You got it, the RSI. Even on the minute chart this baby can be very useful. Today, the RSI helped me three times (actually, only twice so far - I am hoping for three tonight). I spoke of the RSI and how it created concern in the opening session lows. Now look at the middle of the session where we set reaction lows, one after another, with flat over-sold RSI indications. That was the signal for me to cover all shorts for a trip to the top trend line.
At that trend line a break-out was signaled when price started to congest along the line. The 20p MA started to act as support for price action, which when combined with the fact that we broke through the 50p MA, almost guaranteed a break-out. I did not trade long as I refuse to take long positions when I am convinced about a swing change. Price ran to the bottom of the gap where it consistently met resistance due to the price consolidation that we have been seeing for the last couple of sessions. We even saw a classic retest of the down trend line. Once we bounced off of the down trend line, I created a new uptrend line connecting the last reaction low with the bounce point. I then duplicated the line to project the top line of an up channel.
From 3:00 forward, we saw some strength that carried price action back through the gap - short of the channel top. I noticed that again the RSI was diverging and took my final short position in anticipation of a selling wave. Unfortunately that sell wave did not materialize, or was absorbed by a greater amount of short covering.
We closed the day at the top of the channel - and I have decided to short the ES overnight - anticipating some selling pressure into the open.
There you have it.
Good luck tomorrow.
Today was a day-trading day. I was hoping it would be the start of the down swing - but no such luck. I guess a 10% decrease in housing starts when the economists were expecting 1.2% increase is really no big deal. So on days like this you have two options:
1. Sit out and wait for your breaks
2. Get in there are fight for every dollar
Since I am working to erase a terrible loss on Monday, I had to go to the front line. On such days, I only care about the 1 minute chart of the SPX and a variety of charts on the ES. I do not trade cash equity on these days - futures contracts only. Open the 1 minute on the SPX:
I have tried to highlight the features that I used to make trading decisions. First, my bias was that the market would see pressure during the day. I maintain this bias because all of the technical indicators suggest that we are at or near the top of this last reaction wave. This combined with the dose of reality from the housing starts data, in theory, should have resulting in a good deal of selling. With that bias, I took a short position ahead of the open. I actually took the position ahead of the report. For me, it was a low risk entry as the noise following reports always dampens in a few cycles and I entered with the intent of starting my swing position anyway. Anyway, here is the daily:
After a few moments we saw I quick pop followed by sell significant selling. In the process, a gap opened up "intra-day". Now, this is different than a gap that spans two sessions - however, it has similar effects on price action. Whenever I see such a gap, I immediately think of EWT theory and assume that the gap splits the price thrust in half. Hence, you see a fib grid dragged across with the 50% level bisecting the gap. As soon as we hit the bottom of the grid - I took my first profit for the day.
Of course, price did continue downward over the next 10-15 time slices - but it was choppy and the RSI was touching oversold and it was no longer making new lows. This made it clear for me NOT to enter short at that time.
Once price start to rise our attention must turn to above. Where will resistance be? Of course we watch the support points on the mirror side of the price action, but what big tests are there? For me, I like to watch price interaction with the MAs (moving averages) and the BBs (bollinger bands). In this case, we also had a GAP! When price only hiccuped at the 20p MA, all eyes to the 50p MA. By the time price reached the 50p MA, the 20p MA was already turning and we had already passed through all of the support levels on the mirror side of the price. That meant that the GAP was a likely target. The location of the 200p MA supported that theory.
We blew through the gap but price was met with some resistance at the top. This is a good sign - however it is important to let the price action fully explore the gap and decide what the heck it wants to do. In today's case, the price action re-tested the bottom of the gap and shot up - in bits and spurts. Whenever I see that kind of action (spits and spurts - short little price bursts) I get ready to short. Note how much stronger the price action was on the sell wave following the weak second thrust through the gap. I know it is hard to look at it on screen in static form - but if you traded the session today you know what I am saying.
At this point, I decided to start my first trend line - connecting the opening high with my suspected first reaction in a down trend. This line served me well throughout the day and was used in combination with the ES charts, volume and RSI to make most of my decisions. I will not go into each one as I traded 8 setups with 7 wins and 1 loss. I will say that the 7 winners occur ed prior to the trend change.
The trend change - ah yes, the trend change. It is funny that I spoke of the RSI yesterday and last week. Guess what tipped me to the trend change - in advance. You got it, the RSI. Even on the minute chart this baby can be very useful. Today, the RSI helped me three times (actually, only twice so far - I am hoping for three tonight). I spoke of the RSI and how it created concern in the opening session lows. Now look at the middle of the session where we set reaction lows, one after another, with flat over-sold RSI indications. That was the signal for me to cover all shorts for a trip to the top trend line.
At that trend line a break-out was signaled when price started to congest along the line. The 20p MA started to act as support for price action, which when combined with the fact that we broke through the 50p MA, almost guaranteed a break-out. I did not trade long as I refuse to take long positions when I am convinced about a swing change. Price ran to the bottom of the gap where it consistently met resistance due to the price consolidation that we have been seeing for the last couple of sessions. We even saw a classic retest of the down trend line. Once we bounced off of the down trend line, I created a new uptrend line connecting the last reaction low with the bounce point. I then duplicated the line to project the top line of an up channel.
From 3:00 forward, we saw some strength that carried price action back through the gap - short of the channel top. I noticed that again the RSI was diverging and took my final short position in anticipation of a selling wave. Unfortunately that sell wave did not materialize, or was absorbed by a greater amount of short covering.
We closed the day at the top of the channel - and I have decided to short the ES overnight - anticipating some selling pressure into the open.
There you have it.
Good luck tomorrow.
Tuesday, November 17, 2009
I trust the RSI
Several posts ago I pointed out that the RSI was diverging from price on all charts. I explained what RSI was and that was that. Yesterday, after punishing myself for making some poor trading decisions, I blogged about the few technical indicators that remained bearish. I spoke of the 20p MA crossing down below the 50p MA on the 5 minute chart, the fact that we remained outside the lower trend line of the upward channel on the hourly, and that the RSI continued to diverge.
Today I offer the hourly chart:
We remain outside of the channel and are migrating to the left. This remains a bearish sign - but is not the most important indicator on the chart. Again, the RSI shows a divergence.
For those of you who do not believe in using the RSI - please re-evaluate your thinking. RSI divergence is about the only leading indicator that actually works a high percentage of the time. For example, look at the low price points on the left of the chart. See how we were setting now lows in price? Now look at the RSI. The lows of the RSI started to rise. This simple divergence was an early warning that trend change was about to occur.
Now look at the reaction highs on the right side of the chart. See how we are setting new highs? Now look at the RSI. The highs of the RSI are dropping. This divergence is an early warning that the trend is about to change.
Does it work 100% of the time across all time periods? No - nothing is perfect. However, you need to watch the RSI in all time frames and note when it IS working. When it is working, you can leverage it to your advantage.
The chart also features support/resistance levels that must be broke if we are to change direction.
I recouped a decent portion of my loss today through non-emotional technical trading. Though the market stayed in a tight range (compared to days of late), I was able to extract 10 pts. by scalping the ES. This is a high stress activity, but then again so is being short the market.
Cheers.
Today I offer the hourly chart:
We remain outside of the channel and are migrating to the left. This remains a bearish sign - but is not the most important indicator on the chart. Again, the RSI shows a divergence.
For those of you who do not believe in using the RSI - please re-evaluate your thinking. RSI divergence is about the only leading indicator that actually works a high percentage of the time. For example, look at the low price points on the left of the chart. See how we were setting now lows in price? Now look at the RSI. The lows of the RSI started to rise. This simple divergence was an early warning that trend change was about to occur.
Now look at the reaction highs on the right side of the chart. See how we are setting new highs? Now look at the RSI. The highs of the RSI are dropping. This divergence is an early warning that the trend is about to change.
Does it work 100% of the time across all time periods? No - nothing is perfect. However, you need to watch the RSI in all time frames and note when it IS working. When it is working, you can leverage it to your advantage.
The chart also features support/resistance levels that must be broke if we are to change direction.
I recouped a decent portion of my loss today through non-emotional technical trading. Though the market stayed in a tight range (compared to days of late), I was able to extract 10 pts. by scalping the ES. This is a high stress activity, but then again so is being short the market.
Cheers.
Monday, November 16, 2009
Got Crushed...
Once a month or so, I get crushed. Today was that day.
1. Ben said that he does not see evidence of a bubble in the US - anywhere.
2. Ben sees no issue with banks having both security investment divisions and traditional lending divisions - in fact, it is good and he will continue to supply liquidity.
3. Ben still wonders what is the value of the toxic assets. (and jokes)
4. Ben will keep interest rates near zero for a long, long time.
5. Ben thinks jobless recoveries are the norm and to be expected.
6. Ben will sacrifice the dollar without concern.
It was an ugly day and I do not like the technicals.
- We set a new high.
- We are back firmly in the main up channel
- 1120 is a reasonable target
I see only a few reasons to be short into tomorrow:
- 20p MA has crossed down through the 50p MA on the 5 minute.
- Price failed to penetrate the lower trend line on the up channel on the hourly
- RSI continues to diverge on all charts
Sorry no illustrations today - I'm too beat up right now! Perhaps later after I get my strength back.
Cheers.
1. Ben said that he does not see evidence of a bubble in the US - anywhere.
2. Ben sees no issue with banks having both security investment divisions and traditional lending divisions - in fact, it is good and he will continue to supply liquidity.
3. Ben still wonders what is the value of the toxic assets. (and jokes)
4. Ben will keep interest rates near zero for a long, long time.
5. Ben thinks jobless recoveries are the norm and to be expected.
6. Ben will sacrifice the dollar without concern.
It was an ugly day and I do not like the technicals.
- We set a new high.
- We are back firmly in the main up channel
- 1120 is a reasonable target
I see only a few reasons to be short into tomorrow:
- 20p MA has crossed down through the 50p MA on the 5 minute.
- Price failed to penetrate the lower trend line on the up channel on the hourly
- RSI continues to diverge on all charts
Sorry no illustrations today - I'm too beat up right now! Perhaps later after I get my strength back.
Cheers.
Thursday, November 12, 2009
As Expected...
We had a very nice, and predicted, pullback today. No sense in throwing a party though - there is too much work to be done.
Right now I am focused on the hourly chart for the SPX. I have also rearranged my trading desk layout to better monitor the dollar, EUR/USD pair, and the mini contracts for the major indexes. The arrangement allows me to view trends of each in several time frames at once (specifically daily, hourly, and 15 minutes). Open the hourly candlestick chart for the SPX:
Looking at the hourly chart of the SPX, we see more evidence of a possible double top. Price action failed to reach yesterdays intra-day highs and of course we set new intra-day lows for the first time in over a week. We see a very nice local double top with floor formed today and yesterday - setting up a nice resistance point at 096ish to contain the next reaction high. Another important feature is that we have broken all the support levels from the reaction highs of the last rally leg (formed on October 18,19, 21, 23, and 26). There is no real support until we reach the "Pivot Zone" down around 072 (extending to 058ish).
My guess is that we will trade within the containment zone 096ish to 072ish during the next session or two. There is a lot happening within this zone and we must watch price action carefully. My plan is to sell the rallies whenever price moves up through one of the red lines on the chart. For example, if price action rises to or slightly above 096 tomorrow, I will add to my short ES line. The same applies for each subsequent retest of a red line once price passes through it on the way down. Judging from past price action, we will see the 50p MA which is near the 38% retracement of this last rally leg at 076ish. We may not get a bounce here as some would expect. Reason being that I have noticed forceful breaks of the 50p MA by price action during these pullbacks. Rather, I think we may see a direct run to the 068 level - wich is the 50% retracement of the last rally leg and a major break of the bottom BB. If this happens, we may see a strong bounce and retests of the various red lines.
If this is a major double top we will need to see a break of the 1029 floor. A break of the 029 level would be the first time in the last 8 months that a reaction low broke the level of a prior reaction low. If this happens - look out. We will see the 9 handles again.
Anyway, thanks for the kind sentiments for Trisha - she is home recovering as I type.
Good luck with the markets!
Right now I am focused on the hourly chart for the SPX. I have also rearranged my trading desk layout to better monitor the dollar, EUR/USD pair, and the mini contracts for the major indexes. The arrangement allows me to view trends of each in several time frames at once (specifically daily, hourly, and 15 minutes). Open the hourly candlestick chart for the SPX:
Looking at the hourly chart of the SPX, we see more evidence of a possible double top. Price action failed to reach yesterdays intra-day highs and of course we set new intra-day lows for the first time in over a week. We see a very nice local double top with floor formed today and yesterday - setting up a nice resistance point at 096ish to contain the next reaction high. Another important feature is that we have broken all the support levels from the reaction highs of the last rally leg (formed on October 18,19, 21, 23, and 26). There is no real support until we reach the "Pivot Zone" down around 072 (extending to 058ish).
My guess is that we will trade within the containment zone 096ish to 072ish during the next session or two. There is a lot happening within this zone and we must watch price action carefully. My plan is to sell the rallies whenever price moves up through one of the red lines on the chart. For example, if price action rises to or slightly above 096 tomorrow, I will add to my short ES line. The same applies for each subsequent retest of a red line once price passes through it on the way down. Judging from past price action, we will see the 50p MA which is near the 38% retracement of this last rally leg at 076ish. We may not get a bounce here as some would expect. Reason being that I have noticed forceful breaks of the 50p MA by price action during these pullbacks. Rather, I think we may see a direct run to the 068 level - wich is the 50% retracement of the last rally leg and a major break of the bottom BB. If this happens, we may see a strong bounce and retests of the various red lines.
If this is a major double top we will need to see a break of the 1029 floor. A break of the 029 level would be the first time in the last 8 months that a reaction low broke the level of a prior reaction low. If this happens - look out. We will see the 9 handles again.
Anyway, thanks for the kind sentiments for Trisha - she is home recovering as I type.
Good luck with the markets!
Wednesday, November 11, 2009
RSI Divergence...
Open the daily closing line chart.
Note the divergence in the RSI. RSI is an oscillating index that measures internal market strength by comparing the total gains to the total losses in a given period. It is an index, meaning it can be expressed as a percentage. I used a 14 day period in this chart.
I trust the RSI more than most technical studies - not for the overbought/oversold condition jazz (though that can supplement my analytics). For me, the RSI is a warning service. In a healthy confirming market, price action and the RSI should be setting relative highs (or lows) together. In a upward trending market, if you begin to see new reaction highs in price but lower corresponding RSI levels, you get your warning. At a minimum, you should start taking profits and prepare for a minor trend reversal.
This single indicator has worked very well during this rally. If you look back to July and follow each reaction high, a divergence occurs in advance of every minor trend change. Today I notice the largest divergence in RSI since this rally began. I labeled it in purple. Just another one of those signals...
Anyway, today is a short post as more important things are happening in my family's life. I am wishing Trisha a speedy and healhy recovery from surgery!
Cheers and be well...
Note the divergence in the RSI. RSI is an oscillating index that measures internal market strength by comparing the total gains to the total losses in a given period. It is an index, meaning it can be expressed as a percentage. I used a 14 day period in this chart.
I trust the RSI more than most technical studies - not for the overbought/oversold condition jazz (though that can supplement my analytics). For me, the RSI is a warning service. In a healthy confirming market, price action and the RSI should be setting relative highs (or lows) together. In a upward trending market, if you begin to see new reaction highs in price but lower corresponding RSI levels, you get your warning. At a minimum, you should start taking profits and prepare for a minor trend reversal.
This single indicator has worked very well during this rally. If you look back to July and follow each reaction high, a divergence occurs in advance of every minor trend change. Today I notice the largest divergence in RSI since this rally began. I labeled it in purple. Just another one of those signals...
Anyway, today is a short post as more important things are happening in my family's life. I am wishing Trisha a speedy and healhy recovery from surgery!
Cheers and be well...
Betting on a double top...
A quick glance at the December ES:
We are seven bars into the reaction wave, up in pre-trade, but I still think we have a double top forming and I have opened a short line on the ES. Volatility has been very high, volume show a divergence in the last run up, and I'm measuring a short top.
If we are not at a double top, we are close to the end of this reaction wave anyway. I will build my short position carefully.
Let's see what happens here. I will be away from the desk most of the day, so stops are in place just in case.
We are seven bars into the reaction wave, up in pre-trade, but I still think we have a double top forming and I have opened a short line on the ES. Volatility has been very high, volume show a divergence in the last run up, and I'm measuring a short top.
If we are not at a double top, we are close to the end of this reaction wave anyway. I will build my short position carefully.
Let's see what happens here. I will be away from the desk most of the day, so stops are in place just in case.
Tuesday, November 10, 2009
MIssing Follow Through...
Yesterday I posted the hourly chart and illustrated the last congestion band before we set new highs. Looking at it yesterday, I had my doubts that it could stop price action. Never underestimate how difficult it is to set new highs. Today, the bulls needed to follow through on yesterdays rally. That did not happen (yet).
What did happen is an interesting pattern called firt rise - first failure. Like a double top, it does involve two local highs, but the second high fails to reach the level of the first high. A "floor" is left between the two peaks. The benefit of the pattern is that it allows us to create our setups.
From a short standpoint, we are looking for a break below the floor - which is around 1088. A break at the floor usually results in the unwinding of the first peak to it's base. The path to the base runs through several important technical points. I have identified two possible targets for a short setup. Target A is in the range of 084 and 080. This includes a possible re-touch with the 20p MA and a re-touch with the true trend line folloing the rally bottoms. We had a little bump and run action that needs to calm down. Target B includes what I believe to be the base of the first peak and the gap left when this puppy ignited. That is of course in around 072-068.
Though I don't want to think about the possibility, a long setup would include a break of today's high near 095 with a run to of course 1100 - with a real chance at 1120. Remember if the floor is not taken and a retest of the 095 level is made, it is likely going to break out (3rd time a charm). If we break out above our 1100 high, you can expect up to 28 points in the run (not necessarily in one session!). This is calculate by multiplying the difference between the high at 1101 and the low at 1029 by .38 (I approximated).
Well, there you have it. Tomorrow should be interesting without the FED desks and the boys at the banks.
Good luck.
What did happen is an interesting pattern called firt rise - first failure. Like a double top, it does involve two local highs, but the second high fails to reach the level of the first high. A "floor" is left between the two peaks. The benefit of the pattern is that it allows us to create our setups.
From a short standpoint, we are looking for a break below the floor - which is around 1088. A break at the floor usually results in the unwinding of the first peak to it's base. The path to the base runs through several important technical points. I have identified two possible targets for a short setup. Target A is in the range of 084 and 080. This includes a possible re-touch with the 20p MA and a re-touch with the true trend line folloing the rally bottoms. We had a little bump and run action that needs to calm down. Target B includes what I believe to be the base of the first peak and the gap left when this puppy ignited. That is of course in around 072-068.
Though I don't want to think about the possibility, a long setup would include a break of today's high near 095 with a run to of course 1100 - with a real chance at 1120. Remember if the floor is not taken and a retest of the 095 level is made, it is likely going to break out (3rd time a charm). If we break out above our 1100 high, you can expect up to 28 points in the run (not necessarily in one session!). This is calculate by multiplying the difference between the high at 1101 and the low at 1029 by .38 (I approximated).
Well, there you have it. Tomorrow should be interesting without the FED desks and the boys at the banks.
Good luck.
Monday, November 9, 2009
Quite a Pop...
Well, I expected a test of the upper congestion band and feared the weaker short hands (or perhaps smarter ones) would cover at the first sign of the failed right shoulder. Volume was of course low, but there is no denying the tenacity of the rally. Looking at the hourly chart we do not see a single red bar. No pullback.
The final congestion band in the 1095 to 1100 range presents a possible double top, but a break and close above 1100 would likely negate that possibility. The gap left down between 070-072 combined with the distant 20p MA may give enough pause to for a pullback tomorrow. If a reversal is going to happen in the week, it is often a Tuesday - hence the expression turn-around Tuesday...
Again, for those who remain short, check your loss limit and time table. For me, a break out and close above 1120 this week is enough to adjust my positions - not abandon.
Good luck out there!
The final congestion band in the 1095 to 1100 range presents a possible double top, but a break and close above 1100 would likely negate that possibility. The gap left down between 070-072 combined with the distant 20p MA may give enough pause to for a pullback tomorrow. If a reversal is going to happen in the week, it is often a Tuesday - hence the expression turn-around Tuesday...
Again, for those who remain short, check your loss limit and time table. For me, a break out and close above 1120 this week is enough to adjust my positions - not abandon.
Good luck out there!
Subscribe to:
Posts (Atom)
