Technical Downtrend

We have been topping for quite some time. It feels like an eternity, but it has actually only been 1 week. We set the initial high off of the last rally leg on August 24th at 1038. We had one test on Friday which in fact set a new high on an intraday basis to 1039 and change. But the very bearish shooting star bar should have been a strong warning of a reversal.

I see an important trend in the topping formation. Volatility is rising and we continue to set new intraday lows - in fact 3 of the last 4 sessions have made new intraday lows. We also see a very important break in trend with respect to the closing level. Today was the second session in a row which we closed lower day over day.

Granted these are not "major" reversal signs, but they are bearish and have to be considered. They reflect what I believe to be the cautious attitude that professionals and retail investors are likely to take to the September month. All of which leads me to believe that we are going to correct a bit and consolidate.

One of my favorite charts right now is the hourly for the last 20 days. Take a look in a new window:



First, you get a glimpse at the levels that affect the current price action. Check out how that little gap just so happens to line up with some fib levels to create a nasty black hole of gravity! It just sucked the price action in today and held it in check. I was really hoping to see a breakdown below the 1018 gap - looks pretty clean down to the next gravity band around 1008. Below that we are clear until some congestion in the 998-1004 band.

The other important feature in the chart is the top trend line and bottom trend line in the flag (if it is a flag!). Anyway, the price action seems to be respecting these levels and I would encourage the use of these lines in your setups. I am also watching the moving averages. Look how the 20 day just crossed down through the 50 day. Depending on the open tomorrow, these could turn down further and act as a ceiling on future price action to the upside.

As for setups - we are in a well defined range right now - certainly the 1018 to 1039 band is wide and seems to be containing price action well. We recently pierced the bottom bollinger band while the band was angling downward. So we get this sideways price action rather than a sharp reversal in price. The open is going to be critical as it will directly impact the relationship between price, the bands, moving averages and the trend lines.

The short play is getting tough here because as we move to the right, the distance between the trend line and the bottom of the gap increases - creating a less attractive point of entry. Think about it, the best short entry would be at the intersection of the bottom trend line and the bottom of the gap. That gives us the largest downside play (1015 - 1008). As we move to the right, the downside play gets constricted (because we would probably choose the lower trend line as our trigger). If you are aggressive, you can short at the break of 1015 and gamble that the trend line will break as well. This may get you the full 7 points. That is where I sit right now. Another short opportunity is to play a rejection at the top trend line - which will again be somewhere in the 1024 area if it happens early enough. Do this with a tight stop - as a break of the top trend line would be painful for you.

Speaking of the break in the top trend line - what a nice long play. That could give you a 16 point ride to the test of 1040. Not bad (unless you are short right now!).

There you have the long and the short of it - good luck!


For those interested, here is a look at the chart with "price gravity bands" that I created on Saturday night - did a pretty good job of predicting today's price action!

Interesting Day...

So we saw the short setup play today. Not surprising to me considering the technicals I observed this weekend and the catalyst (China selloff). I think if it were not for the M&A activity and positive ISM numbers, we would have seen more of a selloff.

My short setup was based on a break below 1023 and a test at 1018 - we got that and I was able to profit from the short position that I carried in from the Friday session. I then suggested that a downside breakdown from 1018 could easily drive price to 1007. My assumption was based on the fact that the gap from 1018 to 1015 was filled in a prior session and the remaining "price garvity band" was relatively thin. Well, it seems we can not underestimate the supportive properties of a previously filled gap! It provided a lot of support in this zone and "captured" the price action firmly for most of the session. I do not put much significance on the final hour today.

I started a new short line at the bottom of the gap. At first glance, you might think it to be the worst entry - I agree, but I am also comfotable with the position as I think we are going to see some correction/consolidation going forward.

I will analyze and post new setups tonight.

Hope everyone did well today!

Expecting Consolidation...

This weekend I spent some time doing regressional analysis on the S&P. I focused on the price action during the last 100 sessions. What I find is that the first 2/3 of the price action congested between 820 and 960. The 30 or so sessions saw a fairly sharp linear rise from 880 to 1039 - with very little new congestion above 960. I also see a major NEGATIVE divergence in the Advance Decline line across the final rally leg. These conditions favor pullback/consolidation.

Looking at my 20 day 60 minute chart - I see a trading range between 1018 and 1039. We are smack in the middle of that range now, with volatility increasing. Perhaps we are in a topping process; perhaps we are resting allowing momentum to build again for another break-out rally.

Finally, I noted on my 15 minute chart that we are caught in what I call a "price gravity band" (the subject of a paper that I am authoring for later publication). Interestingly enough, my analysis suggests that there is more money to be made below the current gravity band than there is above it - however, we are slighlt above the center of the band now with fewer resistance levels than support levels - which could support a breakout. Regardless, price awaits a catalyst inorder to escape this band (in either direction).

My long play setup is based on a break of above 1033 to test 1039. I would get in quickly on the break - watch for a pause at 1035 and then a forceful move from there to a test of 1039. There are 6 points in that move alone. If we break 1039 I would put a trailing stop on through the surge. You will get stopped - however, it is not uncommon for the price action to come down to the breakout level and do a bounce. Either way, a break above 1039 signals another rally leg and could get us to that 1061 level I spoke about last week.

The short play setup is based on a breakdown below 1023 to test support at 1018. This represents only a 5 point move, but tehnicals are weak right now and a test at 1018 has a high chance of failure. Failure to support at that level could lead to a more dramatic downside move. It is pretty soft all the way down to 1007 and true support doesn't kick in until the 1002 level.

I have decided not to publish my charts as part of this entry. I am experimenting with new applications of classic techniques and I am not sure what the results may bring. I would like to see these levels play and continue testing the approach in future sessions. If it looks good, I start to elaborate more and publish the associated charts.

Good luck trading this week!

Missed the Wave - Are we Topping?

Yesterday, I posted "The Last Hurrah" - suggesting that perhaps we are in the final rally leg before a correction at 1061. I based my theory on macro retracement and a suspected 5 wave EWT that I thought was in the middle of wave 3 at the close. I also postulated that a gap up in the morning would further support the case (because the gap could be considered a continuation at the center of wave 3). So, we did gap up and quickly EXHAUSTED at around 1040. What gives! Open the chart in a new window.




Well, it turns out that we were not in the middle of wave three at the close, rather we were at the end of wave 4 - the counter trend wave before wave 5 to exhaust the rally leg. The opening gap was an exhaustion gap (though I immediately assumed continuation gap as my theory called for one). Notice how quickly the market ran out of steam and reversed course in a hurry? Before the end of the first bar we were reversing. By the third bar we were threatening what I thought was the high in wave three during the prior session. At that point I realized that we were actually on the downside of wave 5 - almost exhausted - and my my profits from the long entry eroding each moment that passed. Hoping for the price action to pop after hitting the gap, I held. Unfortunately, after a very brief moment of support, we quickly went down and I exited the long position - minus the fees.

Take a look at the actual EWT. I labeled the bottom of Wave 1, the top of Wave 2, bottom of the real Wave 3, top of Wave 4 and the POINT OF EXHAUSTION for Wave 5. If I were just a little smarter - I could have profited at the top of this wave.

Anyway, I did immediately drag a fib from the base of the rally leg to the top to see how we aligned. I also ran a horizontal trend line through the first line of price support - which went on to become the bisection of a symmetrical triangle which formed in the afternoon. The white line can be found in between the 38% and 50% retracement levels. I consider this location to be weak and decided that I would short if price action crossed below it - which it did on the second attack.

I found the price action to be very much in the hands of the sellers today. Look how after breaking support the price dived, first breaking the 50% and then the 62% levels with relative ease. I took this as a very bearish signal - but held off on adding to my short position. (I prefer to see a break at 1018 to step up my short line).

Oddly enough, after passing through the 62% level, we did not see a full retracement. Either I have my levels wrong, or who knows what...

I think the action was brutal from here on out. Lots of movement bucking off longs and shorts alike - culminating in a nasty coil again. The proximity of the coil to the 38% and 62% was really quite favorable. These serve as very good locations to consider exiting a short or exiting a long after a breakout. In fact, if you used the top and bottom trend lines of the triangle only - you would have been brutalized by the "end-around" that took place towards the apex. I labeled it for your enjoyment. The end around basically fakes an upward move towards the end of the coil, only to reverse and come around the nose. (I know it is not perfect on this chart as it doesn't quite get ahead of the nose - but you get the picture).

price action continued to process downward towards the end of the day until the magic moments at the end when all things get better and we manage to squeak out a positive week.

Anyway. The net of it all is that I am sitting with a very light short position - waiting to see what next week (and September) has in store for us. Keep in mind that though we reversed rapidly from the high today - it was in fact a new high... Do we have a double top? Time will tell.

I am watching for a break above 1040 or a break below 1018. All other levels and analysis still apply.

All the best - I'm done for the weekend!

The Last Hurrah...

The market looks like it has one final rally leg - perhaps. Today we witnessed the retrace of the continuation gap at 1018 and a breakout above the bull flag that formed from 1038. That break happened above the top trend line of the flag at 1025. If you were well positioned, you could have played short to the gap and reverse long for a very nice double swing profit. I did get a nice piece of that setup. See the chart for details.



More importantly, we now have to determine our next setup. Though we broke out above the top trend line, we did not have the support needed to hold above two key support levels. First, we eclipsed yesterdays high of 1033 but retreated immediately. Consequently, we had no attempt on 1038 - which is the present high of the long rally. Ideally, we would have had a successful break above that level. That would have eliminated any doubt about where we are headed. So our short term resistance will be 1033 and 1038.

I will first argue a case for a rally to the low 1060's. To do this we need to justify a 1060s target in all time frames. Again, I offer a key portion of the 2 year daily chart for consideration.



First the assumptions. If all rises are retraces of prior highs ( and conversely, all drops are retracements of prior lows) then the rally from the March 6th low must be retracing to the shelf at 1300. Of course, you can disagree - you can choose a prior high and later high if you wish. I choose the end of August - which is almost exactly one year ago. The 1 year fact has no significance in this analysis - I just thought it was interesting. What is significant is the sturdy shelf set at that level. It is the first "true" past support/resistance ABOVE our current level. Everything else is sheer panic-pause-panic-pause-and more panic!

Drop a fib and check the levels. Looks to me like there is general alignment with the 38% and the 50%. If anything, the fib levels might be a little low - but for the market we are in and the time table we are viewing, rough alignment is enough to validate the fib anchors. So, we assume a good grid - where is the price action today? Today's action played out smack in the middle of the 50% and 62% retracement level. Think about it. There is a 78 point swing between the levels, we had a low of 1016 (30 pts above 50% line) and a high of 1033 (28 pts below 62% line). We are officially in the middle of the road!

Continue to look at the chart. What direction are we heading in? Seems to me that we are gasping to go higher - literally gasping - but trying to go higher - even if for one last time. This really does feel like a final push and I can see it reaching 62% and then collapsing. The world fully expects this to happen and contrary to the contrarians - it must. (talk about a contrary view).

OK - we may have a case on the macro level for 1061. Is there anyway to confirm it on higher frequency charts? Let's open the 20 day hourly chart.




I have isolated the last week or so to illustrate a theory. In my prior posts I identified a 5 wave EWT formation starting at 996 and exhausting finally at 1036. That was the last rally leg. I have seen cases made that perhaps we have a double-3 formation (meaning my EWT is contained withing the 3 wave of a higher order EWT), however I do not see that clearly. I see one well defined EWT that exhausted at 1036 and had a final spurt to 1038. This was the last rally and off of that rally I see the bull flag that broke out today.

Again the fib for the rally aligns very nicely - very nicely indeed. This is our first micro indicator. We have bounced off of the 50% retracement - with force! I think this supports a retest of 1038. Further, we have to consider the length of the flag pole - which starts as early as 978 and as late as 996. Let's be conservative and say 996. We have 42 pts of travel up the pole. If this is a indeed a bull flag breakout - add 42 to the bounce at the 1018 gap and we are in the 1060 neighborhood - safely if we measure the flag post from 978 as that gives us 18 more points of upward play.

Finally, I think we see a new 5 wave EWT developing. Open the 5 minute chart for today's action:



I have labeled the bottom of Wave 1 at approximately 1016, the top of Wave 2 and 1025, and the MIDDLE of wave 3 at 1033. It is not uncommon for wave three to have either a gap in the middle or a pause. I think we have a pause to gather strength for the push through 1033 and then of course 1038. I would not be surprised to see a breakout of 12 points above 1038 before the pause preceding the exhaustion wave to 1060.

One final note, the white line is the 50 period MA and the Gold is the 200. Whenever the 50 crosses up through the 200 on the 5 minute chart, I see strong upward thrust several bars later. I am not sure what to expect through the close - but a gap up (type continuation) would not surprise me.

OK. I made my bull case - now what about the bear case? I think it is pretty simple. If we test and fail 1038 convincingly, we have to watch levels of support below. Roughly, these include:

1027-29 (yesterday price action from apex to trend line)
1023 (38% retracement of last rally leg)
1018 (top of gap and 50% retracement and the initial high in the 2B reversal)
1013 (first rise/failure against the 1018 high)
1005-1007 (spot where we broke trend)
1002 (historic price action)
996 (full retracement)

I would be hesitant to go short until a break of 1018 - very important.

Anyway, that's my analysis - and I'm sticking to it!

Good luck all!

Choppy Trade - Ends Flat - Bull Flag?

In some respects I am happy that I could not attend to the desk today. The few times I could revealed very choppy price action and I can only imagine how burned I would have felt on the trade setups that I prepared the night before. The good news is that I carried my short position into the morning and book a profit with the down wave in the first 30 minutes.

Just to review, I proposed two possible setups for today's action. The "Long Setup" was based on the fact we are still in an uptrend, at the end of a local rally exhaustion phase, and a saw the possibility of an Adam and Eve reversal underway. That did not materialize. The "Short Setup" was based on my belief that the gravity of the gap centered at 1018 would pull price action down and complete a S-H-H-S pattern. Well that didn't happen either. Lets first look at a close up of the hourly chart:




As you can see - we moved sideways. The consolation prize is that we did test the levels that I identified in yesterdays posts. Specifically, we completed a retrace to the 1022.5 (short play support) line and saw a very brief penetration and then a strong pullback which popped at 1030 (long play resistance) but failed to break 1032.

Looking at the 1 minute intraday graph:



We see the whipsaws at both of these levels early in the day - and go on never to see them again. Instead, we progressed into a half-assed coil - building tension and creating carnage out of tight-stopped day traders all day long. And we ended the day unchanged. Bravo manipulators! Anyway, the chart shows the apex and what I would think is the break point. We may have an interesting open tomorrow.

OK, back to longer period technicals. What the heck is going on here? Are we about to collapse? Or, is this just a rest - a sideways consolidation - while the big boys tan? With September approaching, everyone is thinking correction. I'm thinking correction - but my thoughts don't count. The only thing that matters is what the charts say.

Let's step back again and look at the hourly over the past 20 sessions.



Focus on the fact that we have just completed a rally leg and there are technical indicators that suggest a rise to 1061. With these things in mind, we may be witnessing a bull flag. A bull flag is characterized by descending highs and descending lows that sink at the end of a rally leg. I have labeled the rally (flag pole) and the trend lines of the flag formation. One possible scenario is that the gap at 1018 is the gravity for this flag. It also happens to sit at a the 50% retracement level. If there is another rally leg left, it would likely ignite at 50% rather than 62%. So, the gap could be filled in the coming sessions as the price action sags in the flag, and then thrust upward for another 5 phased rally to 1061. Remember, if it is a bull flag, you can expect the price thrust to rise in an amount equal to the flag post. In this case, the flag post started at around 996 and rose to 1038 - 42 pts. If we pop off of the 1018 gap we can expect a rise to 1061.

Keep in mind, this analysis does not negate the short setup that I described in my prior posts. In fact, the protective long I described to be taken at the gap closure is critical. It is choppy out there so don't be surprised if you are bucked off the bull. Step up in your time frame - don't ride this action minute to minute after you take a position - I like the hourly for this setup.

I hope this makes sense to folks. It of course is only one possibility.

Happy trading!

The Long Setup...

The action this past Friday put us back into an uptrend, and until there is a closing low below 1023, we remain in an uptrend. The trend is your friend until then. (See my earlier post on Short Setup to play trend reversal).

The firs thing we should do is back up and determine how much head room due we have to go. I do this with the following 2 year daily chart (weekly works as well):



I lay a fib grid from the last significant high that is above the current high. This seems to be around 1300. An argument can be made for 1160 - but I think it is a weak one. The 1300 level had a nice shelf of support, where as the subsequent highs were very transitional and clearly part of the rapid down leg.

If this fib accurately covers the retracement domain, we should see alignment of price action with the standard retracement levels. I think we do. Look at 38% line and how it has served as resistance and then support. The same goes for the 50% line. In fact, our last rally seems to have sprung off the 50% retracement level and it is headed for the 62% line - which is at 1061. That leaves about 30 pts of head room. Which is not very much considering the volatility we are seeing.

Anyway, a long play from here requires entry when the coast is clear. In the Short Setup, I discuss the possibility of trend resuming upward after closing the continuation gap at 1015 - and I feel that this is a real possibility. In fact, this is my preferred long setup scenario. But what if we do not get a retrace?

However poorly, I have tried to indicate an interesting reversal possibility in the following chart.



It is an Adam and Eve reversal. These reversals print in two conditions - a bottom reversal - or at the end of a rally when an exhaustion phase completes. Aha - we have that case now! The Adam and Eve reversal is characterized by a sharp bottom on Adam and a longer round bottom on Eve. The bottom of Eve is usually higher than the bottom of Adam. (stick to the analysis!).

The open tomorrow will clarify this for us. If we open flat and see a slow rise, I will close my open short from yesterday and take a long position, watching for a breakout at 1030. We'll be looking for another attack at the high at 1038.

Final note, I am suspicious of this last rally and not convinced that we aren't in the middle of a head fake. However, in a perfectly technical world, we retrace to 1061. From this point forward I will be looking to rebuild my short position.

Short Setup...

OK, there is a case to be made for a lower open and continuation of the down trend. I have yapped about the gaps enough, but just to be clear about this case, here is the chart...




There are two gaps (technically 1 gap) that did not fill today. The first gap was at the open. Though it is technically not a gap (in the sense that price action worked across it in the prior session), it is having the same effect. The gap is a narrow hole in the wall between 1027 and 1025. I think we will fill this (even gap down through it) and I will look for the price action to touch or pierce the lower bollinger band. Depending on the open, that could be as low as the 38% retracement line at 1022.5 - which is the first line of support that needs to be broken in this setup. There may be a small pause/bounce here an argument can be made that this is the right shoulder of a S-H-H-S pattern. If it is, the price action should press downward to close the continuation gap (true gap by definition) which is bisected by the 50% retracement line at around 1017.5.

With that in mind a short play down to 1015 looks good yielding 13 pts if you are short going out of the close today. See my earlier posts on this to see how to introduce a long at 1015 as a precaution. (Once continuation gaps are closed, they tend to attempt reversals.) If you do see reversal, add a loose trailing stop to your short with the long. You'll give a point or so up on the short but pick it up on the long anyway. Of course, do not take the long if action suggests strong downtrend continuation. A test of support at 1004 is always a possibility.

Finally, any close below 1023 technically establishes a downtrend.

In my next post, I'll discuss a the Long Setup.

The power of a gap...

First, I made money today - and for that I am happy.

I made money because I took the time to plot a setup first thing this morning when the futures firmed and the potential of a gap presented itself. All of the analysis in the "Long Play" post played out well. Specifically, the entry at 1031 and test of 1036 - which turned into 1038. But what really worked for me today was the counter trend short plays which I took near the highs.

You may ask why I took a short at the high - afterall the high broke 1036 and my thesis called to go long at that point. The answer is simple - GAPS. Open the chart and you will see that we opened with a gap and we peaked with a gap. I believe both of these gaps conspired to create a great short opportunity.



When we failed to print longer solid bars above the final gap, it became clear that it was of type "exhaustion". Of all gap types, the exhaustion type is most likely to fill. The smart play is to short the action to the bottom of the gap. Further, if the gap fills quickly you have a bearish signal and there is a very good chance that the price will retrace to the start of the rally leg. Remember, I am talking about exhaustion gaps. Many other gaps can, and do, fill quickly and then reverse with strong price thrusts back into the trend.

My confidence in the short position was strengthend by the presence of the opening gap between 1025 and 1027. Here is a close up of the little guy.



Adding confidence further was the fact that we retraced 68% on the first pull back from the high of 1038 (when a fib is dragged from the prior session low). This is also bearish and is often followed by a slow rise which is met with selling pressure towards the top. Think about all the folks who bought into the gap assuming that we were breaking out. All those folks had to wait the long trip back. Typically, they dump just to get even... From that point forward we had the price action respecting the retracement levels which again aligned very nicely with support and resistance of the past session.

I think we are still exhausting the top phase of this past rally leg and have not filled the continuation gap at 1018! Chances favor filling the gaps at 1027-1025 and the continuation gap centered at 1018. If they do not fill soon - they will remain as an anchor for eventual retracement.

Also, I introduced the hourly chart no too long ago. I used that chart throughout the day. There is some choppy action out there and I got gunned several times in yesterdays session. When that happens, it may be best to move up to the 60 minute view of things. Here is a view of that chart - as you can see, it is very possible to fill the 1027-1025 gap in next bar or two.



Consider that we recently penetrated the top bollinger band sharply and it is typical to come full swing to the bottom bar.

I'll be studying setups tonight and hope to post my game plan before shutting down.

Good luck trading.

The Long Play...

Last night I spent more time analyzing the short play - assuming that we will eventually close the continuation gap at 1018. I maintain that this gap will be filled - it is the nature of continuation gaps. The issue is, it doesn't always happen right away.

I did not do a thorough analysis of the long play. Based on the futures market firming this morning, we have to look at resistance levels and determine good points of entry on the long side (or short depending on the action).

To do this, we start with the intraday chart from yesterdays session.



Here is the detail:



On the large chart we see the fib fan - slightly adjusted to reflect the close. As you can see, we closed just above the middle fan blade - in a coil. Coils carry tension, they represent indecision and when the unravel, they tend to explode. To measure how much of an explosion, you have to trace back to the trend preceding the coil and measure the vertical distance. This happens to be the 1031 level. This blows through the last fan blade at 1027.

So how strong is the 1031 resistance? I see four points where 1031 served as support before it broke down. Technically, the more times the level served as support, the greater the resistance. However, volume needs to be considered as well - and yesterday was not a big volume day. So, we have to assume that this resistance may not be enough to hold back a strong rally.

Breaking 1031 reveals 1033. This represents a very important test. If we are turned away at 1033, then breach 1031 we are back on that slippery slope. If we break resistance at 1033, a test of 1036 is inevitable.

So, a setup could be long from 1031 to 1036. I would wait to enter this setup until after the open settles. A gap up in the morning may quickly fill which would be consistent with the exhaustion wave.

A more conservative setup is to go long at a breakout above 1036. This signals a continued rally and forces us to view the market from a higher time frame.

Anyway, that is the long play.

I still favor the action of my prior post - but we have to remain objective and work with the market - not against it!

Looking at the hourly chart...

To review, we saw a topping pattern turn into a 2B reversal with a 5 wave EWT that ended in an exhaustion gap that was filled. We now sit on a shelf that made up most of the fourth wave - coiling with tension. So the questions is, what next? Do we retrace the continuation gap at 1018 down to 1015 and resume the upward trend? Do we fill the continuation gap and proceed to breakdown into the prior trading range? Or do we just "random walk/run" straight up from here? I wish I had the correct answer. All I can do is prepare setups for all cases.


I have a setup for the gap fill at 1018 which I described this weekend. Basically it is a short play down to 1013 and a long play from there. This setup assumes that the rally is still in tact and it simply needed to retrace that continuation gap. 1013 is a significant for two reasons - 38% retracement of the last upleg and the first price support below the gap. Assuming we close and retrace to 1024 (our current level) there are at least 5 points on the short and 11 points on the long. Try not to get gunned! If the price pokes into the top of the gap, it will usually fill. This is a safe play so hold.

What if we keep sinking below 1013? What next. Well we need to go to the charts. This time, I'm looking at a 20 day hourly chart. All we want to do here is identify important levels below us and put them into context. Open the chart in a new window:



Again, drag a fib grid from low to high. Note the alignment of the 38% retracement with the price support at 1013. That is our first target. To get there we must first close the gap and break below that 1015 line. If we do, we are back into the prior trading range. I have only drawn the tops of the support levels in this range (the full range looks to be from 978 to 1018). We have 1005ish for the 50% retracement - which aligns with the last top before the EWT breakaway phase. It also seems to be the neckline of a head and shoulders pattern - there I said it. We then have the ever so mysterious 1000 level at 62% retracement, breaking down at 1000 would signal that the last rally was in fact a head fake and the downtrend resumes.

As for the possibility that we shoot up from the open, all I can say is go long - because 1040, 1060, and 1120 are all real possible targets in this crazy market. Now, I have to admit that I am skeptical about the possibility. Look at some key points I placed on the chart. Look at the last time we a pierced an upper bollinger band, came down from above 70 RSI, and saw price action cross elbowed moving averages - all at the same time. We had a fairly substantial leg down. In fact, it was the first leg down in our most recent down trend. The only concern I have is that the bollinger bands are still reaching up steeply.

Finally, this is an hourly chart across 20 days. Adjust your timing accordinly. Don't expect things to materialize on a 5 minute chart.

So what do you think?

Exhaustion...

Sunday night I introduced the possibility of a 5 wave EWT. I thought that the Friday session represented the end of wave 3 and 4 and that wave 5 would play out today if we saw gap up in the morning. That we did. Take a look at the chart.



Despite a good read, I was unable to profit from this exhaustion phase. It was simply to tight a range to play and in retrospect, I should have sat out the action. Four of my trades were gunned out and only one (the short from 1034 to 1027) earned for me. The net was zero on the day - minus fees.

So to get any value from today, we have to do a post analysis. First, we draw a fib from the start of the rally to the top of the rally and see where the retracement levels land. The 38% retracement lines nicely with the support at 1024. Also note the bottom trend line in the rally. See how it was broke after the last intersection with this retracement level? Now we have this volatile finish, that seems to form a coil - gunning off positions with each turn!

It is important to note that each gap formed today was indeed closed. That is not a bullish sign for the rally. Further, the continuation gap - which aligns perfectly with the 50% retracement line has not been filled. The long support shelf at 1024 is the only thing holding up this retracement. It should be further noted that the gap aligns with the top of the prior 2B formation. If it is breached, the next level of support is 1015. This is indicated as the bottom white horizontal line of the graph.

At this point, I will review my setup for a retest of the gap at 1018 which I describe several posts ago.

I learned a painful lesson, which is "sometimes it is better to sit out the trade and find an entry with a greater reward profile."

Happy trading.

A view goig into 3:00pm (2:50)...

So we did get a gap-up, we did get a retrace, and now the question is do we get a test of the continuation gap at 1018. The following graph shows what I used for my trading decisions today.



My earlier post provides a view of the EWT with the continuation gap at 1018.

Happy Trading!

If we Gap-up in the morning...

If you have been following my posts the last week or so, I described a topping process that turned into a 2B reversal pattern, and we witnessed a breakout that indicated on Thursday when price action crossed top trend and committed on Friday with gap-ups in the early session.

My prior post described a setup that I will watch for in the event of an immediate retest of the 1018 and 1013 levels. But what if that does not occur? What if we gap up in the morning? Now that is a different case, and it can be tricky because I already see two gaps in the price action on Friday. So I now suggest another possible setup to consider tomorrow in the event of a gap-up scenario.

The setup assumes that we saw the completion of the third and fourth wave of an EWT on Friday. Open the following chart for consideration:




Elliot Wave Theory suggests that rallies happen in 5 waves - three with the trend and two counter trend. In this case, our first wave is made up of the first three bars on the hourly chart. This is where we broke trend. Note the small breakaway gap that formed between the second and third candlestick. The second wave included 4 bars of rest, allowing momentum to rebuild for the third wave which was explosive and included a classic "continuation gap" through the prior high in the 2B pattern. The continuation gap is labeled. We then had a fourth wave of pause that DID NOT retrace the continuation gap, followed by what seems to be the beginning of the 5th and final wave of this rally.

If this is a classic EWT and the gaps are "breakaway" and "continuation" in the chart, we can expect a final "exhaustion" gap tomorrow morning which could drive price action all the way to 1040. A target 1040 because the continuation gap is typically located 50% up the rally leg. This rally started at 996 (arguably 992) and the gap is around 1018. That puts the bottom half of the rally at 22 points, leaving 22 to the top from there. 1018 + 22 = 1040.

These are tough to play because you really need to be in long before the exhaustion gap prints. However, the good news is that most exhaustion gaps will retrace - allowing a setup on the short side.

If we get the gap up in the morning I will be looking to enter a short position at the top with a loose stop, tightening as the retrace is completed. A tactic is to drag a fib from the start of the rally to the suspected top after the gap and look for at least a 38% retracement.

There you have it - the two setups that I will look for in the morning.

Happy trading!

Cumulative Volume Index...

So its 1:15am Sunday morning and I am very interested in the Friday event where we broke out of a downtrend in August on options expiration day during a technically overbought market. So interested that I can't sleep unless I put some context around the event - or some boundaries at least.

I spent most of the day resting and reading on several key concepts. First, I studied the "breakout" and examined a number of examples. I also reviewed the characteristics of rallies and the principles of EWT. I reminded myself of the fact that strong rallies require a combination of investors - the more conservative value players and the wild speculators. No rally can last without both. The job of the value guys is to come in large and buy the foundation and the speculators drive the price higher in a second wave. Wave after wave, the price builds - until the speculators fail to take the rally further. Then the market will unwind and regroup for an attack from lower levels of support.

Anyway, I was not that impressed with the breakout on Friday. I think there was a good squeeze in the morning causing the minor gapping up to the 1024 level but the second wave did not materialize and we closed only slightly better at 1026. If we do not gap up on Monday, chances of a pullback to 1018 and 1013 are likely. I think these will be the best points of entry - shorting around 1018 with a tight stop and then taking a long around 1013 with a slightly loose stop. If a retest travels down to 1013 and fully rebounds to test 1024 again, the setup allows for 5 pts on the short and 11 points on the long.

If we gap-up on Monday morning I'll look for points of entry on the long side - and possibly reduce my shorts further to 25% position.

I was playing with the freestockcharts.com website - looking for an alternative view of the same data. I created this layout to help me evaluate volume. The CVI is a running total of the difference between volume of advances less volume of declines. A looked at the last 24 months on a weekly chart. Slapped the volume underneath and used some Bollinger Bands on the price action and CVI histogram. Finally, a ran a fib time series starting from the bottom in March to see how it lined up.

Take a look in a new window:



I labeled a couple of interesting observations. The CVI broke through the top Bollinger Band and crossed well above the running average. Head left on the graph and locate the last time we broke above average. Look at the reversal and significant downtrend in the price. Also, note the actual volume this week, and for most of this leg of the rally. It is lower than the average, where it was predominately higher than average during the early stage of the rally in March. Finally, note there is a downward moving Bollinger Band top headed straight for our price action and based on the next event horizon on the Fib time series, they may hit in the next 3 weeks.

Though I read these as warning signals of a coming downward trend, we have to be aware of the levels above and below. In green, we have the 1120 resistance and in red we have support at around 880. I would not be surprised if we see these levels as a trading range during the next 3 months.

Get ready for Monday!

Close look at the action today...

This morning I feared a break-out and executed my plan to protect the portfolio. I now am left with roughly 1/2 of my short position and some profits from the long position that I took yesterday at the break in the top trendline.

We are almost ready to leave the 10 day view, it all depends upon the action Monday. Let's take a look and see what happened and why. First the big chart showing the fib grid, fan, time series, and major resistance going into the breakout. Open the graph in a separate window and read along.




Two sessions ago I suggested that we should all know our levels and treat them as decision points. The key levels going into this 2B setup were at 1007, 1013 and 1018. Why? 1007 was about the top trendline, 1013 was the level of the immediate prior high, and 1018 was the "high candidate" at the start of the downtrend.

Once we broke trend in yesterdays session, I reduced my short position by 25% and took a long in both SPY and DIA. This minimized my exposure to a successful breakout attempt and allowed me to get in early for a possible long play. My focus was now on the 1013 and 1018 levels.

Look at this enlarged view to see how fast this took place.



We gapped right through 1013 in between the two first minute bars and 1014 became support. At this pause, I quickly reviewed the performance of the global indexes and made the decision to reduce my short by another 25%. After a very good fake, the action exploded again with three gaps in as many minutes (at 1018, 1021 and 1023).

Close up of the gaps:




Though I was tempted to take profits on SPY and DIA, I stopped to consider the setup. If this is a true breakout in a 2B reversal, the market will run again. Funny enough, flat line... She sat at 1024 in tight range till the final hour. I studied the RSI indicator and Stochs to try and time the final surge. I decided to put a tight trailing stop on the sale of SPY and DIA at around 3:00PM. I was very forunate, as the run to the high was steady and I was not taken out along the way.

Some of you may ask why I took down the SPY and DIA long position in the end. Let's just say I don't think Faber is so wrong... If this is a true breakout - not a head fake, I'll get confirmation on Monday and join the fun!

One last point - check out how well the fib time sequence aligns with the pops and drops over the last 10 days. Incredible...

Big Picture Review

Just about any study of trading emphazises the importance of protecting yourself against faulty setups. I see a possible 2B reversal materializing on the S&P. The reveral of course is from the latest downtrend in the upper leg of the rally that started in March. I address that downtrend in my earlier posts. Yesterdays action suggests the possibility of a bear trap and in these cases, we have to determine how much risk exists in rally continuation and how to best position for the next setup.

For the benefit of those who are not familiar with a 2B reversal, it is the case when we see the prior local low is violated after the last local high. This is the first signal of trend change. Subsequent to setting the new local low, a failure to break the last local high occurs. Action then pushes to a new local low after this first attack. If the next attack at the new high breaks the upper price trend line, you have your first alarm and possible break-out. I think that is what happened yesterday and we see it in the futures this morning.

So with this in mind, we may have a breakout and we need to know what the worse case scenario could be. To do this, I offer the following big picture chart - which is a weekly view of the S&P from last high to March low:



Sadly, we can not discount the "technical possibility" of a run to 1120. That is a fairly substantion leg up from here and if you are short now I would be very careful to guard against a breakout above 1018. I will use a decisive break and close above 1013 as my next signal to adjust my shorts and flip long. Of course we have to be careful of whipsaws and failed breakouts...

Trading is a risky business, but if we let our positions become "part of our family" we are bound to be punished.

Broke Trend...

By far, the most difficult thing to do as a trader is to sell at a loss. Unfortunately, we all have to do it when it is the best interest of the portfolio. Yesterday, I wrote an entry about levels. I'm glad that I did. While writing the entry I was studying my model of the SPX. I noted that the past two sessions saw upward penetration of several resistance levels. Those included:

1. The lower fan blade
2. The middle fan blade
3. The 38% retracement

The action rested arount the the 50% retracement mark, hugging the upper fan blade. Going into today, my concern was continued up trend and breach of further resistance levels. I decided that a breach of the upper trend line (at around 1007) would be enough of a signal for me to reduce my shorts by 25% and take a hedging long with SPY and DIA. Well, we had a breach and I took the actions - though it felt painful.

Here is a view of the main trend and levels:



Here is a blow-up of the breach:



At this point we will likely have a test of the 1012 and 1018 levels. By reducing my shorts and taking a long, I can maintain a bit of stability in the portfolio and analyze the action when the index tests the top.

Know your the Levels

During a topping process, there is a "candidate high" formed somewhere in the cycle. In our present case - the candidate high is the August 7th intraday high of 1018. We assume this to be the top and seek evidence of a series of lower lows going forward. Ideally, we would see a series of lower highs as well. However, that does not happen so easily. Generally, there are attacks ("tests") of the high while lower lows are made. This can be frustrating for a short position and often leads to premature abandonment of a trade. The problem is of course knowing when to hold a position or leave a position. For me, I like to start with the basic "levels" analysis.

Here is my approach:

First, identify all of the key support and resistance levels, based directly on the tops and bottoms of printed price action. Do this for the 10 day, 3 day and 1 day charts, with a period of 5 minutes. Of course, you must already have in your mind a clear understanding of the macro charts - 1 yr, 3yr, 10 yr. On these charts, draw horizontal support and resistance lines and determine where the price sits relative to the number of resistance levels above and support levels below. If you are short, you hope for more levels of resistance above than levels of support below. If your are long, the reverse applies. Treat these as your DEFCON levels.

Second, draw your best approximation for the top trend line and bottom trend line. Note the points of intersection with the support and resistance levels. Also, assess where the current price sits in relation to these trend lines. Where is the price headed assuming that the price action tends from end to end? If it is headed to the top trend line, consider a buy. If it is headed to the lower trend line, consider a sell. That consideration should take into account the number of lines in the way.

Finally, add a couple of fib tools to the mix. Of course, drag the ends of the fib tool (grid and fan) from local high to local low. Use these tools on all charts. Where is the price action with respect to each fib? Study the 38, 50, 62 retracement levels. Trust these tools on charts where the fib grid aligns with existing support and resistance.

When analyzing, try to inspect movement towards or away from points with the greatest number of intersections. Each time a point is crossed by a line, the significance of the point and its level become greater.

With a solid understanding of the levels in your charts, you can apply further technical analysis to assess price movenment during the chart period. That's for another post.

Looking at the S&P, here are the key levels:

1018
1013
1007
1002
998
992
987
978


Happy Trading.

A little crazy today...

So China is officially in a bear market and the US markets initially dive then manage a powerful rally to finish up on the day. Did the action today break the down trend? No.

Let's go to the charts. Again, using the same fib fan and fib retracement tools as we did yesterday, you will see that the action was within the limits of the lower and upper fan blades. The only exception was on the open, where the lower blade was deeply penetrated to the downside. When this happens, it is not unusual to see a counter reaction to the top of the upper fan blade. Hence we saw a nice pull up to the 998-999 level. Also note that the upper fan blade intersects with the 68% retracement level on the fib grid which runs from the intraday high of the 7th to the intraday low of the 17th. Further resistance was provided with the long flat action on the 14th in the 996-998 range - serving as a nice ceiling on this move.

Remember, you can click on the image for a bigger view:



Todays action up close:



We remain in a downtrend, but we must watch for a break-out tomorrow above 1000 and be especially concerned about a break-out above 1002.

Happy trading.

The trend is your friend...

So, step back from the news for a moment. I mean yesterday was black monday, today we are in full bull mode again. You can't rely on the news at face value. The fact is that the market is a machine - complex at times - but for the most part predictable - if only in hind sight!

Media aside, we are in a downtrend which started on August 7th after an intraday high of 1018. Until we see evidence to the contrary, the downtrend continues and the swing trade should align in the same direction - down. Counter trend trading is hard and can be dangerous, and I have never met a person that can call an exact reversal point.

But you may ask "How can you say we are still in a downtrend - the market rallied 82 points today!" Well, despite recent behavior, markets are supposed to move up and down in the context of a trend - oscillating as the forces of supply and demand do battle. This is how we get "channels" and "top line trends" and "bottom line trends". Simple, I know - but amazing how quickly good positions are abandoned at the first sign of counter trend movement. Take today for example everyone who was short through Monday covered today.

Let's look at the charts. First take the action over the last two sessions. A basic fib grid from Friday close to Monday low shows that todays price action rose to and bumped off of the 50% retracement line. In fact, when you examine the last 2 hours of trading, the push from the 50% line was forceful relative to the upward pressure. Also not the negative divergence in the MACD histogram and the price in the late morning early afternoon hours (price rising MACD levels descending). And how about that down trend in the RSI? The most bearish read is if 987 is breached tomorrow we can see a full reversal of today's retracement and a test of the 979 level.



Blown up for your closer look:



Now examine the chart over the last 10 days. Note the fib fan from the high on the 7th to the low yesterday. We are right bumping around the first fan blade. If we get forced down from here, we will see more downside short term. A less bearish view may be that a test of 995 then 1001 (the next two fan blades). If these are breached to the upside, it would be wise to consider the possibility of a trend reversal. One final note, the fib grid on this same chart does not line up todays price action with the 38% retracement level. I needed to see 993, but it just didn't happen - despite several rejected attempts.



Now the blow-up:




Happy trading!

Happy to see confirmation...

For those of you who have followed my blog (none I suspect!), I have been calling for a correction. I believe it is officially underway. I am very pleased with my technical analysis over the last 10 sessions or so... Here is a look at the short term retracement that I expect.

I will now wait and if we breach 960, 940, then 920 - I'll expand my outlook to the following chart:



Also, for those watching the DOW:



Long term DOW:

Forming a Top....

As I suspected, we are not able to break the high on August 7th. Each attempt has failed when met by significant selling pressure. There is alot of overhang at this level and I just don't think the momentum is in place to push through. Look at the triangle forming. Lower highs and more violent volatility to the down side. This will give way to downside breakdown. The market must retrace and regroup with more participation. There is alot of money on the side waiting for a correction. They will not get in at these levels...

Got to follow the charts!

Today we saw some selling pressure on all indexes across all market segments, notably the financials. As you know, I am in the camp that believes a correction is due. I feel stock prices are ahead of the fundamentals (S&P trading at 18.3x earnings with revenues shrinking), sentiment is at an all time high (88% bullish amongst retail investors), and the technicals look very bearish when viewed from almost all time frames. I have already provided a 2 year daily chart demonstrating the major retracement levels of the S&P . I now offer a look at today's action. I do this because, surprisingly, there are some very good traders out there who still think that there is more room to run on the upside short term - meaning the next couple of sessions. I don't see it, and I would love to get more explanation on the view.

For now, here is my look at todays action. Drag a fib across the closing high and the low for today. Note the 38% retracement level. Add a fib fan spanning from the closing high to the last local low for the day. Note the three fan blades and how they track with the retracing highs. What happened when the third blade, first fib retracement, and price converged at the end of the day? Breakdown.

I was amazed to see comments from traders suggesting that market manipulators are simply baiting shorts here. There is no such conspiracy. The market is simply a real time reflection of the conflict between supply and demand - driven by greed and fear. It is our job as traders to stay objective and profit from the mistakes of the herd.

I think the market will now trend lower with some volatility from here on out. Look for tests of 960, 940, and 920 on the S&P. If we hold, meaning we don't see a major leg down, we will remain range bound at best for the next quarter. The administration has supplied sufficient spin to ensure that much of a grace period - but not much more...

Happy trading.

Here is a very interesting quote from a Yahoo! finance article posted on Friday evening...

"Ironically, the investing crowd tends to get bullish only after most of the gains have already been seen. That's why savvy investors use this and other sentiment indicators as a contrarian tool. As the bullish crowd grows, so does the chances of a market reversal.

In the March 2nd Trend Change Alert, the ETF Profit Strategy Newsletter foretold that this extreme of investor sentiment (bullishness), would be seen towards the end of a powerful 40% rally. In fact the top of this rally, a counter trend rally, would be marked by a 'the worst is over attitude' which is exactly what can be observed today.

Similar to 2007 - when nobody expected the upcoming storm - financials (NYSEArca: XLF - News) and real estate (NYSEArca: RWR - News) should lead the charge towards the downside and send broad index like the Dow Jones (NYSEArca: DIA - News) to new lows. Judging by the degree of optimism present today, the move to the downside will be quite powerful and will leave many - just like in 2007 and 1929 - stunned. "

Another common story on Friday evenings deals with Bank failures. Here is an excerpt.

"Regulators on Friday shut down two banks in Florida and one in Oregon, bringing to 72 the number of federally insured banks to fail this year under the weight of the weak economy and rising loan losses"


Why do these run on Friday evenings? It is hard not to imagine a scenario where the media is somewhat orchestrated...

Happy trading!

A note on sentiment...

The US Labor Department release the July jobs report which indicated that employers reduced the number of job cuts to 247,000. The report also indicated that the unemployment rate dropped to 9.4%, and the revisions to last month were positive. Of course, this is a good signal for the "strong recovery" camp. But is it really? Can a V-shaped recovery be possible with these numbers? At best, we are looking at a prolonged bottom in terms of economic activity - yet the markets have fully baked in a V style recovery.

Has sentiment really taken control of the markets? Read the following and let me know:

"The latest sentiment readings are disturbingly bullish. The market has not been at such psychological extremes since major market tops were last put in place. The latest reading from traed-futures Daily Sentiment Index reported 88% bull among S&P traders. The last time a readg this high was reported was on October 9, 2007 - a top in the DOW."

http://seekingalpha.com/article/154606-sentiment-readings-disturbingly-bullish

Interesting Financial News Snippets...

My thesis is that the markets are over-priced when analyzed from a fundamental, technical, and emotional standpoint. Yesterday I provided a supporting technical chart. Today I share two snippets from the morning's financial news regarding employment - one very fundamental driver of any US recovery:

"The financial health of Americans is crucial to lifting the economy out of recession, as consumer spending accounts for 70% of all U.S. economic activity. That's why unemployment has been such a concern for the market. Higher job losses mean more consumers are left with less to spend."

"Planned layoffs at U.S. companies jumped 25% in July from June, depicting further deterioration in the labor market."

I think the following snippet sums-up the emotional issue:

"bulls have momentum and are focusing on news they like while ignoring or spinning that which they don't."

How do you plan to trade this environment?

Short the S&P - A Technical Case...

Markets are driven by three factors - fundamentals, technicals, and emotion. I think an argument can be made to short the S&P in all three cases. As I finish my nightly analysis of my positions and setups, I leave you with this daily chart of the S&P over the last 2 years. Note the intraday high of 1576 on 10/11/2007 and the intraday low of 666 on 3/6/2009. Dragging a fib grid from top to bottom shows that on 8/4/2009 the S&P has retraced exactly 38.2%. This fact combined with the highest RSI level in the period spells "pullback time".

As you look at the chart, think of this quote:

"Bear markets print according to the same mechanics as individual stocks and futures. Look for a double bottom or Big W to signal the end of a major selloff." - Alan S. Farley (Author of Master Swing Trader)

Do you really think we are headed straight up from here?

Love to hear your thoughts!