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.