Volatile Triangle

I am glad that I did an analysis on the hourly chart yesterday - as it played an important role in decision making today. Before we get into the chart, did you note how volatile it is getting? The VIX (VXO) rose as high as 25.32 today - closing up .94. The index ($VXO) has risen about 15% since Thursday. That is a bearish sign. It also leads to some of the best trading sessions!

Take today for instance - we had price swings from from a low of 1046 to a high of 1063 - 17 points. I you where holding 20 ES contracts at the low and sold at the high you would have made $17,000 today (of course if you were on the wrong side of that trade you would have lost $17,000). Volatility = !big risk! = $big money$. I think we are going to see much higher levels of volatility in the coming sessions - so be very careful

I have updated the hourly chart from yesterday and want to look closely at the action. If you have not read my hourly, daily, weekly, monthly series of posts - I encourage you to do so, at least yesterdays post is important. Open the latest chart.



First - you will see all the MAs, fibs, BB, and trend lines from yesterday. I have added only 1 item - a new bottom trend line starting from the very low on Friday and extending through the low of today. This is such a picture perfect scene. Note how the new trend line intersects with price action EXACTLY on the 38% retracement of the Full Rally Fib (that is the purple line.) In yesterdays analysis, I said that a rejection from the top trend line was likely and that if we broke 1060, we'd take out 1059, 1056 (also the 20p MA) and 1052. Beyond that I pointed to 1041 as a very likely target. Well, in retrospect I should have inserted 1047 because the 38% retracement of the full rally is a significant level of support - and it deserved more attention. Just goes to show you that the market has a good memory - even when we suffer from financial ADD!

We are now in a triangle with price action alternating between two trend lines. The top trend line remains the line drawn yesterday - from the 1080 high through the highs of our last two sessions. The center of this SYMMETRICAL triangle is at around 1056. This happens to be the 50% retracement of yesterdays rally and the 38% retracement of last weeks down leg. The apex seems to be somewhere out towards the end of the day Friday or Monday.

Triangles tend to break somewhere around 2/3 of the way through. Meaning we could see it happen tomorrow. A break can be out above the upper trend line, or down below the lower trend line. When the triangle breaks, it will typically travel, with velocity, the distance equal to the price action preceding the first coil. For this triangle, that would be the 39pt drop from 1080 to 1041. This distance is usually measured from the apex.

Studying break-outs above the trend line, we look for key resistance in the way. I count 10 levels of resistance until we get above 1080. These include all of the fib levels, both MAs, a trend line, and the upper BB. Studying the break-downs below the trend line, I count 6 levels of support to break. This includes fib levels, a trend line, and the bottom BB. The density of upward resistance is greater than the density of downward support and the latest price action was down crossing below the MAs. These are bearish indicators to consider.

Final note, this is a volatile triangle with some decent price swings - be careful but ready to profit on the swings between trend lines. Do not act on the first break above or below the line. Wait until price action confirms - usually through a return to retest of the trend line. If it jumps from the retest in the direction of the breakout - great, you may have a 39 point ride ahead of you!

Good luck out there, and remember volatility = !BIG RISK! = $BIG MONEY$

The Hourly Chart

The action over the past few sessions has been very different when compared to typical sessions over the last 6 months. Different in the sense that the market seems "free" to do what the participants ask. I guess I'd say there seems to be an absence of manipulation. Frankly, I think this has spooked a lot of participants. After all, who can remember when we had a free trading market? A market where selling pressure drives prices down and buying meets actual resistance. A market where you can make decisions without second guessing your analysis!

Anyway, yesterday I addressed the daily chart and the expected bounce after the thrashing the market recieved last week. I also stated that I was disappointed that we did not close below 1060 yesterday as 1059 would have been roughly the 50% retracement of the down leg. Contnuations typically occur after the 50% retracement.

Open the hourly chart for the last 20 days:



The chart has the 20p MA and 50p MA along with 20p Bollinger Bands. I also include 3 Fib grids. The largest grid is dragged from the low of this last major rally at 993 to the high set of 1080 set last Wednesday. This grid is labeled Full Rally Fib. The Down Fib stretchs from the high on Wednesday to the low of 1041 on Friday. The Lastest Fib stretched from the low on Friday to the high set this morning at 1069. These fibs are important to determine the possible support and resistance levels for price action going forward. Finally, note the yellow trend lines that follow the descending highs and lows of the last 5 sessions. These too are important.

Some high level observations....

1. The 20p MA is rising up towards the flat-descending 50p MA. This can be considered bullish - but the angle is not sharp and the last two bars of the price action are descending.

2. Price action drifted sideways and has reversed after piercing the lower BB Thursday. We now see the BB closing and hence, consolidation in the price action. Though we have traded above the 20p MA - we still have not touched the upper BB. Either price must rise or the upper BB must fall in the coming sessions.

3. Price action closed below the 50p MA today. This is bearish.

4. Price action is contained within the trend lines - though hovering close to the upper trend line. It is important to note that the last attempt at the upper trend line met with increased resistance and was not able to touch.

5. Price action is resting just below the 50% retracement level of the Down Fib and just above the 38% retracement level of the Last Fib. Downward movement from here would signal a possible retracement of Monday's rally. This is bearish.

6. Finally, the stochs are still over-sold and the RSI negatively diverges when compared to the highs in price action set last week. This is bearish.

Tuesday is ofter considered a turn-around day for the week - setting the tone for the remaining sessions. This combined with the fact that the price action has failed in its first attempt to test Wednesday's high suggests that we could be in for some downward action. Open the following magnified view:




For price to move higher, we must see a break of the upper trend line at approximately 1065. From that point a break above 1069 would be a signal that we will see a test of 1080.

For price to move lower, we must see a firm break below 1060. This would signify the continuation of the last down leg. To get the continuation we will first have to fully retrace this last rally which started on Monday. This requires breaks of support at Last Fib levels 1059, 1056 (also the 20p MA) and 1052. If we get these in the next session - 1041 is a very like target with the bottom trend line becoming the next level of support. My calculations suggest a possible test at 1025 by end of week. This lines up well with the lower trend line and the 62% retracement of the Full Rally Fib.

I did not see much today to change my bearish outlook for the S&P. I remain 100% short in my cash securities while I continue to profit from my intraday ES futures trades. I will re-consider option spreads once we break either of the trend lines.

Good luck out there!

Looking at the Daily

I did not have a chance to publish analysis on the Daily chart this weekend. But I did have a look and do some basic analysis. For what it is worth, I did expect a bounce today - though I did not think we would close above 1060. Open the following daily chart and let's speculate as to what happened:



First, the moving averages. Clearly, we have been rallying for some time with all of the MA's moving upward with the 20p on top, followed by the 50p, then the 200p. Wow, what a bull configuration! The only problem we see is that the price action is trading at a level almost 20% higher than the 200p MA. This is a bit unusual and many feel unsustainable. Before moving on, note that on Friday the price action came down and touched the 20p MA. Ideally, price action would have broke down across that average when the bears had the momentum - but it did not. We'll pick that up later.

Next, lets take a look at the yellow trend line that runs along the lows formed during this rally. We see some very nice contact and reaction off of this line. Again, in an ideal bear scenario - this line would have been broke on Friday - but it did not.

Next, note the grey fib grid on the left (I placed it there for clarity sake). It is stretched from the low of the last rally leg to the intraday high set on last Wednesday. We hit the 38% retracement level on Friday - and kept going. This is a good bear scenario - but the 50% line needed to be tested and fail - and that did not happen.

These three forces - 20pMA, rising trend line, and 38% retracement level forcasted a bounce today. In fact, I played the bounce with an expectation that the downtrend will resume this week. I sold my insurance options at a premium and shorted the ES at the high of the day. My only disappointment is that we did not retrace deep enough from the high. Open this final blow-up of the hourly chart to see why.



I was hoping for a close below 1060 as this would be below the 50% retracement of the last three sessions. A 50% retracement is not uncommon and many analysts wait for this level before resuming the trade with the prior trend.

So what happened? Perhaps the thin holiday trading exagerated price action at the close. The market clearly had a strong morning rally, but then it formed a rising wedge which broke right around 1064. From there, prices just rolled until the final 30 minutes of trade. During the closing minutes most of the price action can be discounted as it is a result of traders going flat.

Unfortunately, we can not conclude much for the bears or the bulls today. The balance of the week will tell us more - starting with tomorrow.

I am particularly focused on a break below 1060 and 1056 - this could lead to a full retracement at 1041 and a continuation of the down trend.

Alternatively, a break-out aboive 1065 would be very bullish and could result in a test of the 1073 seller and of course the intraday high of last Wednesday.

Good luck out there.

3yr Weekly Chart

This post is a continuation of my weekend analysis. If you have not read the "10yr Monthly" post, you might consider doing so as I am following a top down approach to the analysis.

The monthly analysis is really big picture stuff - the weekly starts to bring things more into focus. Not so much that we can make an intraday decision, but certainly a needed view for any swing position lasting days or weeks. When you compare the price line on a weekly to the monthly, you start to see a rhythm to the price movement - even if it is a bit syncopated.

Again, open the chart in a separate window and allow me to orient you to the key chart features:




1. This is a weekly LINE chart for the last three years

2. The 20, 50, and 200 period moving averages are labeled and lightly fatter than the other lines to allow for easy identification

3. I have included bollinger bands in grey. These bands are based on the classic 5 periods - not 6 periods as I did in the monthly.

4. I have included a 5p MA which is essentially the center line of the bollinger bands. Remember, price action will tend towards upper and lower bands crossing OR bouncing off the center line.

5. I have added a fib grid for the CLOSING price action and the CENTER fib line.

6. I added a fib fan which spans from the high of October to the first local bottom in the major down leg. The fan is useful as it projects the attitude of the down turn and provides an indication of where natural support and resistance will occur.

7. Finally, there are yellow trend lines that following the 5p MA from the start of the major down trend in October through the tops of major intermediate swings. The top line is very close to current price action. Also, a second trend line follows the lows of the most recent up leg that started in March. Note it also is very close to current price action.

I will be working on analysis later tonight and tomorrow - but you should immediately note several fundamental differences in the charts features when compared to the monthly. Absorb those differences and try to make sense of them in the context of your thesis AND outside your thesis.

The first thing I notice about the weekly chart is that the 200p MA is moving down and price action is trading below the line. This indicates that in this time frame, we are technically in a bear phase. At the same time, we see some bull indicators, including the rising 20p MA that has pierced up through a flattening 50p MA. Also, price action has been above the 20p MA since the end of March. When measured on whole, the MAs suggest that the market is making a major decision and Price action during the next several weeks will determine if the 20p MA does an about-face or continues a run to the 200p MA. To assess which is more likely, we need to analyze the efforts of each move.

Starting with the bear case - price action has been riding above the 20pMA for almost 6 months. Since crossing, it has not once regressed back to touch or cross the average. Further, price action crossed the 50p MA and has not regressed to that line either. One argument is that a regression to the MA's is over-due and price action can be expected to at least touch the 20p MA soon. Currently the 20pMA is around 960 - and rising. Looking at past regressions, the price action drops relatively quickly and the action of the MA lags - so a 960 target is probably fair.

The bull case seems a little more challenging. Price action would need to carry the 20p MA from 960 to roughly 1200 over the next several months. That means that the S&P price line would need to reach closer to 1350 (as the MA lags) and would be trading at higher than any published target for 2010 and above 35X the projected S&P earnings. That would be 2X greater than the PE ration at the top of the biggest bull market in history. I think that is a tall order for the first half of 2010.

The next thing I will look at are technical levels of resistance and support for the price action in the near term. Open the following magnified chart view.



Again we see the trouble zone - but this time with a little more detail.

Price action (based on the closing values) is in blue. We know that the MA analysis suggests that either we regress to the 20p MA (in pink) or we make a run to the 200p MA (in white). What are the obstacles.

1. We note that price action was just firmly rejected at the top BB. The result is price action reversing and the BBs opening up. This signals volatility is about to kick in.

2. We note that the rejection of price action at the top BB also intersects with the down trend line of the 5p MA highs.

3. We also note that the top blade of the fib fan aligns perfectly with both the down trend line of the 5p MA and the top BB.

These strong forces are likely responsible for the hard rejection we saw this past week. There seems to be a lot of program selling at this intersection.

Looking at price action right now, we see that it intersects with the 5p MA line (white). There are only two possible outcomes - it will either cross down through the line or bounce up. Chances favor a cross down - as this is all occurring at roughly the 38% retracement level of the major down leg. Note the white and pink horizontal lines - these are the 38% retracement levels for the 5p MA and actual closing price respectively.

At major retracement levels such as this, at a minimum, we can expect to see some sideways consolidation. The top trend line, fib fan blade, reversing price action and draw of the distance 20p MA almost guarantee sideways movement.

Now let's take that further. If we begin to move sideways, we will eventually run into the yellow up trend line formed from the lows of the 6 month rally. This trend line sits above the lower BB - which is currently expanding downward. If price crosses the trend line (even if it is moving sideways) it is considered a break down, and program trading will kick in and result in selling pressure. The draw of the lower BB will add gravity to the downward thrust. Additionally, this will mark a significant break below the 38% retracement levels and the psychological 1000 level. We could very well see extended selling a that point and price action would now be headed firmly back towards the 20p and 50p MAs.

So heading down, the support levels seem to be 1044 (our current level and the 38% retracement level of the 5p MA), 1020-1019 (the 5p MA up trend line and the 38% retracement of the closing price line), 990ish (bottom BB), and then 960ish (20pMA). Below these levels and we have to look at the middle fan blade in the low 920s and the 50pMA in the high 800's. I will point out that the 10yr monthly chart shows 920 as the 38% retracement level for this 6 month rally. Coincidently, 920 matches very nicely with the middle fan blade on the weekly and the eventual location of the 50p MA. Always pay special attention to support and resistance levels that converge in three dimension time studies.

Heading up, we would need to see price action reverse and break the upper down trend line in around 1060's. If we do, we will see a retest of the 1080s intraday high and an eventual run at the 50% retracement levels in the 1120 -1140 range.

Monthly Chart over last 10yrs

As promised, I will be analyzing the charts this weekend - starting with the monthly for the last ten years. Some of you may question the value of such a period. Why on earth do we care about the last ten years? We care because we live in a myopic society today where many traders (including the professionals) can't think beyond the last 4 weeks. This is a form of financial ADD and it is troublesome. In fact, are argument can be made that it, combined with unchecked greed, has responsible for most bubbles and most bursts.

Looking at the big picture also allows us to put things into context. Remember, there are trillions of dollars in the market from a variety of investors in different stages of their lives. If you are 65 years old having put the vast majority of your nest egg into the market during the final 8 years of your working life, now facing retirement with a home that has lost 30%-50% of its value, do you even have the luxury of staying in the market? What about the state of the global economy as a whole? Are we truly on to a new cycle of economic expansionism? If so, what are the drivers? How do they compare to past cycles? Are conditions ripe today?

Anyway, let's look at the big picture. This is going to take a while (IN FACT THERE WILL BE A SERIES OF POSTS FOR EACH TIME PERIOD AND EACH POST WILL BE REVISED SEVERAL TIMES) so strap yourself in and open up the first chart which is the 10year monthly. I advise opening in a separate window.



I first want to orient you to the primary chart components - and I am only concerned with price action at this stage. Here are the key chart features:


1. This is a monthly LINE chart for the last ten years

2. The 20, 50, and 200 period moving averages are labeled and lightly fatter than the other lines to allow for easy identification

3. I have included bollinger bands in grey. These bands are based on 6 periods - not 5 periods. I did this because we are now 6 months into this rally leg and I think we are either consolidating or forming a local top and I wanted to see how this thesis jives historically.

4. I have included a 6p MA which is essentially the center line of the bollinger bands. Remember, price action will tend towards upper and lower bands crossing OR bouncing off the cetner line.

5. Finally, I have added a single fib grid for the CLOSING price action and the CENTER fib line.

Take a moment to organize your own thoughts on this graph. I have four main observations to share.

1. An argument can be made that the market has formed a broad double top and could very well be headed for lower lows. Look at the price line. The first top was made in March of 2000 and the second top was made in October of 2008. There is no denying the double top claim, however some may be skeptical about the possibility of a lower low. I mean, who is to say that we are just not range bound? Well, perhaps we are - but I think we have to consider the fact that the low on the price line of March 2009 was substantially lower than the low of the price line in October 2002. At a high level, the market reached euphoric levels in 2000, it suffered from a major Delcine in confidence, recovered to a similar level of euphoria and then lost an even greater level of confidence. Considering all that we know today, are world conditions (economic, political, social, etc.) ripe for an extended bull run? Or, are we off to a premature start? I think this question is being contemplated by the markets right now as we approach the major retracements of the last leg down.


2. The moving averages are important as they are the quickest way to digest the trend. It is fascinating to note that the slowest average on our chart (200 period) is actually rising. This tells us that at the highest level, the market is actually rising. This can be explained by the fact that most downward action happens quickly and as a result, has less of an impact on the average. Uptrend happen over longer periods of time. What is more fascinating, is that both the 20 and 50 period MAs are headed down. That is the prevailing trend. In fact, the rate of descent on the 20p MA is sill pretty scary and as we have seen in the last day, it had a substantial downward impact on price (casuing 40 point drop). It will also cross DOWN through the 200p MA soon. This is a bearish signal. I will point out that it has not happened in the last 25 years. This event could very well cause the start of a full retracement of the rally.

Having said that, we do have some bullish factors as well. First, the price line has crossed UP through the 200p MA and is approaching the 20p MA. An argument can be made that the price action is reverting and should extend positively as far as it did negatively. That would of course require a break above the 20p MA and the 50p MA. That implies at least a 200 pont move from here. Although that may not feel reasonable, there is a technical case for the action.


3. The price action has entered the very first trouble zone since the rally started in March. Open the following chart which magnifies the current price action with respect to key levels:




The price action is in blue and it has been rising - almost vertically - since the bottom in March. There was very little in its way. In fact, price action suddenly reversed after dramatically sliding down the bottom BB. Since then there have been only two tests. The first is the center line of the BB. This is to be expected and once we cross through that line, confidence was gained. Price ascended strongly and then PAUSED at a point that allowed the center BB line to bi-sect the price action off the bottom. You can almost feel the caution. After a short period of consolidation, and a healthy diet of green shoots, the price action made a direct attack on the 200 p MA - crossing it nicely. But notice the slight bend of the slope. We see price action losing some of the vertical strength exhibited through-out the earlier months. Reason? The Trouble Zone!

Notice how the terrain suddenly changes to include many levels of resistance and converging lines. Price action now has to navigate a series of obstacles, including:

i) The 38% retracement of the CLOSING PRICE LINE. This is huge in that it will either open or reject a run at the 50% line. A rejection of 50% is a very, very bearish signal.

ii) As we have already seen, the 20p MA is a powerful downward force on price action. Look at the angle at which it is descending. The slopes of price action and moving averages really have to cooperate to promote a rally. They seem to oppose each other and the head banging has begun. Compare the current rejection to the seemingly effortless peircing of the 200p MA. Now note the slopes of the MAs. The 200p MA was moving with price and much flatter - more vulnerable to an upward piercing.

iii) For now, let's skip the 38% retracement of the center BB line. Yes, you can apply technical analysis to moving averages. In fact, volatile markets often dictate such analysis. Regardless, the intersection of price action with this retracement level is not as important as the intersection of this level with the actual 6p MA. That is not in play yet - so move on to the next level!

iv. The next challenge is the top BB. Do you notice how flat it got in the last month? Generally speaking, if price action pierces a flat band, it will generally cause a strong reversal with price action regressing to either the middle BB line or the lower BB.

v. The 50% retracement line. This is where many trends are continued or cancelled. Though I often speak of 5 wave EWTs - there is a very popular belief that major rally legs retrace at 50% levels. So, if we do reach the 50% retracement level on the closing price line, the market will have a STRONG tendency to continue the prior trend - which happens to be down. (Sorry my bull friends but I do not make the rules!). The proximity of the 50% retracement level to the top of a flat BB strongly supports this possibility.

vi. Let's also skip the 50% retracement of the center BB line for now - however let's recognize that it does represent additional resistance.

4. Considering we have a total of six (6) points of resistance, four of which are often associated with reversals. It is safe to say that we are in the TROUBLE ZONE. If we emerge on top - no stopping this train until the next test at 1252 (which happens to touch the 50p MA). If we don't get through, we may very well get the retest of the bottom. Assuming we are near the closing level for the month. The following retracement chart will help guage the pullback levels:





Love to hear comments!

Could be, could be...

Wow, I like it when things make sense. I am not talking about the fact that fundamentally, the market is over-valued at 139x trailing P/E. I'm not talking about the fact that sentiment levels have reached lunatic frenzy levels, where people actually believe that the market can only go up and this should not be questioned. I'm talking about the technicals - finally we see some technicals that make sense.

I certainly do not want to celebrate, yet... However, check out this 5 minute chart for the last two sessions.



From a technical standpoint, the action was simply superb. I see no less than 3 down side EWT wave patterns and potentially a much large one under development. Remember, there are 5 alternating waves to the pattern - in this case starting with a down wave, slight pullback, continuation wave, slight pullback, and then exhaustion wave. The fact that we piled three back to back with zero correction tells me that this is the real deal.

For the heck of it - take a look at each minor EWT to see for yourself. Minor EWT 1 is classic - it even features a nice continuation gap in wave iii.



Minor EWT 2 is less pretty but clearly takes shape. What I really like about Minor EWT 2 is that it actually morphs right into Minor EWT 3 - meaning the exhaustion wave v of EWT 2 becomes the breakdown wave i of Minor EWT 3.



Minor EWT 3 was the biggest sellout of them all and is simply crazy! I could easily argue that it is made up of multiple EWTs - but what is the point?




The point is that this selloff is obeying classic technical patterns and that is a good sign. Further, if the larger EWT is materializing, there is a very good chance that we can see another 120 points off the current level rather quickly.

I am looking at this current move as an opportunity to by cheap insurance. Today I purchased in the money call options on SPY and DIA for October, protecting 40% of my short position against a further rally this month. I plan to watch price action over the coming week and will consider full insurance (perhaps with November call options) at even lower prices. This would allow me to sit comfortably on my short positions until a correction takes place.

This weekend I will perform a thorough analysis of the yearly, monthly, weekly, and daily charts to identify possible targets for a downleg.

Happy trading!

Watching the Hourly...

It is time to observe price action on the hourly chart. This will tell us if we have a top or just the base for a new rally leg.




Note how we touched the top band and started our drift to the right. Very similiar to the daily chart. I've addded the key fibs for the intermediate price swings. The RSI is weak and the stocks indicate a possible reversal in price. Looking for a sharp down turn in the fast stoch this morning to confirm rejection at the top.

Price levels of importance:

1073-75 (a breach could send action to the 1083 area.

1067-1064 (a breach could send action to test the local low of 1057.7.

Good luck out there!

Flat Top...

Another day of selling at the top has kept this rally from moving another leg up. On the daily chart we continue the migration to the right and remain in over-bought territory.



RSI is flat along with price action, but still over-bought. However, it can continue in this area for several more sessions. The stochs are also suggesting an over-bought condition with only marginal room for an up session. Again, the stochs are not absolute in their oscillaitons, meaning we can remain over-bought for some time.

I labeled three levels of support that I hope to see come in to play in the next several weeks. The top at roughly 1075, a left shoulder at roughly 1040 and a neckline (although it should be slanted, my bad..) at around 980. In an ideal world, we would flatten out the head just a bit more and head down to the neckline. My bet it that a large number of people will cover as that was the point where many of us thought the correction was under way. This covering will give us the right shoulder - which will fail because we are just way over priced here! (Hey, we are all speculators!).

Regardless of what happens, one thing is clear short term, we continue to hit a ceiling in around the 1073 area. We have some serious selling at this level and the result is a flat top that will either serve as a base for our next expansion or the mark of a local top.



Looking at the 1 minute chart for the last 3 days, you can see that several attempts at 1073 are just getting rejected. At the same time, we see support developing at 1071. This is a remarkably narrow trading range. Note the small 5 wave EWT rally that developed at around 11:30am. I have a fib grid drawn from the low (1068.9) to the high (1073.87). See the gap that formed in the middle of wave three? That again setup my short ES trades this afternoon. The confluence of the continuation gap, the 50% retracement level, and yesterdays high have created a nice price gravity band that, when combined with the selling at 1073, has kept this rally in check. The only other important fact to note is that the opening gap did not fill today - and chances still favor price action returning to fill the gap before moving too far ahead.

Perhaps the seller at 1073, the over-bought conditions, the un-filled gap at 1066, and the sheer ridiculous nature of the this entire rally will be enough to get a heathy correction started!

A break above 1073 and then 1075 could signal a new leg to the 1083 level. A break down below 1068 could lead to a test of 1064-2 and full retrace to 1057.

Good luck out there.

Bearish Day...

In a nutshell, the price action on the S&P failed to breakout above yesterdays lows. Further, the price action failed to fill the opening gap. This is bearish. Having said that, there really was no definative win for the bears. In fact, an argument can be made for consolidation just as easy as roll-over. Either way, we had some interesing action during the day. Take a look at the chart.



I labeled the resistance line formed by yesterdays lows. Notice how price action bumped up against this line at least 1/2 dozen times throughout the day. This is a key level going forward. Will it serve as resistance or support?

Next, look at how we gapped down at the open and DID NOT retrace the gap during the first hour. That is usually bearish - but it is also a strong pull force for price action to return at some point. Frankly, I would have prefered to see this fill early and be on with the downward move. We have to watch this gap tomorrow as well. What will happen if it fills?

Earlier in the day I posted about the triangle that formed and resolved just before noon. My comments on the triangle can be read in my prior entry. I will just say that I was pleased that I took my profits as soon as I saw this formation. Look how the 5 wave EWT rally broke out to the top side. In fact, the third wave of this EWT has a classic gap - which I later used as bait for another successful short play once price action was rejected at 1066.

I was very surprised that price action failed 4 times at 1064-66. This is unusual. Three times is a charm they say. It took a fifth attempt to create enough of a squeeze on the shorts to pop up and attempt a gap fill. Guess what, the attempt failed. Price action was firmly rejected at the base of the gap - enabling one last short play to finish the day.

I can not tell what is going to happen tomorrow - but I remain bearish and resolute in my short position. I'll continue to trade the ES during the day to maintain income. One final look at the daily for all those who question my rationale. We pierced the top BB and will very likely head back to the lower band during the coming weeks. I will see this out to the finish.

Intraday Triangle...

I normally do not post intra-day - but today I decided it might be interesting to discuss a pattern that has developed and some trade tactics. Here is the 1 minute intraday chart for the S&P.



As a rule, when you see a triangle form, get out. It is a sign of indecision and will likely result in a break-out. The direction depends, it could be a reversal, or it could be continuation. In many cases, there is a false breakout, gunning positions before reversing.

The key with triangles is to have good trendlines on top and bottom. Watch volume, RSI and stochs. Never act on the first move out of formation, rather let the move test the penetrated trend line again and if it bounces it should do so strongly and regain the high set on the initial break out. Then enter your position.

Also, it is importnant to know your levels around the price action. Today, the key levels 1057 (the low set on the initial down drive) 1061.7 (38% retracement of the opening drive), 1063.02 (50% retracement) and 1064.35 (62% retracement). Also, note the location of key MA's 200, 50, and 20. Look for intersections of the MAs with the key levels. Price action will get turned away near these intersections.

As I am writing this post, an upside breakout attempt has been made, it broke key levels (38%, 50%) but failed to reach 1064.35 on first attempt. Note that the 200 period MA was approaching and likely played a role in the pause. I suspect it will attack that MA again and we may even see an attempt to fill the opening gap. Generally, the 200 MA will push pretty hard on the price action.

Good luck out there!

Peak or Consolidation?

Today was one of my best trading days - booking substantial profits through my intraday e-Mini trades. Still, my short positions on the cash securities are hurting. Thankfully, I do not look at them as I remain resolute in my position.

From a technical standpoint, today was very bearish. Open the 5 minute chart for the last 10 sessions.




The yellow lines show the top and bottom trend lines in a channel that started about 9 days ago. Note how strong the rally was during the first half. The price action ran pretty tight to the top trend line. Then, starting this week, we see it sag and drag along the bottom trend line. The market gave it all it had on Tuesday, Wednesday and the open today, but failed to reach the top trend line. Price action was firmly rejected in the 1073-74 range twice and straight down to the bottom trend line.

Note how well the fib grid aligns with the price action in this last rally leg. We retraced to the 38% line which happens to intersect with the lower trend line of the price channel. This gave the action enough strength to bounce, however there just was not enough support to climb above the highs of yesterday. In other words, we struggled to get back to scratch, and failed. That is bearish. It is also bearish that we crossed the bottom trend line twice in such a short period of time.

Look tomorrow for a possible reversal. If we see a break of support at 1062 we could see a significant down leg begin. The RSI negatively diverged from price action during this last rally leg - which means that we can quickly see 1044 (start of this leg on Tuesday). If we gap down hard in the morning, this full retrace becomes very likely.

Alternatively, we are in a furious up trend and this may simply be a rest/consolidation step. It is entirely possible to break through 1068 then 1072 and of course 1074 to go on to new highs. Unfortunately, those highs might be near to 1080-84 range. This target is determined by the slope of the top trend line of the channel - which is showing an average rise of 8 point per session. If we see the high early morning figure, 1080 - later in the afternoon 1084.

Good luck!

Good luck.

I think we will now reverse...

What a parabolic rally! Worlwide no less.

These last 3 days have been very challenging for me. Primarily due to technical problems at the desk. After losing connectivity to all exchanges on Sunday night, I spent 24 hours straight working with the folks at Trading Technologies to troubleshoot and solve the problem. Started with the guys in Singapore (thanks Francis!), then over to the folks in London (thanks Sean!), then to Chicago (thanks Paul!), and finally Dan the network man in Wisconsin! Long story short, we made an investment in a new router yesterady.

Anyway, the markets move - even without my participation! And move they did. I remain 100% short on the DOW and S&P - getting a little too deep in hole for my comfort. However, the moment of truth has arrived. We are in the 1060 zone and the DOW is head banging 9800. If we are going to reverse, my studies say NOW!

I offer one chart today and then some unrelated observations. First the chart, it is the daily chart of the S&P for the last 1 year or so.



All that matters here is that ANY TIME that we pierce (or even touch) the upper BB while it is near flat, we correct. This is the case as far back as I can see. In fact - you should look back on your own at the top of the prior bull run. You will see that this event was the lead indicator for all of the major drops that followed.

You can add the traditional fib-grid from the August 08 shelf and even through a pivot grid from the very base of the rally (post July consolidation). They all line up with the piercing of the top band. We will now correct.

The market may seem irrational to all right now, but I assure you - the smart money is selling and a correction is now underway.

Good luck.

Pullback Levels (if we pull back!)...

I took some time to quickly assess the levels and gauge this last rally leg. Here is the 60 minute view of the ES futures for the last several sessions:



First, the rally looks powerful from the standpoint of the price action - but the volume of the last leg looks weak compared to the prior leg. (Marked). Let's assume that this signals exhaustion and there will be a pullback (eternal optimist). Using two fib grids and a couple of trend lines on the price channel, we see that if we break below 1037 our first test is 1033. This will be the intersection of the bottom trend line and the 62% retracement. Rule of thumb, if we break 62% we will likely get a full retrace of this top rally leg. (1031 may cause a bit of pause).

If we retrace this last rally, I think it will be a very important victory for the bears. The next immediate target would be 1023 - which is the 38% retracement of the larger main rally. I am confident that this will break, as the gap at 1018-1015 is calling!

Looks like the price action has had a head start this evening.

Good luck!

Never a dull moment...

Today was brutal - but I did not move off my short position. I have been focused on the ES mini contract as my day-to-day income generator. There is no denying that the market hit that magic number today - and I guess the squeeze is in order for all of those who are short.

Things are bubbling - even the Bank of China’s Zhu Sees ‘Bubbles’ in Asset Markets. But that won't stop the liquidity train. It would be a lie if I said I was not worried. I will be watching the futures market and tomorrow's session to see where we are headed.

Don't under estimate resistance at this level. There was a very big sell at the close.

Energizer Bunny...

This market just keeps going, and going, and going - on fumes!

Anyway, I have learned in this market not to fight the powers. Rather, let the powers trip themselves up. 9600 on the DOW and 940 on the S&P are right in front of us, yet despite the dollar manipulation and spin doctoring of news - we can't seem to make the grab! That is not to say it won't happen tomorrow or the next day. But think about it, if we were in full rally mode, the 1039 high should have been taken out today.

A rally needs cooperation between manipulators, speculators, and value players. The manipulators bait the speculators, the speculators bite and carry the price higher, value players fill the price action with volume to solidify support. The cycle can then repeat itself. If either the speculator or the value player fails to participate, the rally can not occur.

Look at the 3 minute chart of the ES mini future contract for today.



I labeled some general phases of a typical pump-dump scam run during the day. I'm not saying that this is what happened today - I'm just suggesting one possible scenario.

Though we opened down sharply, high volume buying stabilized price action and proceeded to trail off during the opening hour. I labeled the divergence between the rising price and the falling volume. This tells you that buyers are buying only enough to keep the price action higher - no more. Further evidence of this is provided by the price swings that appear between 9:30 and 11:00. As soon as the throttle is released, the price drops swiftly. This tells me the manipulators had trouble baiting the speculators in the early session.

Next the manipulators pump the volume and price all the way up to the noon hour, hoping again to bait the retail speculators during the lunch time day-trading session. As you can see, price flattened and volume sagged. Again, indicating that the speculators have no interest. At best, we saw some speculation towards the back half of the second lunch hour taking the "post lunch gamble". That caused a volume and price spike that we see at around 1:30PM - drawing in just enough speculators to execute a payoff move.

At this point, the price is as high as it will get on the day, and the sellers can proceed to dump their shares through rising volume and sharply descending price. The day's setup did indeed payoff in this pump-and-dump scheme. So well, that we see the setup for tomorrow already underway - with a confirmation through a lack of interest and trailing price action in the after hours session.

Lightly traded, highly manipulated, and very dangerous. That is how I characterize this market. Now I have to go and listen more carefully to President Obama to get a clue as to what will happen to the markets tomorrow.

Good luck out there!

Market Remains Weak...

Surprise, surprise. The dollar index falls to 77.210 on the futures market (as of 9:00PM EST), December Gold hits an intraday high of 1009.50, and the S&P manages to fail repeatedly to break out above resistance at 1025. Worse, S&P leaves another gap below and the internals are looking pretty poor. Here is a quick look at the hourly chart.




Note the resistance line at 1025 that needs to be broke in order for a rally to continue. I watched the futures and the cash trades during the day and was amazed at how much control the sellers had at this level. Strong selling thrusts every time the index rose to 1025. Look now at the RSI and stochs - way over bought. Also, we see another negative divergence in the Advance-Decline issues during the final hours of the day. Finally, another gap between 1016 and 1018. Very funny indeed. We know what happened with this gap last time - like a black hole it will suck the price action back in due time.

The US equities markets are looking a bit sickly right now - and perhaps too tired to even attempt a run at 1039. I think we should start to roll. But it is important to contemplate matters carefully. First, why is the dollar falling? Second, why is Gold rising? Finally, what does this mean for the US equity markets?

I have my opinions. First, I would like to note that Gold started its run before the big drop in the dollar today. So it is hard for me to accept an argument that Gold is up because the dollar is down. On the contrary, I think the dollar is down because Gold is up after breaking a major resistance level. Next, Gold has been rising independently of US equities. This suggests that participants feel more comfortable with the near term performance of Gold over the equities or the dollar. I do not think this has anything to do with inflation just yet. I think this is 100% fear based flight to safety. Fear of something that we just don't see yet. However, I am becoming more confident that it will involve a fairly significant market correction.

Love to hear some thoughts on that subject.

All the best!

Quick Thoughts on Market Strength...

For those of you who follow this blog, I tend to rely heavily and past price action as a predictor of future trends, support and resistance. In some senses, I am a purist - almost as detached as the "point and figure" advocates out there - who completely discount time and volume in trend analysis. After all, if the market is truly efficient, volume and time are as irrelevant as sentiment and P/E ratios.

I choose to start with very fundamental analysis of price levels AND add time to the mix. Volume is important for me only when it is significantly less than or greater than the average OR when volume diverges from price movement. For example, if I see S&P futures price is rising into a flat bollinger band on decreasing volume - I'll sell contracts looking for a reversal or at least a retracement to the normal line. But that is pretty tactical.

I do like to supplement my fundamental analysis of price trends with key technical studies. During a topping process - I seek confirmation of my thesis through key divergences. One that I like to rely on is the Advance/Decline ratio. Look it up to get more details on this indicator and how it can be used to guage market strength. In a nutshell, the ratio is calculated by dividing the number of shares advanced by the number of shares declined in a day. Plotting the ration across time below price action gives you a better appreciation for the strength of a market. Though it is an oscillator primarily used as a "signal" - it can also be analyzed with trends and levels - just like price action. Therefor, if we see a divergence - meaning a decrease in the ratio while the price is rising - we should be concerned. A decreasing ratio during increasing price suggests that the price is rising based on the action of fewer shares than the broad market. Alone this may not be important, analyzed within the context of the broader market developments it may be very significant.

Take a look at what I see on the daily chart:



Why is the ratio decreasing over this last rally?

Though a negative divergence between market breadth and price action is not a requirement for a major reversal, it has been the most successful method during the past 50 years for warning of a market top.

Something to think about...

No Guts - No Glory

Today was a great day. A light volume rally that allowed me to place a full short position - twice! As planned, I shorted the bottom of the gap (1016) heavily - first at around 1:30 (did the same with the DOW) and covered with a trailing stop during the ensuing pullback. The size of my position enabled a nice profit. I was pleased to see the end of day rally and did not hesitate to re-apply the full short position again at the close.

Too often, we watch each tick of the day (or night for futures traders out there) and question the rationale of our setups. Each tick in the opposite direction is torture and it becomes impossible to remain rational. For this reason, I stayed far away from my desk this morning and most of the afternoon. Why bother watching? I knew from analysis earlier in the week that we were headed up today - I did not have to witness the action. I knew based on analysis and historical statistics, that the gains today would peak in the afternoon. When I finally looked at the market, and saw it all came together as anticipated, I allowed my gut to take over and trade.

Gut is not emotion. Gut is a core combination of intelligence and instinct - it is a sudden overwhelming awareness of opportunity. Something that you must learn to trust and follow. If you hesitate, you will lose.

David Einhorn of Greenlight Capital manages a fund of about $6 billion. In a letter that he sent to his investors 3 weeks ago, he said that the fund has sold almost all equities into this rally and has virtually no long position. Further, they have purchased a fairly substantial S&P Puts position, believing that the summer rally has built in an assumption of a very strong recovery (approximately 25% of the fund is now in SPY Puts). Their sizable investment in physical gold reflects their concern that this assumption may be faulty and premature. David Einhorn is showing his guts in a very big play.

Guts - the ability to act on instinct based on intelligence...

On the monthly chart, the S&P has retraced 38% of the decline from the high.



We are up against the 200 period MA and the 20 period MA is coming at us like a hammer. Historically, reversals at the 38% retracement level are the most brutal - especially when contact with MAs and trend lines are involved - and often these reversals lead to new lows (or highs) in the primary trend. Remember, the primary trend right now is down, the secondary trend is the recent bear market rally. Everything else along the way are short term swings...

If you are short - stay calm and try not to get squeezed - however, there is no shame in taking down your positions and waiting for a confirmed correction. Nobody calls a top perfectly, nobody calls a bottom. Better to be late to the start and early at the finish with all the profit in between!

Have a nice weekend!

Keeping it Simple

Last night I did very little technical analysis. Mostly because I was busy setting up and testing my futures desk in simulation mode. (Amazing how easy it is to make money in simulation mode!) Another reason is that the analysis is not required at this point. There is no need to over analyze the situation at hand. We are in a downtrend, in September, with a bunch of technical indicators pointing to a correction. I am short the market and plan to remain short through the correction.

For those who "need" the technical data, I encourage you to look at the daily for both the S&P and the DOW. Start with the S&P.



Search for any period in the last 2 years where we had the 20 day (pink) trading on top of the 50 day (blue) trading on top of the 200 day (white). Did you find it? There you go, October 2008. In fact, that was the very last high set by the market. Now, study the distance between the 20 day and the 200 day in that period. What did we see? About 7% spread at the most. Well, today we sit with almost TWICE the spread near 13%. You can do the same with the chart of the DOW.

Now, take a look at the daily for the last 100 days again - focusing on the period starting June 11 and ending with a local bottom in July.




I posted on HMS board that the last time we printed a daily stick entirely below the 20 day moving average, it was a doji at the bottom of a topping process. The very next day we were up, followed by another small positive session and then the correction continued. Ultimately we corrected 10% from the high. We are doing the same exact thing right now.

Anyway, now is NOT the time to look at the 5 minute, 15 minute, or even the hourly charts. Now is the time to patiently wait the swing down to the 980 level, then the 960 level, and we'll see from there - ALL ON THE DAILY CHART.

Keep it simple and be calm - this is not a market collapse, it is a natural correction that is necessary if the Bull wants to keep charging in 2010.

Good luck!

Down Sharply - 8 Billion Shares Traded...

Well, I don't think anyone is surprised today. We all know that the market needs a little rest and consolidation. As a result, we see a little more than 2% correction off the top on 8 billion shares traded (NYSE). OK, where to now?

To answer that question, we first step back and up to a higher level. Let's look at a weekly chart and see if there is anything interesting/telling:



The important features on this chart are the 200,50, and 20 period MAs as well as two fib grids that I placed from the last two peaks on the left side of the March 6th low. At the highest level, we remain below the 200 period MA which indicates that over this time period, we are still in bear market territory. (Please don't argue with me on this, the rule is what it is!).

Next, though we recently crossed the 50 period MA, we started to get away too quickly it seems. The MA is headed south-east, price action is heading north-east (almost perpendicular), bouncing along the 20 period MA to boot. It is reasonable to expect direction of the price action to align more with the direction of the 50 period MA at some point. Of course, that will happen if we continue with this rally - but that would take quite some time (price action changes direction more easily than MAs), and it would probably require the price action to reach to the 200 period MA in the process. That looks pretty close to a 100% retracement of the Aug-08 high of 1318. Possible, but probably not in the coming weeks. A more likely near term scenario is that price action will turn and align with the direction of the 50 period MA. This will likely involve contact with the 20 period MA.

Now that is the key event in my mind. What will happen at the intersection of the price action and the 20 period MA. If we come in too steep, we'll pierce sharply and we could be in for a nasty decline. If we glide in more gradually (soft correction advocates will push this scenario) we may get a nice bounce, as we saw when this happened in June-July. The June-July correction took place over a 4 week period. Perhaps we can expect the same action in September. If we extend this corrective/consolidation process for the next 4 weeks, it seems to me that we could expect convergence with the 20 period MA at around 960. Do you see that?

OK, let's get out of the weekly view and open the daily for the last 100 days.



First, check out the congestion free zones between the current price and the retracement level around 975-980. Next notice that there is little congestion between the 975 retracement level and the 960 level. Seems to jive with the weekly scenario, and considering that 960 is the top of the previous trading range, I think it is a reasonable target.

Having said all of that, I would not be surprised if we see volatile price movement up and down through out this correction. The volatility first ensures that the big boys create as much carnage and suck up as much money as possible. There are a lot of day trading heroes out there ready to slaughter. Beyond that, price movement through this upper range is the only way to ensure a strong support base for any further rally.

Finally, my 60 minute chart shows the breakdown below the gap from 1018 to 1016 - followed by confirmation after breaking the down trend line of the failed flag.




The chart also indicates soft support below 998. This is my main short trigger level and I will carefully monitor other shorting opportunities on all pullbacks. The first goal is profit on the swing to 978 - if it comes!

PS-> Notice how well the hourly chart predicted the price capture at the 1004-998 level. That is what I call a "price gravity band". Also, I spoke yesterday about how important the top and bottom trend lines of the flag were. You can see today that both played and if you decided to short off the rejection from the top trend line - you did very well!

Good luck out there!