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! = $BIG MONEY$