Next 5 Sessions are Key

So we survived the week, ending with the markets finally a bit exhausted from the JPM/Intel mania (both stocks down substantially by the way). This pause allows us to examine the trend, patterns and levels so as to make smart trading decisions going forward.

I start with the daily bar chart for the last 100 days. Though I use the line chart format for most of my longer term studies, 100 days is short enough that I can get some meaningful noise from the candlesticks.



The single most important feature of the chart is the red price channel that has been in place for many months. We had only one break, which was a downside move in July that brought a break of the 200p MA. We rebounded and fell right back into the channel. That is a cool feature of channels. For this reason, never abandon them on your charts - even if you think price action has left the channel. It may come back.

Channels are very dependable until they break. Sounds like a silly statement, but it works. Right now we are right at the top line. Unless we rally out of bounds, we'll likely do the same thank we have done in the past. That is, we'll see a rejection after perhaps 3-5 days of volatility along the line. If we reverse direction, we'll most certainly find our way to the bottom trend line. I have labeled this area the "Target Zone". With this in mind, shorting the 1090 down to the 1060-40 area is a good play. If we break down below the bottom trend line, we could see another retrace to the 200pMA at my target of 920.

The next chart is the 20 day hourly bar chart. I use this chart to confirm what I see on the daily.



The most important features of this chart are the yellow channel lines from our last pullback, the red rising wedge of the last rally leg, the "Last Rally Leg" fib grid, and the last three EWT waves labeled 1,2, and 3. (The EWTs are labeled at their approximate 50% level).

At the highest level, after breaking out of the down trend in Oct 5th, we entered into a rising wedge - riding up the 20p MA with no touches of the 50pMA. That is pretty darn bullish. The up leg consists of three EWTs - the third of which demonstrated the weakest of exhaustion waves (they got progressively weaker from the start). Once the third EWT exhausted, significant selling pressure forced price action directly to the bottom trend line of the wedge - breaking it and remaining under ever since. This is bearish.

The support found at 1081 is from the 50% retracement of the third EWT. We bounced from there and showed strength which was sold into at the close. This can be seen in the grave stone doji that printed in the final hour. This is a bearish warning. The open on Monday will be key. If we continue down, we will see a retest of 1081 and an attack on the 50p MA at 1078ish. It is very likely that we will see this attack as part of a broader retracement to the 38% level of the Last Rally Leg. This is at 1067. Further, a healthy rally can, and often will, pull back to the 50% retracement level before resuming the up trend. For this reason, I label it the "Likely Retracement" - which is at 1058-60.

The DAILY shows the bottom trend line at 040-060 and the HOURLY confirms at 058-060 with the 50% retracement of this last rally leg. This makes 1060 a good target with 050 a more aggressive outlook.

IF we break support at 1050, be prepared for the possibility of re-entering the down trend channel of our last pullback.

Note that I can make a case that this last rally leg is not yet finished. Arguably, we are in the 4th wave of 5 in an EWT that started at the base of this rally leg. This can be seen on the hourly chart. Minor EWT at 1 is Major EWT phase 1. The exhaustion of minor EWT1 is Major EWT phase 3. Use minor wave 2 and minor wave 3 to complete Major wave 3. Exhaustion today was Major wave 4 - now we get an explosion to 1120 to exhaust the Major EWT that makes up the Latest Rally Leg.

Think of your trading moves for either case...

Good luck out there...