If you have not read my prior post regarding the topping process, please do as it is relevant to the analysis on the hourly chart - which I will present now. Open the 20 day hourly:
The key features of the chart are the obvious and sharp down channel that is bound by the yellow upper and lower trend line. Take a moment to appreciate how "sudden" and "violent" price movement is during down trends. Compare that with the other side of the mountain where up rallies are more prolonged and incremental. This means that major distribution is taking place and it is being controlled in a range of about 30 points. That is wide and presents a great profit opportunity for smart traders. The rule is to trade the channel until it breaks.
Also note that I have placed red resistance lines at four levels. These resistance levels have been chosen bases on the price action in both prior up legs and in the recent down legs. Any support shelf created in the uptrend becomes a resistance in counter rally efforts of the down trend.
If my H&S topping theory is correct, we must see a counter rally at some point soon. If we rely solely on the hourly chart, the logical point for a counter rally start is around the lower trend line of our down channel. That is at point A in my chart. This is somewhere near the 1020 area. It can be several points below or several points above. The key is to look for a bottoming process early Monday. Once we see a reversal forming - which will include a new bottom followed by the first retest failure, you can expect buyers to step in. These buyers will likely be the swing traders looking for the channel move to B.
I have circled and labeled B on the chart should play somewhere in the 1050-056 range. We need to watch for a break of the upper trend line - which must happen with a CLOSE above the line and a follow-through the next day. If this happens, we are set for the creation of the right shoulder in my H&S pattern (discussed in prior post).
The targets for the the right shoulder top are labeled C, D and E. A break of E would be bad in my estimation and could very well signal the end of this correction. C is a very likely target and I would seek exhaustion and reversal somewhere around D as anyone who gambled at the top (1080 and above) and did not exit will do so at the first signs of distribution. From there we can expect to see the second major push down and a possible breakdown at the neckline (which will be the lowest price set on Monday).
How do we play this possible setup?
1. The short play assumes that there will be a final down move towards the bottom trend line at A near 1020ish. The opening on Monday is critical to this setup. If we open up and rise to 1040, this may be a great short entry point with a stop just above 1042. From 1042 and above there is some congestion which should either forcefully reject price action or slow the rise. If it slows the rise only, get out. Other wise, ride the push down to a test of Friday's low around 1031 and be quick to asses a bottom possibility. This alone is a 9 point move with a 2 point risk. If we see a break of the low expect a test of the bottom trend line.
2. If we open and break out above 1042, I would expect price action to rise first to and slightly above the 20p MA on the 60 minute chart. That will likely be around 1050ish. If it reaches this level it will likely overshoot and be met by my first line of resistance at 1053. Here we could see some sideways movement and an eventual test of the upper trend line in the down channel. The ride up is worth about 10 points, and I would highly recommend a trailing stop loss with this move up - as I think it would be initially quick as the smart money wants in right away to catch the move. A break above this top trend line will require a bit of work and the longer it takes, the better the chance of an upside profit to the price level labeled at C. If you are smart, take the money at the trend line test and re-enter long if we break out above the line and pass a retest during a retreat. In other words sell at the line, prepare at first break, but after the first retest of the line.
My positions is a bit more complicated, as my core shorts are supported by complex option spreads, resulting in additional trading strategies to maximize my profit potential. I will go into those later today. But they are all based on the above analysis.
Once again, I did not have the benefit of watching the market action during the last several sessions. This is disturbing to me to say the least, and I can not say with confidence that these setups will play.
Good luck out there!
18 comments:
Thanks for the daily setup! I will be watching intently.
David:
If there is a true head and shoulders pattern, then in combination with the wedge pattern, it would suggest that spx at 1100 was a top in the sense of a decline past the 200d ma, even a retest of the 666 level. I guess I was looking for a simple 15% correction to the 200d ma with a further USD decline = equity rally. What do you see if there is a correction here longer term? thanks.
Bob , I will chime in , I dont think its a correction I think its a term trend change. There is a gap at 725 that I would bet gets closed before we see 15k again .
Bob/Payline,
The failure to break out above 1120 is very significant. If we are truly rejected here, I would have to conclude that the last 7 months were indeed a bear market rally and that a trip to the March low is a possibility. Very difficult to get my head around that possibility after such a historic market move - but from a technical standpoint it should be expected.
I am not ready to analyze that scenario yet - simply because I think we need to get through the topping process.
Good luck with the setups - use them with caution!
David/Payline:
RE:
"I am not ready to analyze that scenario yet - simply because I think we need to get through the topping process."
A very sensible and reasonable statement.
I am also trying to put some puzzle pieces in place. Let me ask the following and see if there is a viewpoint.
A puzzling thing is that there is some interest in the upper resistance for spx at oct 2007 + may 2008 + oct 2009. This upper resistance is still in place for djia and spx, and sort of in place for sml. But comp has exceeded it by ~10% (qqqq also) so the significance of this is upper resistance line is puzzling.
Also, a 15% decline is very easy in terms of the "bad" news. But a decline to 725 or 666 would take someting meaningfull. At this point in an orderly market, a decline of 34% would have to contend with the Bernanke put. To Marc Faber, IF the spx declines "unreasonably" in the eyes of the politicians, the treasury, and the federal reserve THEN the FED will immediately use QE to reinflate the bubble. The mega crash is coming but maybe not just yet.
With the mid term elections coming next year anything more than a "healthy" 15% correction may put Bernanke in a Pelosi head lock, and don't forget someone paid 750 million to get Obama elected so at this point I think the agenda is still in place(?)
I would be very interested in your view point(s). Thanks and sorry for the long winded question.
Thanks David for the analysis! Feels nice to read your posts again after missing them for a week :)
PS
I agree that there is a cieling at sml=345, rut=650, comp=2200, spx~1200-1250, djia~11000, and mid~750. But if the market's intent is to move higher vis-a-vie the Bernanke put, the normal process is a series of moves above the ceiling with a sharp pull back to shake the weak hands loose. Once this process is complete then move higher will progress. Of course this illusion cannot continue forever.
Hi BoB G I can only give you my view, that and 10 bucks can get you a cup of coffee at starbucks
The break in the long term line by Comp and not by DJI and SPY would simply be a break that lacked confirmation.
In the 725 , 666 or even some 400s out there . I dont look for that soon, the 2000 market top bottomed in 03 , the 29 crash bottomed in 34 , I look for a multiyear drift down , as Global Stimulus is not a long term recovery plan , and its failing will make it more difficult for the money printers politically.
In the Us case, there may be a limit to what the bond-buyers will tolerate. If you put your crazy hat on for a moment, its possible to invision much higher interest rates and deflation at the same time. HOW, the consumer buys less, ( usa- euro ) the producer ( chia-japan ect) has less of our money to buy our bonds with .( I know you can fed QE for now anyway)
With great respect to Dr Faber, the natural force is deflation , the Fed is the unnatural force of inflation,
The Fed won from 2004- 2007 and then lost,and is now winning again. Some say never bet against the Fed , My mother told be never bet against nature long term.
There could be a knife to the heart or a death of 1000 cuts .
( 2 wars , 100b $ a year heath plan , cap and trade debate , 100t
in off books liability's and medicare,11b in long term debt on short term finance. adding 2t a year to that. Pixie dust for an energy plan, Nothing close to and economic development plan )
( note Dr Faber is " ultra bearish long term " )
WOW 666 sounds optimist long term now.
Long live Capitalism.
Payline:
Yup ... :)
Do you follow Max Kieser? only sings one song but sometimes entertaining.
http://maxkeiser.com/
Bob,
The significance of the upper trend line is of course that it connects a series of lower highs since the crash. Both the DJI and SPX have demonstrated resistance at (or very near) the line, while the COMP cut through. The analysis of why is important - and keep in mind, there are no right answers to the question.
First, the COMP is considered a more volatile index - so you can expect more radical breaks and re-tests of resistance and support. It is also technology heavy, and tech tends to lead rebounds as it is first to see pick-up in the cyclical business cycle. These two factors help explain why the COMP reached (and broke) it's down trend line first in August. In Auguest, neither the DJI nor the SPX were near their down trend lines. Rather, they were just reaching their 38% retracement levels of the crash - right at the base of the vertical drop seen during October 2008. It is interesting to note that all three indexes showed hesitation at this point and many of us thought that a reversal was in play. Obviously that did not happen.
Both the DJI and SPX wanted to push ahead and "fill" the "virtual gap" from October 2008. I say virtual, because tge dramatical vertical fall behaves exactly as a price gap - in fact there are gaps in the daily action though-out that period. While the SPX and DJI filled that gap - bringing us to the most recent highs at the trend lines, what was the COMP to do? The COMP had every reason to continue its rally.
So we had a case where the indicies did not "line up" in terms of resistance.
Today on the other hand we have a case where key resistance does line up for all three indicies.
Look carefully at the COMP - it is head banging with substantion resitance caused by the consolidation bottoms in the first half of 2008. We call this "overhang" and it will weigh heavily on upward price action. Simultaneously, the SPX and DOW are head banging with their long term down trend lines. (note that price action is still well below the price consolidation is early 2008 - concern?)...
So broadly - we have a situation where all indicies have resistance, gaps have been filled, and short term MAs are way over-extended when compared to long period MAs.
At a minimum, I think the rally can survice a fair pullback of up to 10% from today's price point and start a period of consolidation between the 900-1100 range on the SPX.
Unfortunately, the DOW is lagging the SPX a bit and has some work to the downside to catch up and confirm a topping process. I would like to see a test of the 9500 area soon. If we get it, followed by the right shoulder, I think we can expect consolidation in the range of 9000-10100.
The COMP is way ahead and I think it is the first to see the low end of the consolidation range. I expect to see 1850 to 2200 over the near term.
Many folks have said it, and I agree, for us to see a full leg down and test of the March lows, something extraordinary must act as a trigger. Something that all the QE in the world will not address. Remember, the current FED policy is "the measure of last resort" and there is not much more that can be done without irreversible damage.
Now, I want to go on record - I would trade in major losses on my short positions today for a real recovery and a justified bull market. I can make money in either case.
david o, what you are saying makes sense. i bet we are down early and then we get a squeeze.
One other observation to help understand why I think the COMP leads SPX and the SPX leads the DJI. Draw a trend line against the major lows in the bear market rally for each index. The COMP shows a clear break 4 days ago with imeediate and strong confirmation. The SPX shows a break 3 days ago confirmation on Friday. The DJI shows no break - as of YET.
David:
Very, very good stuff.
David , there is one other possibility, Unlikely but possible,
An open lower and a sharp move lower with a break of the lower line to sub 1018.....
An ABC counter really off the bottom trend line is what I am expecting , just wanted to throw the other out there.
My Best
Hey Payline,
Agreed - a test of the lower trend line in the down channel right out of the gate is a real possibility. We should watch for a break of Friday's low 1034. If it happens, without a gap, I will likely short the ES with a semi-tight trailing stop. Looking at the downside breaks last week, the moves seem quick and violent. Wish I were more in tune going into the week!
We're up right now this morning, but I doubt anyone really thinks this morning's bounce is going to last through the day (?). I'll tell you that Friday did surprise me.
Check out this graph:
http://slopeofhope.typepad.com/.a/6a00e00989822288330120a6472e65970b-800wi
Just based on technicals, graphs, etc., you would expect a bounce. Per payline's EWT (which I think is garbage) it is very possible we won't get much of any bounces on the way down here.
My BS guess is that the low for this cycle is 1030 (maybe 1025) and that we hit it today! Man, who really knows?
I swear, it is almost comical. I should have gone long a bit more to take advantage of this rally. I did short at 50-52 and now I am out. Doesn't make up for Friday.
thanks for the info david.. finally made some $$ back from a horrendous week last week - still down but clawing back up.. looking forward to your thoughts going into tommorrow..
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