I started the day creating some charts. I like to do this during the opening while the cash markets catch-up with the futures markets. NOTE: these first two charts do not feature today's price action - they were created in the morning. I decided to start with the weekly closing chart:
I like how the H&S pattern is taking shape on the weekly. Notice how it s forming nicely under the top trend line? Many folks have cited that the last attempt at a H&S pattern in June/July failed - and feel the same is going to happen now. Perhaps, but I never viewed the June/July topping formation as a H&S. For one thing, the neckline gave way before the right should had a chance to firm. Also, there was no significant resistance sitting on the top. Compare that with our current situation. We have a much better neckline, our top is right around the descending top trend line, and we seem to be bouncing along the 38% retracement level. As we move to the right, the trend line puts pressure on price action and the bottom trend line in the down channel falls deeper away. The longer it takes - the greater the downside potential. I also think it is time to close below the 20p MA and perhaps get a test of that 50p MA - don't you think? Looking at the weekly chart, I see a real possibility for several months of consolidation in the 800-1100 range...
The daily closing line chart was next on my list. Again, this chart was created in the morning, so no price action for the day. Funny enough, my drawing shows what I thought would happen - and it played fairly well!
First, note the up channel which we broke last week. Also note the two fib grids that I placed on the chart. One grid (right) stretches from the base of our last rally leg to the high. The second (left) stretches from the base of the prior rally leg to the high. This last rally leg is as good as gone - it will retrace 100%. When it does, we'll be sitting at about the 62% retrace of the rally from the prior leg base. Funny enough that coincides with the neckline of our expected H&S pattern. Generally speaking, rallies that retrace 62% retrace fully. Generally, H&S tops have a greater chance of reversal than continuation. When you have more than one technical indicator pointing to the same conclusion, chances are good that the conclusion is likely - still not a guarantee.
The following chart was prepared at the end of the day and I think it is beautiful. It is the 3 minute for 3 days. (Yes I look at all time frames and all intervals all the time - it is a sickness). Open the chart:
What have we here? A rising wedge! What is good for the goose is good for the gander. If this plays out as I expect, the wedge will break in the next session, or two, or three - and we will get the back side of the right shoulder that I have been visualizing for some time. I did highlight one artifact on the chart - that is the FOMC rip. Boy did a lot of traders get crushed with that action. I think the most important thing to recognize is that someone sold the news. This is distribution folks and I expect much more to come.
I suggest everyone check out this prior blog post I made to see where I think things are headed...
Cheers
20 comments:
a lot of good info... thanks.. you don't have to answer today's play but would be grateful to your insight.. what i did was to wait until s&p broke out of the top red channel band on decent volume which it did at around 10:36 and that's when i got in ~1063 and got out ~1066.. am curious to know what your entry/exit points were.. maybe there is a 'trader unwritten rule' not to ask about things like that but i'm really trying to get more disciplined as i shoot from the hip a lot of times and takes a while to get me out of some deep holes (i was tempted to hold overnight but sold off at the last minute - i vowed never to hold over night after some fas/faz nasty gap downs).. anyway thanks and i'm learning a lot from your analysis.. all the best..
i did see an earlier break at ~10:00 but didn't go in as it retreated..
What did you mean about this Head and Shoulder failing the same as July?
Hi Devon,
Most of my intraday trading is with the ES contract. For that reason I do not track exact entry and exit points. Rather, I correlate the charts on the futures with the charts of the Index to make quick timing decisions. For example, today we saw two important tests - one at the widened down channel top trend line (which you saw the retest and bounce) the other at the base of the congestion band that begins near 060 (where we saw two mild rejections before moving slowly up through the close). Both of these setups played well and I was able to catch several points on each. I don't get into the posting of exact trades -simple because I am a visual active trader who uses one thing as a guide - that is the session profit number. On futures platforms this number is LARGE and dynamically updated each tick (based on all of your positions in all contracts). When I have caught enough of the move OR achieved my target profit for the day - I exit my positions. This is very different than trading my cash equities - where entry and exit points are monitored more precisely. Hope that makes some sense.
Hi Nicasurfer,
Back in June/July (about midway through this rally) we started to see some consolidation and there was a bit of buzz around the net about a topping process. Some folks were calling for a H&S pattern - left shoulder formed in May, head in June, expectation of right shoulder in July. This of course failed - as we went ahead with a very strong rally leg - leaving many of the short participants burned. I have read comments on various boards about this H&S formation failing. I simply wanted to point out some differences between the two charts. Hope that helps.
As for tomorrow - we remain in the up channel, but the wedge is building. Let's watch to see if it rounds out and breaks to the down side. Use the chart I linked to in the post to determine good support and resistance levels.
Good luck out there!
Hi David , What was coming was clear but I was deer in the headlights man today.
Stopping In your area B , at a nice 50% fib from the top , it the top left corner of the up channel touching the trend line coming down from the 21st and 23rd on the hour .
The $ looking like it coming back our way , a big rally today with
Xlf Over bought.
Think we might peak here ? at 66 or do you find 74 more likely?
Either one makes a nice shoulder does it not ?
I think I recall a failed HS on 1930 , followed months later by one that did not fail.
My Best
Hi David , I think your reply to the other folks got me taken care of .
Good luck and be careful out there .
Payline,
We are close to a top - I am thinking 073-074 as the high before the reversal - though I reserve the right to change my mind after tomorrow's session.
It is hard to trust analysis - sometimes, when I feel I am not handling price action well, I step back to a higher time frame and trade those setups - avoiding some of the viscious volatility.
Good luck tomorrow! (I'm out of the market for the balance of the week).
hello again david...thanks a lot for the insights.. going over today's chart i just can't believe how uncannily the top red channel line played out - it's almost like that's the line the 'major' traders were using to drive the market - the retest at noon hovered exactly at that line until it moved higher.. it seems that TA may be a self-fulfilling prophecy.. so as the green up channel goes seems like we're in for some resolution the next few trading days.. the train seems to be headed toward a brick wall @~1080 next monday or tuesday.. that'll be where the major battle is it seems - unless we're headed south before then..
David:
Like you said it is the combination of indicators that is key. For several weeks I have been looking at the three year chart of the SPX daily price action; the upper resistance trend line (oct '07 to oct '09), the rock solid rising wedge pattern (nov '08 to oct '09), and the formal two month topping process. The combination of these patterns makes me conclude that a considerable effort has gone into this process and that it is nontrivial.
From spx 1100 to 950 is -13.6%. I cannot conclude that the people that engineered this event will be satisified with a -13.6% move even though it should be fairly quick. Similary, past experence tells me the patterns are simply too compeling and significant too suggest that -13.6% will be sufficant.
Very puzzling given the political aspect.
I must conclude that this will be another down leg in the overall process. If it were to hold the 950 level and try to rally, there would be considerable recent overhang and the multiyear down trend to contend with, almost immediatly. The bears would be in full color. Could it be so simple as to the crush the shorts and push through the down trend line? That doesn't make sence, COMP would almost immediatly have to contend with 2200 (but possible?). COMP 2200 to me is significant because it represents people's 401k accounts. These are people that send there kids to college and so on. Like you noted the move down from spx 1200 was so fast that to fill the 'gap' didn't meet that much resistance. But a meaningful up leg from spx 950, as well as the other indicies, would start to take a real effort, it isn't a simple matter of squeezing the shorts over and over.
Very puzzling, well I went 50% short at spx 1075 and today I increased to 100% short at spx 1060. Initially I planned to cover at the 200d ma. But now I am thinking to hold for something lower.
Sorry for part II of the novel, but I am trying to look six months down the road.
Can you offer any insight? Thanks.
KPH:
If you are invited to the xtrends private club, can you give any hints as to sol's position? thanks
Payline:
We are doomed! CNBC sez there is a head and shoulder pattern forming but that it is all mumbo jumbo TA, they are even taking a popularity poll!
http://www.cnbc.com/id/33696174
David,
Thanks for keeping this blog! You have great insight into the world of analysis. I always look foward to the end of the day to read your comments on the market..thanks again.
Bob G, that is $300 a month as far as I know, and I don't know them. Atilla was saying he thought we would hit as high as 70 before heading back down until next spring.
KPH
looking for opinions on the best way in the equity market to track oil? i used to buy DXO for upside and DTO for down side. with the demise of DXO i haven't found a product that truly tracks the oil futures? is UCO my best bet or is there a better product out there. thanks in advance.
lbowa
Could have done better today (didn't take enough profits after the morning selloff), but did OK. Hope everyone here did fine.
Ibowa, short something like USO, especially if USO bleeds over time due to contango.
(Why didn't I just cover my short at 11? I covered some, but still...) All in all, not a bad week, although I am still down a bit from one point last week. More upside next week possible. Much depends on the financials. We'll see if I can make money on every trade next week. (I took some small profits this week -g-. From here on out, the smarter strategy is likely to short the top of the channel? I will have to think this out.)
KPH
BOB G Thanks for the link
Greg Troccoli is a good TA guy, a not typical cnbc lakie, yes the word is out , but a blind man could see the making a SHS top here. But also note this is the 3rd time seance Aug, that we started SHS, that right shoulder has been elusive
I will feel pretty good when it rolls over and forms. and falls under 1025.
Payline:
I agree with you, it will be a good feeling if we see SPX under 1025.
DJIA is stubborn, it still has not broken the wedge. The wedge lower support will be at 10000 at the end of the month!
David:
Any thoughts on the DJIA. Seems to be w/i the wedge. Also, is being helped higher by the 25d SMA.
RUT looks quite bearish, so far.
Bog G, we may go nifty fifty. People would love that.
KPH
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