Good luck!
Tuesday, December 29, 2009
What an Opportunity...
We all know what happens to rising wedges that build with low volume. They collapse. Just look at this daily chart for the March ES. I highlighted the volume for the last seven sessions. This classic pattern that is fairly reliable.
Good luck!
Good luck!
Monday, December 28, 2009
Let the games begin...
We are at the end of the year. S&P has pushed to it's 2009 highs - trading at 1127 as I post - yet, we all know that this amazing 9 month rally is changing. It is tired - running on fumes and built on low volume. The fundamentals are not in place, the government is now faced with a tremendous debt burden and has much more to finance going forward. For those of you who have not read the news this morning, a very important signal has been sent to the market by El-Erian - get out of equities.
El-Erian of Pimco
Having placed my short equity bets early, I have an especially difficult challenge. My first target for the S&P is around 960 followed by 880. My average short position is slightly above 1000. The risk reward profile of this setup is a horrible and in retrospect, I should have abandoned the position three throw backs ago. The question now is how to maximize profits as this corrects. The answer is leverage and the solution is the ES. I will be matching 1 ES contract to every 500 shares of SPY in an effort to compound my gains and/or mitigate loss. This is a dangerous solution as it involves leverage.
I will be trading in a 20 point range based on a core short position, scalping to keep in the money when needed. I have been using this technique for the last 10 sessions and I have managed to build my core short position at 112250 - with no losses recorded. This is important as I opened my core position much earlier at a much lower level and have scalped to effectively raise my entry more than 15 points.
Though I could have waited until the first week of January to enter this position - avoiding some of the hard work scalping - who is to say that a sell-off is not in the cards before Jan. 1? The technicals sure suggest it is possible.
The fact of the matter is that calling a top or bottom is a losing game. You can wait and miss it. You can jump all in too soon and lose it all. To succeed in a trade such as this, you need to anticipate change and scale into play - fighting as hard as you can against the tide to be in position when it moves your way. That is where I am right now - and it is where I trade my best.
So, let the market drift higher on low volume as the VIX starts to perc. I'm trading in lock step, building substantial potential energy in my positions. This will break soon and I will profit from the big move soon enough. Bring it on baby!
Good luck out there...
El-Erian of Pimco
Having placed my short equity bets early, I have an especially difficult challenge. My first target for the S&P is around 960 followed by 880. My average short position is slightly above 1000. The risk reward profile of this setup is a horrible and in retrospect, I should have abandoned the position three throw backs ago. The question now is how to maximize profits as this corrects. The answer is leverage and the solution is the ES. I will be matching 1 ES contract to every 500 shares of SPY in an effort to compound my gains and/or mitigate loss. This is a dangerous solution as it involves leverage.
I will be trading in a 20 point range based on a core short position, scalping to keep in the money when needed. I have been using this technique for the last 10 sessions and I have managed to build my core short position at 112250 - with no losses recorded. This is important as I opened my core position much earlier at a much lower level and have scalped to effectively raise my entry more than 15 points.
Though I could have waited until the first week of January to enter this position - avoiding some of the hard work scalping - who is to say that a sell-off is not in the cards before Jan. 1? The technicals sure suggest it is possible.
The fact of the matter is that calling a top or bottom is a losing game. You can wait and miss it. You can jump all in too soon and lose it all. To succeed in a trade such as this, you need to anticipate change and scale into play - fighting as hard as you can against the tide to be in position when it moves your way. That is where I am right now - and it is where I trade my best.
So, let the market drift higher on low volume as the VIX starts to perc. I'm trading in lock step, building substantial potential energy in my positions. This will break soon and I will profit from the big move soon enough. Bring it on baby!
Good luck out there...
Wednesday, December 23, 2009
Stick to the Swing Trade...
I hope everyone is ready for the holidays. Despite the terrible end of year performace of my accounts, I am very content and looking forward to the food, wine and company of my family. I am also comfortable with my positions - though I am getting a bit sick and tired of waiting for a correction. Seems like the administration, through the FED and media, will do everything necessary to promote the equities markets and spin the economic realities into fantasy. Eventually, things to square away - but it is disturbing for a technical analyst to trade in this environment.
Open the 60 minute candlestick chart of the March ES futures contract.
As you know, I maintain a small short position which (through quick scalping) remains about flat as of this posting. It seems obvious to me that we are at the top of a channel and about to head south. I see only two levels of support standing in the way of a trip down to 094. Those are about 111150 and 110275.
I note that we missed the top this morning following the consumer spending news. I suppose the gross miss on the GDP also contributed to a tame X-Mas rally. The technicals reflect that this puppy is puffed and ready for a throwback.
The rising pattern is very, very weak - completely unstructures and has a volatility diamond dead center. The RSI is clearly diverging over the last three peaks and the volume is rolling opposite to the price (meaning as the price declined volume increased and while price rose volume declined). These are signals to reduce long and shift short.
Let's see what happens today. Barring a breakout to the topside, I will ride my current swing to 094 - but due to the holidays, I will not add to my short position. I simply do not want to carry any stress into the weekend.
Good luck out there and Happy Holidays!
Open the 60 minute candlestick chart of the March ES futures contract.
As you know, I maintain a small short position which (through quick scalping) remains about flat as of this posting. It seems obvious to me that we are at the top of a channel and about to head south. I see only two levels of support standing in the way of a trip down to 094. Those are about 111150 and 110275.
I note that we missed the top this morning following the consumer spending news. I suppose the gross miss on the GDP also contributed to a tame X-Mas rally. The technicals reflect that this puppy is puffed and ready for a throwback.
The rising pattern is very, very weak - completely unstructures and has a volatility diamond dead center. The RSI is clearly diverging over the last three peaks and the volume is rolling opposite to the price (meaning as the price declined volume increased and while price rose volume declined). These are signals to reduce long and shift short.
Let's see what happens today. Barring a breakout to the topside, I will ride my current swing to 094 - but due to the holidays, I will not add to my short position. I simply do not want to carry any stress into the weekend.
Good luck out there and Happy Holidays!
Monday, December 21, 2009
Swing Trade...
X-Mas rally? What a funny thought. Amazing to me that this dominated the headlines - as if it has any merit. They say 12 of the last 15 years we rallied into the New Year. The logic is that "odds favor a rally". Funny as heck. In fact, I once flipped a coin 10 times to humor myself. It turned heads 7 times out of the 10. I guess that means that odds favor heads in that game.
Anyway, here is a very simple closing line chart for the last 30 days of the S&P. One rule comes to mind - trade a channel until it breaks.
I opened a short line on the ES - one (1) contract - just as a humorous test to see if we stay in the channel and extend back down the range. I am in at 1108.25. I have an OCO (order cancels order) trade in play with my stop loss at 1112 and my target at 1094. This is about a 4 point risk for about a 14 point gain. The risk-reward profile fits - let's see if the range from the last 30 days stays in tact.
Ho, Ho, Ho...
Anyway, here is a very simple closing line chart for the last 30 days of the S&P. One rule comes to mind - trade a channel until it breaks.
I opened a short line on the ES - one (1) contract - just as a humorous test to see if we stay in the channel and extend back down the range. I am in at 1108.25. I have an OCO (order cancels order) trade in play with my stop loss at 1112 and my target at 1094. This is about a 4 point risk for about a 14 point gain. The risk-reward profile fits - let's see if the range from the last 30 days stays in tact.
Ho, Ho, Ho...
Sunday, December 20, 2009
Quick Post on VIX
I was curious to see the latest with the VIX. The VIX as you know is a measurement in the volatility of the S&P options. It is really a measure of sentiment and a rise in the VIX usually accompanies declines in the SPX. The VIX reaches it's lowest levels when participants become complacent - our confident in their positions. Many folks put a lot of stock in this reading as a contrarian indicator - meaning if the VIX is at it's lowest levels, we should not be surprised by a down move in the index.
This is really an over simplification and I think a bit dangerous. The reality is that folks rush to options to protect and/or profit from sudden market moves. The VIX measures sentimental reactions to market moves - it is really not a leading indicator. Having said that, we should always keep an eye on the VIX and see what it can tell us.
The chart I put up with this post maps the VIX and the SPX over the past 120 days.
The VIX is the line chart (based on closing values) and the candlestick chart is the SPX. The 200d SMA for the VIX is in white and the 10d SMA is in red (bounded by a 10 period bollinger band). I have added very basic trend lines for both instruments.
Looking at the SPX bottom trend line, we see that the VIX shows a reaction high at each of the related reaction lows of the SPX. This is to be expected - however notice how the spike in the VIX in each reaction high is INCREASING. This indicates that the level of anxiousness with each SPX throwback is increasing. In fact, if you look at the last 20 days or so, you will see that even though we are near our lowest levels on the VIX, the bottom levels of the VIX are also RISING.
If we were to follow the VIX top trend line we can expect a MAJOR spike in the VIX very soon - to levels above 30 - which is a 50% increase from where we are today. A spike in the VIX of 50% would imply about a 10% throwback in the SPX. (You can do the extrapolation from the prior three VIX spikes and SPX reaction lows).
This simple calculation seems to jive with many of the other observations and levels that I have calculated in recent weeks. I may consider playing the VIX along with my short positions. This quiet period may be the best time to take a position.
Enjoy!
This is really an over simplification and I think a bit dangerous. The reality is that folks rush to options to protect and/or profit from sudden market moves. The VIX measures sentimental reactions to market moves - it is really not a leading indicator. Having said that, we should always keep an eye on the VIX and see what it can tell us.
The chart I put up with this post maps the VIX and the SPX over the past 120 days.
The VIX is the line chart (based on closing values) and the candlestick chart is the SPX. The 200d SMA for the VIX is in white and the 10d SMA is in red (bounded by a 10 period bollinger band). I have added very basic trend lines for both instruments.
Looking at the SPX bottom trend line, we see that the VIX shows a reaction high at each of the related reaction lows of the SPX. This is to be expected - however notice how the spike in the VIX in each reaction high is INCREASING. This indicates that the level of anxiousness with each SPX throwback is increasing. In fact, if you look at the last 20 days or so, you will see that even though we are near our lowest levels on the VIX, the bottom levels of the VIX are also RISING.
If we were to follow the VIX top trend line we can expect a MAJOR spike in the VIX very soon - to levels above 30 - which is a 50% increase from where we are today. A spike in the VIX of 50% would imply about a 10% throwback in the SPX. (You can do the extrapolation from the prior three VIX spikes and SPX reaction lows).
This simple calculation seems to jive with many of the other observations and levels that I have calculated in recent weeks. I may consider playing the VIX along with my short positions. This quiet period may be the best time to take a position.
Enjoy!
Saturday, December 19, 2009
Holding Pattern or Clever Distribution?
Though I have not been posting, I have been trading lightly in the range. All of my core short equity positions remain in tact and I have been range trading the ES with steady success. The holiday season gives us all a good reason to proceed lightly and with less stress. I like to take this time to enjoy what we have - which is family, friends, and good wine.
At the same time, I keep an eye on the broader market to make sure it doesn't drift too far from it's current holding pattern. The market is behaving like drivers in a NASCAR race during the lap after an accident. Weaving side to side, but no major moves allowed. At some point, the pacer is going to leave the track and all hell will break loose!
I actually think some of the big boys are cheating a bit. Most of the real action has been on the sell side. I see no conviction to support a break-out to the top side. The momentum has consistantly faded at the reaction highs and the relentless push higher just isn't there anymore. Add to this that the most optimistic of fund managers are calling for a 10% gain in the S&P in 2010. The risk is much lower today for shorts than it has ever been during this rally.
Looking again at the hourly candlestick chart for the S&P - we see our all too familiar trading range.
I have made some very minor adjustments to the top and bottom horizontal trend lines. The levels have been adjusted to the most recent intraday high and low respectively. These values are 1116 and 1089 respectively. I did this because these levels are breakout targets. I expect that when we break from this rectangle, we will gap (up or down) through these levels. These extreme range levels are the last points of resistance and support - therefore they do not help us during intraday action.
For this reason, I have added two more trend lines on top and bottom. (Note color coordination GREEN on top RED on bottom). These trend lines reveal inner triangles that are forming more aggressively within the broader rectangle. Eack trend line servers as an early warning for a potential breakout. If price is going to break out to either side, it must first break out of the inner most triangle then the outer most triangle. It is relatively early in these formations, so as time moves on and price action becomes more constricted, these lines will validate themselves.
So, we closed pretty darn close to the center of the broad range. Where are we headed? Let's try the bull case:
1. We are headed higher because we have bounced off the bottom trend line of the inner-most triangle.
2. We are headed higher because we saw price reversal occur as the 20p MA dropped down through the 50pMA.
3. We are headed higher because price action is about to break up through the 20pMA.
4. We are headed upwards because we successfully penetrated the 38% retrace level of the last down thrust.
5. We are headed upwards because the RSI showed a slight divergence as price action reached the floor.
6. We are headed upwards because there is a gap to fill from 12/16.
Let's explore the bear case:
1. We are headed lower because though price action rebounded at the end of the session, it failed to break out above the the three bar range following the gap down. (This range is surrounded in a box on the chart). This failure statistically suggests a continuation in the direction of the gap - which is down.
2. We are headed down because price action did penetrate the bottom of the three bar range twice during the day and statistics suggest that further declines are likely.
3. Though we bounced off of the bottom trend line of the inner most triangle, this triangle has not yet officially formed and therefore is only a possible support/resistance boundary. The rectangle has been predictable for almost 20 sessions and a test of the lower rectangle boundary at 1089ish should be expected.
4. Price action has yet to recover to the 50% retracement of the latest down thrust. The 50% level is a level where price action reverses direction to follow the original trend.
5. The 50% retracement level is below the gap - which was not filled during the session. The longer it takes to fill a gap the greater the chances of the trend to continue in the direction of the gap - down. Reversal at the 50% retrace level will strengthen the gap.
6. The 20p MA is below the 50p MA and heading south into price action. This tends to put resistance on price action and can cause reversal in price direction.
7. The 50p MA is below the gap and is a natural point for price action to stall.
8. The RSI divergence, though present, is minimal and did not occur in "Over-Sold" territory. Divergence is more reliable when it occurs in over-sold or over-bought territory.
9. The run-up at the end of Friday's session was preceeded by a substantial sell impulse - which triggered momentum traders to go short. That initial impulse exhausted quickly, and as is customary at the end of a session (and end of a week) substantial short covering kicked in. This warrants caution in the closing levels - which failed to reach the HOD.
Funny enough, the analysis is a bit of a toss up. I will look to the futures on Sunday to assess reality. Generally, Mondays have been "gap-up" days so we will see.
The most important areas to watch are the 50% retrace at 1105 and the gap between 1106 and 1108. If we fail to reach and close the gap in the early session Monday - I expect price action to continue down and test the 096. Failure at 096 followed by a break of 093-094 would be a strong signal to short. If we fill the gap - I expect a test of 1110ish where we get confirmation or rejection of the inner triangle. A break out above this level would invite a test of the highs - with an increased chance of an upside breakout. (The reason being that this would be the third major test of the highs with the the latest reaction low failing to reach the bottom of the range).
One final note, though I rely on the technicals as much as possible, "feel" is also important. If "feel" does not confirm your technical analysis - apply it with caution. If it does confirm - APPLY IT WITH MORE CAUTION! For whatever reason, I feel distribution at the tops.
Enjoy the holidays folks!
At the same time, I keep an eye on the broader market to make sure it doesn't drift too far from it's current holding pattern. The market is behaving like drivers in a NASCAR race during the lap after an accident. Weaving side to side, but no major moves allowed. At some point, the pacer is going to leave the track and all hell will break loose!
I actually think some of the big boys are cheating a bit. Most of the real action has been on the sell side. I see no conviction to support a break-out to the top side. The momentum has consistantly faded at the reaction highs and the relentless push higher just isn't there anymore. Add to this that the most optimistic of fund managers are calling for a 10% gain in the S&P in 2010. The risk is much lower today for shorts than it has ever been during this rally.
Looking again at the hourly candlestick chart for the S&P - we see our all too familiar trading range.
I have made some very minor adjustments to the top and bottom horizontal trend lines. The levels have been adjusted to the most recent intraday high and low respectively. These values are 1116 and 1089 respectively. I did this because these levels are breakout targets. I expect that when we break from this rectangle, we will gap (up or down) through these levels. These extreme range levels are the last points of resistance and support - therefore they do not help us during intraday action.
For this reason, I have added two more trend lines on top and bottom. (Note color coordination GREEN on top RED on bottom). These trend lines reveal inner triangles that are forming more aggressively within the broader rectangle. Eack trend line servers as an early warning for a potential breakout. If price is going to break out to either side, it must first break out of the inner most triangle then the outer most triangle. It is relatively early in these formations, so as time moves on and price action becomes more constricted, these lines will validate themselves.
So, we closed pretty darn close to the center of the broad range. Where are we headed? Let's try the bull case:
1. We are headed higher because we have bounced off the bottom trend line of the inner-most triangle.
2. We are headed higher because we saw price reversal occur as the 20p MA dropped down through the 50pMA.
3. We are headed higher because price action is about to break up through the 20pMA.
4. We are headed upwards because we successfully penetrated the 38% retrace level of the last down thrust.
5. We are headed upwards because the RSI showed a slight divergence as price action reached the floor.
6. We are headed upwards because there is a gap to fill from 12/16.
Let's explore the bear case:
1. We are headed lower because though price action rebounded at the end of the session, it failed to break out above the the three bar range following the gap down. (This range is surrounded in a box on the chart). This failure statistically suggests a continuation in the direction of the gap - which is down.
2. We are headed down because price action did penetrate the bottom of the three bar range twice during the day and statistics suggest that further declines are likely.
3. Though we bounced off of the bottom trend line of the inner most triangle, this triangle has not yet officially formed and therefore is only a possible support/resistance boundary. The rectangle has been predictable for almost 20 sessions and a test of the lower rectangle boundary at 1089ish should be expected.
4. Price action has yet to recover to the 50% retracement of the latest down thrust. The 50% level is a level where price action reverses direction to follow the original trend.
5. The 50% retracement level is below the gap - which was not filled during the session. The longer it takes to fill a gap the greater the chances of the trend to continue in the direction of the gap - down. Reversal at the 50% retrace level will strengthen the gap.
6. The 20p MA is below the 50p MA and heading south into price action. This tends to put resistance on price action and can cause reversal in price direction.
7. The 50p MA is below the gap and is a natural point for price action to stall.
8. The RSI divergence, though present, is minimal and did not occur in "Over-Sold" territory. Divergence is more reliable when it occurs in over-sold or over-bought territory.
9. The run-up at the end of Friday's session was preceeded by a substantial sell impulse - which triggered momentum traders to go short. That initial impulse exhausted quickly, and as is customary at the end of a session (and end of a week) substantial short covering kicked in. This warrants caution in the closing levels - which failed to reach the HOD.
Funny enough, the analysis is a bit of a toss up. I will look to the futures on Sunday to assess reality. Generally, Mondays have been "gap-up" days so we will see.
The most important areas to watch are the 50% retrace at 1105 and the gap between 1106 and 1108. If we fail to reach and close the gap in the early session Monday - I expect price action to continue down and test the 096. Failure at 096 followed by a break of 093-094 would be a strong signal to short. If we fill the gap - I expect a test of 1110ish where we get confirmation or rejection of the inner triangle. A break out above this level would invite a test of the highs - with an increased chance of an upside breakout. (The reason being that this would be the third major test of the highs with the the latest reaction low failing to reach the bottom of the range).
One final note, though I rely on the technicals as much as possible, "feel" is also important. If "feel" does not confirm your technical analysis - apply it with caution. If it does confirm - APPLY IT WITH MORE CAUTION! For whatever reason, I feel distribution at the tops.
Enjoy the holidays folks!
Tuesday, December 15, 2009
Taking a Break...
I know folks have been wondering where my posts have been lately. Well, I am here and somewhat inactive. It is that time of year and I, like many others, am taking a breather from the rigors of trade. Judging from the hourly, we remain range bound as it seems and I have little confidence that the market is going to make a major move either way between now and the New Year.
All my analysis now focuses on my accounts and how to best realize gains and losses for tax purposes. I am also in the process of an "end year review" to see exactly how well (or poorly) I traded.
A much more important activity is celebrating my son's acceptance to SUNY Geneseo for the fall of 2010. Geneseo, a well kept secret, is ranked as one of the nation's top public colleges - and one of the most selective. He plans to study physics and mathematics in pursuit of a career in research and teaching. He is a bright and warm person who deserves nothing but the best. May he never be tempted to apply his analytics to the markets!
For the rest of us, let's keep an eye on that 1113 level. A break above would invite the run to 1120. Let's hope the break down below the 20p MA on the hourly leads to a more aggressive run through the 50p MA and all the way down to the final break of support at 085ish.
Good luck folks!
All my analysis now focuses on my accounts and how to best realize gains and losses for tax purposes. I am also in the process of an "end year review" to see exactly how well (or poorly) I traded.
A much more important activity is celebrating my son's acceptance to SUNY Geneseo for the fall of 2010. Geneseo, a well kept secret, is ranked as one of the nation's top public colleges - and one of the most selective. He plans to study physics and mathematics in pursuit of a career in research and teaching. He is a bright and warm person who deserves nothing but the best. May he never be tempted to apply his analytics to the markets!
For the rest of us, let's keep an eye on that 1113 level. A break above would invite the run to 1120. Let's hope the break down below the 20p MA on the hourly leads to a more aggressive run through the 50p MA and all the way down to the final break of support at 085ish.
Good luck folks!
Wednesday, December 9, 2009
Not the best second step...
So, we did not get the follow through that I was hoping for - however today's price action was very helpful in terms of the developing picture. Let me also say that I have been trading very poorly this week and have essentially "struck out" with the bases loaded these last two sessions. The sad part about it is that I had profits in both sessions, but failed to maintain discipline and gave it all back - plus the trading fees. I know that is not what you come here to read, but I had to get it off my chest. Here is the hourly candlestick chart:
So, why was today so important and clarifying. First, for those of you who doubted that we are range bound at the top - stop doubting it. On my charts, the 085ish area is the bottom of a rectangle tat we have been trading within for the last 20 sessions. We touched 086 today - which was good thing. The bad thing is that we bounced up off that level and did not follow through at the retest. So 086 became the LOD.
The 086 LOD. combined with the closing stick helped us to define a down channel on the hourly. This down channel, which is bounded by the thin pink lines (and labeled), is formed from the reaction highs and lows since December 04. We closed with a throw back from that top trend line near the 097 area. (Note I spoke of the 096 area a few posts ago - I believe it will be a pivotal point in this battle).
You may also note that the fib fan blades (resulting from a drag from 12/04 high to today's LOD) show the 50% retrace blade in almost the exact position as this top trend line. This is important as both lines serve as resistance. Ideally, we will see rejection at this point and price action will resume it's channel descent. Unfortunately, I am not so confident. You see, these trend lines and fib blades also represent points notorious for GAP UP. In fact, if you look at the ascent off the last two reaction lows of this top, you will see big GAP moves up. Those gaps happen to align pretty nicely with fib fan blades (not show here for clarity).
Though a gap up is possible tomorrow morning, I would like to highlight the obstacles in the battle zone. In order to move up from here, price action must break the 20p MA, the down channel top trend line, the 50% fib fan blade, and the 38% retracement level of the main fib grid. It is going to be tough - but possible.
Also, a quick glance at the ES hourly chart suggests that we may be finishing a S-H-H-S pattern. We are of course at the right shoulder now - meeting resistance at the 096-098 area. If resistance holds, expect a drop off to the Thanksgiving low of 069ish.
Back to the SPX. A less than encouraging down thrust is on the mirror side of our current price point. This kind of recent price action suggests that the ascent could be rapid to the 50% retracement level near 1102ish - and the 50p MA. If we get there quickly, I would start planning on a test of 1110 - following price action down around the 62% fib arc (look at the mirror side to get an idea of what I am suggesting).
One final note, though fib tools don't always work, they often do. A fib time series suggests that next next reversal will sometime in the morning session. Pure crystal ball stuff! Perhaps we gap up to the 1110 area - roll over and fall back down into the down channel.
I am flat tonight on the futures - still short equities.
Good luck tomorrow.
So, why was today so important and clarifying. First, for those of you who doubted that we are range bound at the top - stop doubting it. On my charts, the 085ish area is the bottom of a rectangle tat we have been trading within for the last 20 sessions. We touched 086 today - which was good thing. The bad thing is that we bounced up off that level and did not follow through at the retest. So 086 became the LOD.
The 086 LOD. combined with the closing stick helped us to define a down channel on the hourly. This down channel, which is bounded by the thin pink lines (and labeled), is formed from the reaction highs and lows since December 04. We closed with a throw back from that top trend line near the 097 area. (Note I spoke of the 096 area a few posts ago - I believe it will be a pivotal point in this battle).
You may also note that the fib fan blades (resulting from a drag from 12/04 high to today's LOD) show the 50% retrace blade in almost the exact position as this top trend line. This is important as both lines serve as resistance. Ideally, we will see rejection at this point and price action will resume it's channel descent. Unfortunately, I am not so confident. You see, these trend lines and fib blades also represent points notorious for GAP UP. In fact, if you look at the ascent off the last two reaction lows of this top, you will see big GAP moves up. Those gaps happen to align pretty nicely with fib fan blades (not show here for clarity).
Though a gap up is possible tomorrow morning, I would like to highlight the obstacles in the battle zone. In order to move up from here, price action must break the 20p MA, the down channel top trend line, the 50% fib fan blade, and the 38% retracement level of the main fib grid. It is going to be tough - but possible.
Also, a quick glance at the ES hourly chart suggests that we may be finishing a S-H-H-S pattern. We are of course at the right shoulder now - meeting resistance at the 096-098 area. If resistance holds, expect a drop off to the Thanksgiving low of 069ish.
Back to the SPX. A less than encouraging down thrust is on the mirror side of our current price point. This kind of recent price action suggests that the ascent could be rapid to the 50% retracement level near 1102ish - and the 50p MA. If we get there quickly, I would start planning on a test of 1110 - following price action down around the 62% fib arc (look at the mirror side to get an idea of what I am suggesting).
One final note, though fib tools don't always work, they often do. A fib time series suggests that next next reversal will sometime in the morning session. Pure crystal ball stuff! Perhaps we gap up to the 1110 area - roll over and fall back down into the down channel.
I am flat tonight on the futures - still short equities.
Good luck tomorrow.
Tuesday, December 8, 2009
Good First Step...
Today was a good first step towards the ultimate goal - which is to see the SPX correct before year end. Yesterday I published a closing daily line chart for the SPX and highlighted the wedge forming at the tops of this last rally leg. I called for a break of the bottom wedge line at 096 and stated that we needed a close below that level to have confidence that this rally leg was reversing. That did happen and I am confident that we will see continued weakness tomorrow.
Presently, the SPX is finding a great deal of support at the 088 level. That is our next target. I suspect that it will be taken out overnight in the futures trading. If we can clear 088 we get our test of 082 - which is the 38% retrace of the last leg. It is also close to the 50day MA. If we are going to bounce back early, it will be there. If we break support at 082ish - then look for 074-071.
Don't want to jinx it, so let's keep it simple tonight. Here is the ES hourly chart.
Notice that the clossing congestion is very similiar to the pattern of Nov 26th - where the selling just kept coming and the ES fell 31 points in an overnight session. Judging from the action today I would not be surprised by a similiar sell-off tonight - or at least a test of 082ish. I have also highlighted the 067 area as a very reasonable short term target.
Cheers!
Presently, the SPX is finding a great deal of support at the 088 level. That is our next target. I suspect that it will be taken out overnight in the futures trading. If we can clear 088 we get our test of 082 - which is the 38% retrace of the last leg. It is also close to the 50day MA. If we are going to bounce back early, it will be there. If we break support at 082ish - then look for 074-071.
Don't want to jinx it, so let's keep it simple tonight. Here is the ES hourly chart.
Notice that the clossing congestion is very similiar to the pattern of Nov 26th - where the selling just kept coming and the ES fell 31 points in an overnight session. Judging from the action today I would not be surprised by a similiar sell-off tonight - or at least a test of 082ish. I have also highlighted the 067 area as a very reasonable short term target.
Cheers!
Monday, December 7, 2009
Sellers more anxions than buyers...
Keeping it short and to the point tonight. Open the Daily Closing Line chart for SPX.
Key technical features are:
What do we see? Well, we continue to roll over across the top - meaning we remain in the secondary channel and more importantly, in a wedging triangle. The triangle tells me that sellers are becoming more anxious than buyers. Note how the bottom triangle trend line is quite parallel to the bottom trend line of the secondary channel - yet the top line of the triangle angling downward. This means that sellers are waiting less time to unload shares on the reaction highs. Very simple, very clear. Buyers on the other hand seem content to pick at the lower line. So this is not 100% bearish, but it is certainly not bullish.
The fact that we have yet to close below the 20day MA is bearish. Every recent rally leg has resulted in a closure below this MA. I would expect a cross of this MA and a close at or below 096 is coming this week. I indicate 096 because this is close to the bottom trend line of the triangle. If we break that line, we could see a reasonable attack of the first the 38% retrace of this rally leg at 083. Failure at this level will likely result in a bump (or cross of the 50 day MA at 081ish. Let's assume an 082 test is in the cards short term.
This is a key level as there is very little support below it until the 072 level - which is the peak of the last rally leg and the 50% retrace level for the present rally leg.
We should not even talk about breaks of the bottom trend line of the main channel until these basic points are reached.
I am shorting all rallies, unless we get a close above the top trend line of the triangle.
Cheers.
Key technical features are:
- The fib grid across the high and low of this last rally leg
- The main channel trend lines in red
- The secondary channel trend lines in yellow
- The wedge like triangle trend lines in pink
- The red 20 day MA
- The blue 50 day MA
- The white 200 day MA
What do we see? Well, we continue to roll over across the top - meaning we remain in the secondary channel and more importantly, in a wedging triangle. The triangle tells me that sellers are becoming more anxious than buyers. Note how the bottom triangle trend line is quite parallel to the bottom trend line of the secondary channel - yet the top line of the triangle angling downward. This means that sellers are waiting less time to unload shares on the reaction highs. Very simple, very clear. Buyers on the other hand seem content to pick at the lower line. So this is not 100% bearish, but it is certainly not bullish.
The fact that we have yet to close below the 20day MA is bearish. Every recent rally leg has resulted in a closure below this MA. I would expect a cross of this MA and a close at or below 096 is coming this week. I indicate 096 because this is close to the bottom trend line of the triangle. If we break that line, we could see a reasonable attack of the first the 38% retrace of this rally leg at 083. Failure at this level will likely result in a bump (or cross of the 50 day MA at 081ish. Let's assume an 082 test is in the cards short term.
This is a key level as there is very little support below it until the 072 level - which is the peak of the last rally leg and the 50% retrace level for the present rally leg.
We should not even talk about breaks of the bottom trend line of the main channel until these basic points are reached.
I am shorting all rallies, unless we get a close above the top trend line of the triangle.
Cheers.
Saturday, December 5, 2009
The 10yer Weekly SPX Chart...
So, I ranted again last night. It felt good and I now have a great deal of confidence in my positions. I recently said that gut is important but technical analysis needs to confirm. I have also said that when you find price action becoming erratic and try to validate your positions in higher time frames. So with that in mind let's really step back and examine the 10yr weekly CLOSING LINE chart of the SPX:
First a word about the time frame. We live in a sound byte world dominated by short term trading and short term influences. I like to compare market action to the ocean. We are swimmers at the shore line, judging the waves as they come in. Looking for good ones to ride. The majority of swimmers spot a good one and go for it. Sometimes to find the wave is weak and not worth the energy. They find themselves in the ocean trying each successive wave with mixed results. They are singularly focused. The more experienced swimmer waits and studies the sets of waves that develop and moves into the water when he sees a good build. Riding several waves successfully and having a much better return on his investment. The seasoned swimmer is also keenly aware of the larger tides and currents in the ocean. In my younger more active years I trained for Ironman competitions - which involved ocean swimming. I am not the strongest swimmer and one day, swimming in the Atlantic off the coast of Rhode Island, I raised my head out of water to check my location against the shore. To my horror, I noticed that I had drifted 400 yards out to sea. I was alone, exhausted and caught in a very dangerous situation. You see the ocean itself moves in and out, side to side. For the most part, you can't even feel these deep shifts. The market is just like the ocean in this regard and we have to step back and determine where it is headed. Hence the 10 year chart.
First the technical features:
1. In very light grey I have overlaid a fib grid stretching from the August 2000 high down to the October 2002 low. This was the last bull market crash and since it is the most recent, it is a point of reference freshest in the minds and algorithms of traders and quants.
2. In color, I have overlaid a grid stretching from the October 2007 high to the March 2009 low. The grids do align closely - which will help give credence to any technical conclusions that can be drawn from the past. (Note that I make no statement about the differences in the fundamental economic conditions YET!)
3. In red is one possible down channel formed following the initial reaction highs and lows of the October 2007 crash. Note how all hell broke loose in September of 2008 and we plunged out of the channel dramatically.
4. The basic moving averages are in place, including the PINK 20p MA, the BLUE 50p MA, and the WHITE 200p MA.
5. Stochs and RSI accompany the chart on the lower panel.
Let's pretend this is a one minute chart for the day. Remember, price action and technical analysis is fractal - meaning it can be applied in any time frame with the same results.
If this were a one minute graph, would you go long or short? What are your reasons?
I see a possible double top with a major rejection at the second peak. I see the reaction low off the second peak descending well below the reaction low of the first peak. If you open the 20 year chart you'll see that these two peaks and two valleys define the SPX and we are smack in the middle of the action. In fact, we recently retraced to about the 50% level of the second reaction high. This is a classic pivot point and unless we bang right through it (as we did the 38% level) we are going to experience some pause, consolidation, or reversal.
How can we be more confident about that scenario? First we look at the key trends, resistance, and support levels. An argument can be made that we are at risk of continued down trend unless the market breaks the 1280 mark. Why? A major down trend is considered reversed when a succession of lower lows is interrupted and then confirmed with a higher reaction high. Technically this happened in early June of 2009 when the SPX broke and closed above 930. But, some argue that we are simply correcting for a hyper-extended sub-wave and have re-entered the down channel that I have indicated with red trend lines. If this is true, the argument can be made that the last reaction high of importance is bound by the major down trend line and appears to be the 1280 peak - right before she snapped and eventually hit that famous 666 number. We now have to run up and surpass the 1280 reaction high and set a new reaction low that does not violate 666. At that point, we will have officially reversed. How many of you are saying "that's ridiculous!"?. If you are, think of this as a 1 minute chart. Is what I am saying so ridiculous now? No, it is actual common sense. In fact, you would probably hesitate going long until you saw a break of the top channel line and a failed retest of that very line. The only difference is time frame. It is very hard for any of us to think in terms of months or years. But that is what we must do to avoid finding ourselves out to deep sea with no chance of getting back to shore.
(A side note - I would love to do a post on the fractal phenom of relative trending and try to suggest a view that may at first seem to contradict the 3 trend DOW theory model (primary, secondary, and minor), but in fact validate it at a higher level - it is really just an academic exercise but a think a good topic)
Back to the analysis. Are you still not a believer in the trend? Follow that red down trend line off the reaction highs down to our current price. We are smacking into right now. Look at the volatility over the past couple of months compared to the sharp linear rise in early months of this ascent. The tea leaves are clear - price action is hesitating. But is it simply a matter of the down trend line? The short answer is NO.
The red horizontal band across the 10 year price action is also critical. This is an area of resistance that was established from prior price consolidation during two periods. First, during the end of 2001 into early 2002 as prices tried to stabilize during the decline. Second, during early 2004 when the market was rising off of the major reaction low of September 2002. I circled the congestion of 2004 because it is most important in this analysis.
The 2004 congestion is important because, on the surface, it seems to look like what is happening today. After all, it is the 50% retracement of a violent down move. But after careful analysis, is it really the same? It is not.
Some fundamental differences exist - starting with the magnitudes and durations of the main down pulses that precede the congestion areas. The down impulse that started in 2000 lasted for 25 months. That is over two years of decline with relatively even spacing of the impulse sub waves. That two year decline included six reaction lows with the final low in October 2002. This most recent down impulse, which was triggered by much more fundamental economic concerns, has lasted only 18 months (so far) with five reaction lows - ending in March of 2009. The impulse sub waves were at first orderly, until the September 2008 panic selloff which cost market participants a full 400 points and was followed by an exhaustion sub-wave which shaved another 150 points to get us to the March low. These down impulse differ in magnitude and duration. The first lasted 26 months and cost approximately 700 handles, the most recent seems to have lasted only 18 months yet has cost roughly 900 handles.
Now let's examine each bottoming process. The 2002 bottom required approximately 8 months to confirm a reversal in May 2003 off the bottom set in September 2002. The reversal was confirmed after retracing 140 handles in that 8 month period. If the current bottom holds, the bottom will have been confirmed in a record 3 months (March to June) after retracing another record 270 points. That is twice the magnitude in half the time. Hmmm.
Finally, let's examine the magnitude and duration of the retracement levels. Starting with the 38% level. It took 14 months to retrace 275 points after the low in 2002. It took only 5 months to retrace 350 points in after the low of March 2009. That is a 30% greater magnitude gain in less that 33% of the time. Now compare the price action from the 38% retrace to the 50% retrace in both cases. In 2003 it took about 30 days to get 90% of the way and another 6 weeks to get the touch of the line. At that point we saw weakness and sinking consolidation for a full year which include retests of the 38% level. This is actually pretty normal and a healthy sign. The market rushed up through the 38% level and charged the 50% line - reaching it with only a small struggle in the final weeks. This was the early warning that things were going to cool off. Compare that to the recent run after darting to the 38% line price action has suddenly become much hindered. It has taken the world’s fastest rally almost 4 months to reach the 50% line and we still have not had a break or close of the line. Look how much the market is straining. Perhaps we now the market will take on a more normal pace. If so, we have every reason to expect consolidation between the 38% and 50% levels. That would be a 100 point range if the levels play out.
The thing is that I am having a hard time with the chart. I mean, yes it makes sense that we see resistance right now. But consolidation followed by a continued rally like we saw in 2004? Sorry, there is not a chart in the book that supports that price action. Price usually mirrors itself. If we were going to break through the 50% retrace - it would have had to be a clean shot right through to 1280. Look at the mirror side in the down pulse. Straight shot down through this range - no pause. This symmetry can be observed all on charts in all time frames, including this chart in the prior crash/recovery. The consolidation in 2004 was clearly mirrored by consolidation in the down pulse during 2001 and 2002. The lack of symmetry in the current price action raises doubt that we are going much higher and increases the probability in my calculations for a retest of the March lows. A retest of the March lows would give a proper bottom to this crash, enable price symmetry, and align more with the current economic conditions.
Looking back to 2004, why did the bull awake and drive the S&P to new highs? Was it record unemployment? Record foreclosures? The falling value of real estate? Huge deficit spending? Sinking corporate revenues? Well that is what we have going into the same technical pivot point. Again, price action is telling us something that we know to be obvious yet we see easily dismiss it all because of greed. (OK, no more rants...).
So we have a case for pause and consolidation from the fib grids, trend lines, and major resistance from past consolidation. We also have a possible issue of symmetry that suggests a possible retest of the March lows - which fundamentals seem to support as well. Can we add any further technical confirmation? Yes, the RSI.
I hate to sound like a broken record on this RIS oscillator - but it is the most reliable indicator I know off and one of the few that can actually predict price movement with fair accuracy. I have highlighted key areas where we see divergence in price with the RSI. The RSI is the red line running through the stochs. (Sorry if it is not super clear). Look at every major top and bottom that is highlighted in the pale yellow vertical strips. Each area shows divergence in the RSI - major divergence. Now look at the thinner orange vertical strips to the right of the chart. You will see divergence again. Look at the last strip. The last three reaction highs are feature RSI divergence. I challenge you to find one case where an RSI divergence existed, and price did not reverse direction. There is 10 years of data for you to examine. It has never failed.
A final note is about the major difference between the MA's of these two periods. In 2003-04, the 20p MA and 50p MA had managed to travel up to meet the 200p right when price action reached the 50% retrace. This bullish event helped the market from rejecting price action and eventually move on to the long bull rally. This bullish cross was in my opinion key.
Looking at the current situation, the 20pMA and 50p MA are both well below the 200pMA. This is by definition bearish. In fact, since the 20p MA, 50p MA, and price still remain below the 200pMA - many would consider this a bear market rally. Bear market rallies usually only rally up 35% or so, however the rallie is also directly related to the magnitude and speed of the down impluse wave. This wave was very, very powerful and swift. As you can see from my prior analysis, so has been the bounce rally. We have now reached 50% retrace and the technicals are starting to play out a bit more reliably.
Another important observation is that the 20p MA has gotten way ahead of the 50p MA. In fact the averages show a 110 pt. gap - which is 10% of the index. That is outrageous! Historically, the 20p MA and the 50p MA ride much tighter and often bounce off each other periodocally. Examine the chart and you will see that during the rally off the bottom of the 2002 low, the averages never got more than 50pts away from each other. That is half the gap we see today.
I hope folks got something from this post. Preparing it certainly helped me to feel more confident about the next several weeks/months. I reiterate, this may be the very best time to be short the market.
Good luck and have a great weekend!
First a word about the time frame. We live in a sound byte world dominated by short term trading and short term influences. I like to compare market action to the ocean. We are swimmers at the shore line, judging the waves as they come in. Looking for good ones to ride. The majority of swimmers spot a good one and go for it. Sometimes to find the wave is weak and not worth the energy. They find themselves in the ocean trying each successive wave with mixed results. They are singularly focused. The more experienced swimmer waits and studies the sets of waves that develop and moves into the water when he sees a good build. Riding several waves successfully and having a much better return on his investment. The seasoned swimmer is also keenly aware of the larger tides and currents in the ocean. In my younger more active years I trained for Ironman competitions - which involved ocean swimming. I am not the strongest swimmer and one day, swimming in the Atlantic off the coast of Rhode Island, I raised my head out of water to check my location against the shore. To my horror, I noticed that I had drifted 400 yards out to sea. I was alone, exhausted and caught in a very dangerous situation. You see the ocean itself moves in and out, side to side. For the most part, you can't even feel these deep shifts. The market is just like the ocean in this regard and we have to step back and determine where it is headed. Hence the 10 year chart.
First the technical features:
1. In very light grey I have overlaid a fib grid stretching from the August 2000 high down to the October 2002 low. This was the last bull market crash and since it is the most recent, it is a point of reference freshest in the minds and algorithms of traders and quants.
2. In color, I have overlaid a grid stretching from the October 2007 high to the March 2009 low. The grids do align closely - which will help give credence to any technical conclusions that can be drawn from the past. (Note that I make no statement about the differences in the fundamental economic conditions YET!)
3. In red is one possible down channel formed following the initial reaction highs and lows of the October 2007 crash. Note how all hell broke loose in September of 2008 and we plunged out of the channel dramatically.
4. The basic moving averages are in place, including the PINK 20p MA, the BLUE 50p MA, and the WHITE 200p MA.
5. Stochs and RSI accompany the chart on the lower panel.
Let's pretend this is a one minute chart for the day. Remember, price action and technical analysis is fractal - meaning it can be applied in any time frame with the same results.
If this were a one minute graph, would you go long or short? What are your reasons?
I see a possible double top with a major rejection at the second peak. I see the reaction low off the second peak descending well below the reaction low of the first peak. If you open the 20 year chart you'll see that these two peaks and two valleys define the SPX and we are smack in the middle of the action. In fact, we recently retraced to about the 50% level of the second reaction high. This is a classic pivot point and unless we bang right through it (as we did the 38% level) we are going to experience some pause, consolidation, or reversal.
How can we be more confident about that scenario? First we look at the key trends, resistance, and support levels. An argument can be made that we are at risk of continued down trend unless the market breaks the 1280 mark. Why? A major down trend is considered reversed when a succession of lower lows is interrupted and then confirmed with a higher reaction high. Technically this happened in early June of 2009 when the SPX broke and closed above 930. But, some argue that we are simply correcting for a hyper-extended sub-wave and have re-entered the down channel that I have indicated with red trend lines. If this is true, the argument can be made that the last reaction high of importance is bound by the major down trend line and appears to be the 1280 peak - right before she snapped and eventually hit that famous 666 number. We now have to run up and surpass the 1280 reaction high and set a new reaction low that does not violate 666. At that point, we will have officially reversed. How many of you are saying "that's ridiculous!"?. If you are, think of this as a 1 minute chart. Is what I am saying so ridiculous now? No, it is actual common sense. In fact, you would probably hesitate going long until you saw a break of the top channel line and a failed retest of that very line. The only difference is time frame. It is very hard for any of us to think in terms of months or years. But that is what we must do to avoid finding ourselves out to deep sea with no chance of getting back to shore.
(A side note - I would love to do a post on the fractal phenom of relative trending and try to suggest a view that may at first seem to contradict the 3 trend DOW theory model (primary, secondary, and minor), but in fact validate it at a higher level - it is really just an academic exercise but a think a good topic)
Back to the analysis. Are you still not a believer in the trend? Follow that red down trend line off the reaction highs down to our current price. We are smacking into right now. Look at the volatility over the past couple of months compared to the sharp linear rise in early months of this ascent. The tea leaves are clear - price action is hesitating. But is it simply a matter of the down trend line? The short answer is NO.
The red horizontal band across the 10 year price action is also critical. This is an area of resistance that was established from prior price consolidation during two periods. First, during the end of 2001 into early 2002 as prices tried to stabilize during the decline. Second, during early 2004 when the market was rising off of the major reaction low of September 2002. I circled the congestion of 2004 because it is most important in this analysis.
The 2004 congestion is important because, on the surface, it seems to look like what is happening today. After all, it is the 50% retracement of a violent down move. But after careful analysis, is it really the same? It is not.
Some fundamental differences exist - starting with the magnitudes and durations of the main down pulses that precede the congestion areas. The down impulse that started in 2000 lasted for 25 months. That is over two years of decline with relatively even spacing of the impulse sub waves. That two year decline included six reaction lows with the final low in October 2002. This most recent down impulse, which was triggered by much more fundamental economic concerns, has lasted only 18 months (so far) with five reaction lows - ending in March of 2009. The impulse sub waves were at first orderly, until the September 2008 panic selloff which cost market participants a full 400 points and was followed by an exhaustion sub-wave which shaved another 150 points to get us to the March low. These down impulse differ in magnitude and duration. The first lasted 26 months and cost approximately 700 handles, the most recent seems to have lasted only 18 months yet has cost roughly 900 handles.
Now let's examine each bottoming process. The 2002 bottom required approximately 8 months to confirm a reversal in May 2003 off the bottom set in September 2002. The reversal was confirmed after retracing 140 handles in that 8 month period. If the current bottom holds, the bottom will have been confirmed in a record 3 months (March to June) after retracing another record 270 points. That is twice the magnitude in half the time. Hmmm.
Finally, let's examine the magnitude and duration of the retracement levels. Starting with the 38% level. It took 14 months to retrace 275 points after the low in 2002. It took only 5 months to retrace 350 points in after the low of March 2009. That is a 30% greater magnitude gain in less that 33% of the time. Now compare the price action from the 38% retrace to the 50% retrace in both cases. In 2003 it took about 30 days to get 90% of the way and another 6 weeks to get the touch of the line. At that point we saw weakness and sinking consolidation for a full year which include retests of the 38% level. This is actually pretty normal and a healthy sign. The market rushed up through the 38% level and charged the 50% line - reaching it with only a small struggle in the final weeks. This was the early warning that things were going to cool off. Compare that to the recent run after darting to the 38% line price action has suddenly become much hindered. It has taken the world’s fastest rally almost 4 months to reach the 50% line and we still have not had a break or close of the line. Look how much the market is straining. Perhaps we now the market will take on a more normal pace. If so, we have every reason to expect consolidation between the 38% and 50% levels. That would be a 100 point range if the levels play out.
The thing is that I am having a hard time with the chart. I mean, yes it makes sense that we see resistance right now. But consolidation followed by a continued rally like we saw in 2004? Sorry, there is not a chart in the book that supports that price action. Price usually mirrors itself. If we were going to break through the 50% retrace - it would have had to be a clean shot right through to 1280. Look at the mirror side in the down pulse. Straight shot down through this range - no pause. This symmetry can be observed all on charts in all time frames, including this chart in the prior crash/recovery. The consolidation in 2004 was clearly mirrored by consolidation in the down pulse during 2001 and 2002. The lack of symmetry in the current price action raises doubt that we are going much higher and increases the probability in my calculations for a retest of the March lows. A retest of the March lows would give a proper bottom to this crash, enable price symmetry, and align more with the current economic conditions.
Looking back to 2004, why did the bull awake and drive the S&P to new highs? Was it record unemployment? Record foreclosures? The falling value of real estate? Huge deficit spending? Sinking corporate revenues? Well that is what we have going into the same technical pivot point. Again, price action is telling us something that we know to be obvious yet we see easily dismiss it all because of greed. (OK, no more rants...).
So we have a case for pause and consolidation from the fib grids, trend lines, and major resistance from past consolidation. We also have a possible issue of symmetry that suggests a possible retest of the March lows - which fundamentals seem to support as well. Can we add any further technical confirmation? Yes, the RSI.
I hate to sound like a broken record on this RIS oscillator - but it is the most reliable indicator I know off and one of the few that can actually predict price movement with fair accuracy. I have highlighted key areas where we see divergence in price with the RSI. The RSI is the red line running through the stochs. (Sorry if it is not super clear). Look at every major top and bottom that is highlighted in the pale yellow vertical strips. Each area shows divergence in the RSI - major divergence. Now look at the thinner orange vertical strips to the right of the chart. You will see divergence again. Look at the last strip. The last three reaction highs are feature RSI divergence. I challenge you to find one case where an RSI divergence existed, and price did not reverse direction. There is 10 years of data for you to examine. It has never failed.
A final note is about the major difference between the MA's of these two periods. In 2003-04, the 20p MA and 50p MA had managed to travel up to meet the 200p right when price action reached the 50% retrace. This bullish event helped the market from rejecting price action and eventually move on to the long bull rally. This bullish cross was in my opinion key.
Looking at the current situation, the 20pMA and 50p MA are both well below the 200pMA. This is by definition bearish. In fact, since the 20p MA, 50p MA, and price still remain below the 200pMA - many would consider this a bear market rally. Bear market rallies usually only rally up 35% or so, however the rallie is also directly related to the magnitude and speed of the down impluse wave. This wave was very, very powerful and swift. As you can see from my prior analysis, so has been the bounce rally. We have now reached 50% retrace and the technicals are starting to play out a bit more reliably.
Another important observation is that the 20p MA has gotten way ahead of the 50p MA. In fact the averages show a 110 pt. gap - which is 10% of the index. That is outrageous! Historically, the 20p MA and the 50p MA ride much tighter and often bounce off each other periodocally. Examine the chart and you will see that during the rally off the bottom of the 2002 low, the averages never got more than 50pts away from each other. That is half the gap we see today.
I hope folks got something from this post. Preparing it certainly helped me to feel more confident about the next several weeks/months. I reiterate, this may be the very best time to be short the market.
Good luck and have a great weekend!
Friday, December 4, 2009
Wake up bull herd!
Here comes a non-technical blog entry. (I'm entitled!)
The price action over this last rally top has been super erratic. This is a sign that we ain't in Kansas anymore. Conditions are changing and it is fundamental. The game is changing and the market is reflecting that change in volatility. I interpret the action as heavy distribution.
Yesterday, we saw a false breakout at the open. The event occurred at a key resistance level and that triggered both short covering and the momentum trade. But this breakout was different. It was empty and that was clear from the gappy pops in the thrust. Then there was the heavy selling that just didn't give up. Why should it? After months of conditioning the day trader to buy all dips there were plenty of buyers for the shares. Even the cautious bulls get roped in as they see the down waves stabilize and prices drifting higher - tick, by tick. It's too much to resist. They start buying in anticipation of their traditional reward. Just when the coast seems clear and folks are buying, the next violent down wave hits. This process can be repeated many times, in many time frames. There are enough bulls who are convinced that it will keep going up - just buy, buy, buy!
Take today. What a setup! Who in their right mind covered their shorts on this news! (If you did, please take no offense - just get back in there!). The jobs number, along with any other news item for that matter, is nonsense. It is simply a super short term momentum driver. A pivot point for short term traders. Again, prices rose on short covering and momentum chasers. The media pumping the good news, calling the blow by blow on Bloomberg. All sectors up! No end in sight to this rally. Job data was soo good! We are saved! Get in the market now! This is the greatest buying opportunity ever! Then again, maybe it is the greatest selling opportunity ever - as demonstrated by the big boys when they dumped and shorted this for another 20pts. Fool me once, shame on you. Fool me twice, shame on me. There are a lot of shamed folks out there with third degree market burns.
The problem with all traders - bulls and bears - is that we are impressionable and so easily conditioned. We are also arrogant and think that if we "know enough" we can rationalize the market. The truth of the matter is that there are very few things that we can rationalize about the market. The few things that we can conclude are generally concluded by everyone at once - when it is too late to act upon.
This is a big boys game and the sole objective is to feed off of the smaller guys. We need to be aware of the herd, just as a wolf is aware of his next meal. I also hope the herd can now smell the predators, because though it is too late for many of them, I am well positioned to profit from their panic.
I have no apologies for this position - as I know many of you have similar positions - plus it is a big boys game and folks should trade at their own risk!
Have a great weekend - and short the heck out of all rallies!
The price action over this last rally top has been super erratic. This is a sign that we ain't in Kansas anymore. Conditions are changing and it is fundamental. The game is changing and the market is reflecting that change in volatility. I interpret the action as heavy distribution.
Yesterday, we saw a false breakout at the open. The event occurred at a key resistance level and that triggered both short covering and the momentum trade. But this breakout was different. It was empty and that was clear from the gappy pops in the thrust. Then there was the heavy selling that just didn't give up. Why should it? After months of conditioning the day trader to buy all dips there were plenty of buyers for the shares. Even the cautious bulls get roped in as they see the down waves stabilize and prices drifting higher - tick, by tick. It's too much to resist. They start buying in anticipation of their traditional reward. Just when the coast seems clear and folks are buying, the next violent down wave hits. This process can be repeated many times, in many time frames. There are enough bulls who are convinced that it will keep going up - just buy, buy, buy!
Take today. What a setup! Who in their right mind covered their shorts on this news! (If you did, please take no offense - just get back in there!). The jobs number, along with any other news item for that matter, is nonsense. It is simply a super short term momentum driver. A pivot point for short term traders. Again, prices rose on short covering and momentum chasers. The media pumping the good news, calling the blow by blow on Bloomberg. All sectors up! No end in sight to this rally. Job data was soo good! We are saved! Get in the market now! This is the greatest buying opportunity ever! Then again, maybe it is the greatest selling opportunity ever - as demonstrated by the big boys when they dumped and shorted this for another 20pts. Fool me once, shame on you. Fool me twice, shame on me. There are a lot of shamed folks out there with third degree market burns.
The problem with all traders - bulls and bears - is that we are impressionable and so easily conditioned. We are also arrogant and think that if we "know enough" we can rationalize the market. The truth of the matter is that there are very few things that we can rationalize about the market. The few things that we can conclude are generally concluded by everyone at once - when it is too late to act upon.
This is a big boys game and the sole objective is to feed off of the smaller guys. We need to be aware of the herd, just as a wolf is aware of his next meal. I also hope the herd can now smell the predators, because though it is too late for many of them, I am well positioned to profit from their panic.
I have no apologies for this position - as I know many of you have similar positions - plus it is a big boys game and folks should trade at their own risk!
Have a great weekend - and short the heck out of all rallies!
Thursday, December 3, 2009
Hard Earned Profit...
These last rally legs have been very tough on me and not just because of my core short position which is in desparate need of correction. It has been tough because my timing has consistantly been just a bit early in all time frames. This includes my swing trades, day trades, and scalps. When you enter early, you have to endure a greater risk and worse, you tend to bail with a smaller reward - only to watch the setup complete according to analysis. I have been working on this during the last month, trying to improve my timing and endure longer when I do go in too early. I have been doing a nice job of it, but it is hard and stressful work.
Take for example the short position I took yesterday before the close on the ES. I took the position on gut - backed with substantial technical analysis. The initial position was smart but I should have scaled my position more conservatively. Without going into all the details, I built a full short too early and eventually traded 20 ES contracts and a number of dollar contracts throughout the evening and morning to scalp enough profits so that I could enter the open at my maximum $ risk level. Now, considering that the futures drifted fairly high last night and the blow-off at the open, I am quite pleased with how well I did. My wife on the other hand would prefer that I sleep. Anyway, the real problem with early entry is the tendency to exit prematurely at first signs of profit. I covered all of my positions in stages during the down move - with the last contract covered at 110225. This means that I left many points on the board - which translates into many dollars. At the same time, I have learned NEVER to complain about a profit. I earned about 3x my daily quota today - and for that I am thankful. Further, I am flat going into the jobs report - which will allow me to sleep peacefully this evening. (See my prior two posts for a more complete understanding of the setups)
What is in store for tomorrow? Jobs Friday. Expect volatility - but more importantly, the market will reveal it's direction. There are two paths, one is follow through on the sell side, the other is a breakout to new highs. I personally think we will see follow through on the down side. If you refer to my rectangle post, you'll see that the "Bull Zone" was entered and rejected after the false breakout at the open. This breakout, was a stop gunning exercise at a MAJOR resistance point to trigger a short squeeze and allow the larger participants to take positions in advance of the new trend (which will be down). The rectangle has a height of 30 pts - and anyone who got short during this squeeze expects prices to head down to 1084 at a minimum.
In addition to the false breakout, many bearish things took place from a technical standpoint:
The 1 minute chart is gruesome - with both the 20pMA and 50pMA passing down sharply through the 200p MA. The real chart to look at is the daily:
This last reaction high is really ugly and extremely volatile - suggesting something wicked is about to happen. Look how ugly this top is compared to the round smooth top of the prior reaction high. Statistics favor a cross of both the 20pMA and the 50p MA during this down wave. Tomorrow is SUPER CRITICAL as price action is confronted by the bottom trend line of the wedge and the 20p MA. Both points tend to cause price bounce. If we break out of the wedge and head to the 50p MA - we'll be at the 50% retracement level for the rally leg. I love 50% retracement levels - especially when I am short and they fail!
Sorry I can not do a better job tonight - way too tired.
Good luck out there!
Take for example the short position I took yesterday before the close on the ES. I took the position on gut - backed with substantial technical analysis. The initial position was smart but I should have scaled my position more conservatively. Without going into all the details, I built a full short too early and eventually traded 20 ES contracts and a number of dollar contracts throughout the evening and morning to scalp enough profits so that I could enter the open at my maximum $ risk level. Now, considering that the futures drifted fairly high last night and the blow-off at the open, I am quite pleased with how well I did. My wife on the other hand would prefer that I sleep. Anyway, the real problem with early entry is the tendency to exit prematurely at first signs of profit. I covered all of my positions in stages during the down move - with the last contract covered at 110225. This means that I left many points on the board - which translates into many dollars. At the same time, I have learned NEVER to complain about a profit. I earned about 3x my daily quota today - and for that I am thankful. Further, I am flat going into the jobs report - which will allow me to sleep peacefully this evening. (See my prior two posts for a more complete understanding of the setups)
What is in store for tomorrow? Jobs Friday. Expect volatility - but more importantly, the market will reveal it's direction. There are two paths, one is follow through on the sell side, the other is a breakout to new highs. I personally think we will see follow through on the down side. If you refer to my rectangle post, you'll see that the "Bull Zone" was entered and rejected after the false breakout at the open. This breakout, was a stop gunning exercise at a MAJOR resistance point to trigger a short squeeze and allow the larger participants to take positions in advance of the new trend (which will be down). The rectangle has a height of 30 pts - and anyone who got short during this squeeze expects prices to head down to 1084 at a minimum.
In addition to the false breakout, many bearish things took place from a technical standpoint:
- Crossing down through the 20p MA on the hourly chart
- Crossing down through the 50p MA on the hourly chart
- CLOSING well below both these MAs with heavy selling into the close
The 1 minute chart is gruesome - with both the 20pMA and 50pMA passing down sharply through the 200p MA. The real chart to look at is the daily:
This last reaction high is really ugly and extremely volatile - suggesting something wicked is about to happen. Look how ugly this top is compared to the round smooth top of the prior reaction high. Statistics favor a cross of both the 20pMA and the 50p MA during this down wave. Tomorrow is SUPER CRITICAL as price action is confronted by the bottom trend line of the wedge and the 20p MA. Both points tend to cause price bounce. If we break out of the wedge and head to the 50p MA - we'll be at the 50% retracement level for the rally leg. I love 50% retracement levels - especially when I am short and they fail!
Sorry I can not do a better job tonight - way too tired.
Good luck out there!
Wednesday, December 2, 2009
The Rectangle...
So, I have not stopped analyzing the SPX tonight. I am very curious as to what will happen next and I want to make a good money management decision with confidence. I'm looking for a high confidence setup where my risk is limited to under 25% of my potential gain ($1 to earn $4). I think the setup is present on the S&P now, and I took my position on instinct. My instincts are generally good - but often early in all time frames. For example, instincts told me to go short two rally legs ago - perhaps I could have waited...
When working with high leverage instruments such as the ES, I do not like to carry contracts too long. My time frame is less than 3 days - even when the setup is within the prevailing trend. Too many things can happen in an overnight session. I have lost many thousands through the incredible gunning activity that characterizes the hostile trading environment of today.
Anyway, whenever I find myself taking a position on instinct I like to spend extra time on the TA. Keep in mind that my instinct is based entirely on my technical analysis. It is the sum total of everything I study during the day and evening - released in a guttural action - such as shorting the ES at the end of the day when short covering is expected and jobs data is due to be released the next morning. No guts, no glory. But was it a smart move?
To answer that question, I had to spend some extra time calmly verifying the technicals. I will not bore you with everything that I have said in the past week regarding the RSI, trend lines, support levels, and volatility. All of it points to weakness and a possible top. I don't think there is a person on the planet that can produce a single shred of technical support for another rally leg. This is a thinly traded market fueled by a sinking dollar and zero cost liquidity. Period end of story. So what the heck can we do? What do we watch for? I'll try to answer.
We can divorce ourselves from the right and wrong, the fear and the greed, the justice and the injustice. We can simplify the present scenario into a future events, each predicted outcomes, timing and relative probability. Based on our assessments, and the potential profits implied by our probability profile, we can place our bets. It is as simple as that.
Open the chart:
This is again the hourly chart for the SPX. It shows the three reaction highs in the last rally leg - including the most recent reaction high which is of most interest to us as traders. Let's simplify. We have a RECTANGLE (also called a box) - which is a trading pattern bound by an upper horizontal trend line and a lower horizontal trend line. These trend lines are of course parallel. As I watched this form I thought of a square sinal wave - formed by the sudden and dramatic price thrusts up and down.
There are three ways we can play a rectangle.
1. Trade the range between the trend lines. (30 pts in this case)
2. Trade the break-out above the top trend. (Bull Zone)
3. Trade the break-down below the bottom trend. (Bull Zone)
To play the range, we short as close to the trend lines as possible. Remember, once the trend line is identified - the price action does not always have to rise/fall to touch it. It can rise/fall short of the mark - often providing the first signal as to where the action my head on exit. If it fails to reach the top line before heading south, this increases the likelyhood of a bottom side break down. If it fails to reach the bottom trend line before heading north, this increases the likelyhood of a top side break out. Right now, we are close to the top trend line - but not quite there. If we look at the prior two reaction highs, we see that price action head butts the top trend line over a period of 3 days. We have been up here for 2 days. Seems to me that we'll be hanging around one more session - with jobs data supplying the energy for a final attack at the top. The most conservative play would be to wait until tomorrows session to short - provided we do not break out.
Rectangles statistically favor a break out to the top side. Although the statistic can be questioned - as it was gathered during a broad bull market - it seems reasonable and believable - the more attacks at a top - the more likely price will break out. For many documented reasons, I feel 1120 is the top side target that if passed, I feel will result in a break out. Keep in mind that false break outs are common in rectangles - and I think we saw one today (upside) and one on thanksgiving (downside). Sadly, if we do break out to the upside, statistics indicate an 90% chance that we meet or exceed a target price increase equal to the height of the triangle. Thats about 30 pts on top of the 1120 break out level, or 1150ish. If we see a breakout tomorrow above 1120 - I will close a significant share of my short positions as planned.
Rectangles also break down to the bottom side. As I have stated in several of my prior posts - if we can get a close below 084 we are headed much lower near term. It was only four sessions ago that we tested that 081 area and if I am hoping that we head south one more time. All of the technicals suggest that I trip to the bottom is likely and considering that we have not yet touched the 20p MA during this reaction high - I'd say chances are high that we end the week at the bottom of the rectangle. I think that a break of 1080 is needed for a break down to occur. Statistics show that there is a 65%-75% chance of meeting or exceeding a target price decrease equal to the height of the rectangle. That would put us at around 1050 when all is said and done.
Looking at my current positions, I am short a number of contracts on the ES at around 110750. That is not the best price point. I would prefer shorts within the 111200-111700 range. So, I start with a 5 pt deficit and that is not good as I have a 7pt loss limit on the contracts. This gives me the 25% risk limit that I seek in this setup. My options are to either greatly increase my loss limit risk to accomodate for the early position - or scalp like mad overnight to get my average entry higher. Of course, I could close out my position entirely, and wait until tomorrow's session.
I'm not sure yet...
Good luck tomorrow.
Rectangles do break to the
When working with high leverage instruments such as the ES, I do not like to carry contracts too long. My time frame is less than 3 days - even when the setup is within the prevailing trend. Too many things can happen in an overnight session. I have lost many thousands through the incredible gunning activity that characterizes the hostile trading environment of today.
Anyway, whenever I find myself taking a position on instinct I like to spend extra time on the TA. Keep in mind that my instinct is based entirely on my technical analysis. It is the sum total of everything I study during the day and evening - released in a guttural action - such as shorting the ES at the end of the day when short covering is expected and jobs data is due to be released the next morning. No guts, no glory. But was it a smart move?
To answer that question, I had to spend some extra time calmly verifying the technicals. I will not bore you with everything that I have said in the past week regarding the RSI, trend lines, support levels, and volatility. All of it points to weakness and a possible top. I don't think there is a person on the planet that can produce a single shred of technical support for another rally leg. This is a thinly traded market fueled by a sinking dollar and zero cost liquidity. Period end of story. So what the heck can we do? What do we watch for? I'll try to answer.
We can divorce ourselves from the right and wrong, the fear and the greed, the justice and the injustice. We can simplify the present scenario into a future events, each predicted outcomes, timing and relative probability. Based on our assessments, and the potential profits implied by our probability profile, we can place our bets. It is as simple as that.
Open the chart:
This is again the hourly chart for the SPX. It shows the three reaction highs in the last rally leg - including the most recent reaction high which is of most interest to us as traders. Let's simplify. We have a RECTANGLE (also called a box) - which is a trading pattern bound by an upper horizontal trend line and a lower horizontal trend line. These trend lines are of course parallel. As I watched this form I thought of a square sinal wave - formed by the sudden and dramatic price thrusts up and down.
There are three ways we can play a rectangle.
1. Trade the range between the trend lines. (30 pts in this case)
2. Trade the break-out above the top trend. (Bull Zone)
3. Trade the break-down below the bottom trend. (Bull Zone)
To play the range, we short as close to the trend lines as possible. Remember, once the trend line is identified - the price action does not always have to rise/fall to touch it. It can rise/fall short of the mark - often providing the first signal as to where the action my head on exit. If it fails to reach the top line before heading south, this increases the likelyhood of a bottom side break down. If it fails to reach the bottom trend line before heading north, this increases the likelyhood of a top side break out. Right now, we are close to the top trend line - but not quite there. If we look at the prior two reaction highs, we see that price action head butts the top trend line over a period of 3 days. We have been up here for 2 days. Seems to me that we'll be hanging around one more session - with jobs data supplying the energy for a final attack at the top. The most conservative play would be to wait until tomorrows session to short - provided we do not break out.
Rectangles statistically favor a break out to the top side. Although the statistic can be questioned - as it was gathered during a broad bull market - it seems reasonable and believable - the more attacks at a top - the more likely price will break out. For many documented reasons, I feel 1120 is the top side target that if passed, I feel will result in a break out. Keep in mind that false break outs are common in rectangles - and I think we saw one today (upside) and one on thanksgiving (downside). Sadly, if we do break out to the upside, statistics indicate an 90% chance that we meet or exceed a target price increase equal to the height of the triangle. Thats about 30 pts on top of the 1120 break out level, or 1150ish. If we see a breakout tomorrow above 1120 - I will close a significant share of my short positions as planned.
Rectangles also break down to the bottom side. As I have stated in several of my prior posts - if we can get a close below 084 we are headed much lower near term. It was only four sessions ago that we tested that 081 area and if I am hoping that we head south one more time. All of the technicals suggest that I trip to the bottom is likely and considering that we have not yet touched the 20p MA during this reaction high - I'd say chances are high that we end the week at the bottom of the rectangle. I think that a break of 1080 is needed for a break down to occur. Statistics show that there is a 65%-75% chance of meeting or exceeding a target price decrease equal to the height of the rectangle. That would put us at around 1050 when all is said and done.
Looking at my current positions, I am short a number of contracts on the ES at around 110750. That is not the best price point. I would prefer shorts within the 111200-111700 range. So, I start with a 5 pt deficit and that is not good as I have a 7pt loss limit on the contracts. This gives me the 25% risk limit that I seek in this setup. My options are to either greatly increase my loss limit risk to accomodate for the early position - or scalp like mad overnight to get my average entry higher. Of course, I could close out my position entirely, and wait until tomorrow's session.
I'm not sure yet...
Good luck tomorrow.
Rectangles do break to the
Why I just shorted the ES...
So, it is around 3:15pm and I just shorted the ES again. Why? Well, I am speculating based on some TA. Perhaps it will be a mistake as we all know how the "specialists" conspire to paint the tape at the end of each day. At least, that has been the apparent case for the last 8 months. Anyway, from a technical standpoint there are many good reasons to short the SPX at 3:15PM. Open the chart:
First, a few features (as I write this the market pops!):
1. The fib grid stretches across the HOD and the current LOD
2. The fib fan does the same - providing us with several fan blade retracement lines
3. The Red Line is the resistance of the day (or it was until this last minute pop)
4. The yellow trend lines show a wedge that is rising off the LOD
My choice to short (which I stand by even as the market tests 11010) is based on several factors. First, the confluence of several technical resistance points should be able to contain price action. These include the 38% retracement, the red resistance line, and the wedge top line. These forces contained the rising price action twice at the key rejection points which I labeled.
Above these levels is the 50% retracement level for the down wave. To reach this level, price action must push through some congestion and surpass prior tops without experiencing a sell off.
Finally, the pattern is bearish - it can be considered either a bear flag, a rising wedge, or a consolidation triangle. In either case, in it's current location with respect to the last down move - this is bearish.
Baring a major short covering rally - which I think I am witnessing - this should break to the down side.
Good luck out there!
First, a few features (as I write this the market pops!):
1. The fib grid stretches across the HOD and the current LOD
2. The fib fan does the same - providing us with several fan blade retracement lines
3. The Red Line is the resistance of the day (or it was until this last minute pop)
4. The yellow trend lines show a wedge that is rising off the LOD
My choice to short (which I stand by even as the market tests 11010) is based on several factors. First, the confluence of several technical resistance points should be able to contain price action. These include the 38% retracement, the red resistance line, and the wedge top line. These forces contained the rising price action twice at the key rejection points which I labeled.
Above these levels is the 50% retracement level for the down wave. To reach this level, price action must push through some congestion and surpass prior tops without experiencing a sell off.
Finally, the pattern is bearish - it can be considered either a bear flag, a rising wedge, or a consolidation triangle. In either case, in it's current location with respect to the last down move - this is bearish.
Baring a major short covering rally - which I think I am witnessing - this should break to the down side.
Good luck out there!
Tuesday, December 1, 2009
Very Ugly Charts...
I can't tell you how sick and tired I am at being short. Ninety percent of the time I feel like a fool. Just look at all the people making money hand over fist - buy, buy, buy... The arrogance of the participants who say - "Fundamentals don't apply, technicals don't apply, the market is going up, up, up!" - and it does. Then there are those who are convinced that "they" won't let the market fall. "They" meaning the PPT, the specialists, and of course GS. Very disturbing.
Now here is the thing, there is no secret force controlling the market - at least not at the tick by tick level. No specialist can make the S&P close at exactly 1108.46 - GS can not control the herd when the herd is spooked by a news item - and the PPT does not work at a trading desk every day with the specific goal of screwing the shorts. All of this is emotional non-sense and it distorts analysis.
The fact of the matter is that the markets have grown tired and it is becoming much more difficult for a rally to maintain momentum. If you compare the last two rally legs to the prior legs since March, you will see what I mean. We are rolling over, volume is decreasing, RSI is weakening, and volatility is increasing as big money distributes across the top. This is normal, it is healthy, it is predictable. Until the market gets on with the correction it can not rally any further. A correction of 15-20% is what it will take to get the hesitant participant interested in the game. The problem is as the market corrects, participants (with the aide of the media) will have to analyze the fundamentals - which may not support the present (or corrected) price levels.
For those of you who doubt that we will see a correction, just look at the following Daily chart of the ES futures contract:
Let's start with the RSI divergence over the last three rally legs. When price increases as RSI decreases, a warning signal is generated to reduce your longs and consider shorting. The divergence is getting more and more dramatic. In fact, look at how the price and RSI diverge even within this last rally leg top. This single indicator has been extremely accurate in all time frames for me. I trust it implicitly.
Never, never, never make a TA decision with one indicator. Let's look at others, like volume. If you look at the prior two rally legs, the up segments were somewhat supported with periods of increasing volume. During the last rally leg - the most dramatic rally leg of the series - saw a divergence in the volume levels. Volume levels decreased while price increased. This is the second signal.
Now look at how volatile things started to get - particularly in the last two tops. Increased volatility is usually a sign that big money is shifting - usually distributions are being made by major participants and the "less informed" and "late to the gamers" are on the buy side.
Interesting enough, we did not make it to the top trend line of the up channel on this last rally leg. This is a sign of weakening - a process where the tops are rolling over. There have been SIX attempts at new highs in this topping process - SIX! After a while, things begin to breakdown. In fact, we saw what can happen to the downside on Thanksgiving evening. The futures market blew off 31 points. It has been a long time since I saw that kind of take down.
Now, I encourage folks to study SPX and you will see that we are currently at a double resistance level - one from the major down trend line formed across the tops since the October 08 crash and another from the up trend line formed across the bottoms of the March rally. We are also right about the 50% retracement level. All of these things contribute to my confidence in going short.
My advice - don't "personalize the market" and make it an enemy. The market is an object - a puzzle - meant to be solved, but also meant to be put down when it frustrates you. Don't try to be in every trade - you'll lose too often and you'll be ill prepared to take a chance when a chance is warranted.
Let's see if we rally tomorrow or reverse course. Either must happen as moving sideways does not seem to be an option! Look to the dollar for a clue!
Cheers.
Now here is the thing, there is no secret force controlling the market - at least not at the tick by tick level. No specialist can make the S&P close at exactly 1108.46 - GS can not control the herd when the herd is spooked by a news item - and the PPT does not work at a trading desk every day with the specific goal of screwing the shorts. All of this is emotional non-sense and it distorts analysis.
The fact of the matter is that the markets have grown tired and it is becoming much more difficult for a rally to maintain momentum. If you compare the last two rally legs to the prior legs since March, you will see what I mean. We are rolling over, volume is decreasing, RSI is weakening, and volatility is increasing as big money distributes across the top. This is normal, it is healthy, it is predictable. Until the market gets on with the correction it can not rally any further. A correction of 15-20% is what it will take to get the hesitant participant interested in the game. The problem is as the market corrects, participants (with the aide of the media) will have to analyze the fundamentals - which may not support the present (or corrected) price levels.
For those of you who doubt that we will see a correction, just look at the following Daily chart of the ES futures contract:
Let's start with the RSI divergence over the last three rally legs. When price increases as RSI decreases, a warning signal is generated to reduce your longs and consider shorting. The divergence is getting more and more dramatic. In fact, look at how the price and RSI diverge even within this last rally leg top. This single indicator has been extremely accurate in all time frames for me. I trust it implicitly.
Never, never, never make a TA decision with one indicator. Let's look at others, like volume. If you look at the prior two rally legs, the up segments were somewhat supported with periods of increasing volume. During the last rally leg - the most dramatic rally leg of the series - saw a divergence in the volume levels. Volume levels decreased while price increased. This is the second signal.
Now look at how volatile things started to get - particularly in the last two tops. Increased volatility is usually a sign that big money is shifting - usually distributions are being made by major participants and the "less informed" and "late to the gamers" are on the buy side.
Interesting enough, we did not make it to the top trend line of the up channel on this last rally leg. This is a sign of weakening - a process where the tops are rolling over. There have been SIX attempts at new highs in this topping process - SIX! After a while, things begin to breakdown. In fact, we saw what can happen to the downside on Thanksgiving evening. The futures market blew off 31 points. It has been a long time since I saw that kind of take down.
Now, I encourage folks to study SPX and you will see that we are currently at a double resistance level - one from the major down trend line formed across the tops since the October 08 crash and another from the up trend line formed across the bottoms of the March rally. We are also right about the 50% retracement level. All of these things contribute to my confidence in going short.
My advice - don't "personalize the market" and make it an enemy. The market is an object - a puzzle - meant to be solved, but also meant to be put down when it frustrates you. Don't try to be in every trade - you'll lose too often and you'll be ill prepared to take a chance when a chance is warranted.
Let's see if we rally tomorrow or reverse course. Either must happen as moving sideways does not seem to be an option! Look to the dollar for a clue!
Cheers.
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