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!
6 comments:
Hi David , excellent read as always,
I have one more to bull/bear to add ,
Lets say we break down out of the box to 85ish , every Bear loads short , a counter rally to say 95-00ish , results in short covering rally to new high.
I mean this as a cautionary tail.
None of the possible options would surprise me , caring any delusions that I know which way its going :)
Good luck out there
Hey Payline,
I think if we break below the 085 level with a gap - the correction will begin. The line to the door will be long and the panic will be serious. Further, the action of the last 20-30 sessions will serve as substantial overhang supply. The big boys are distributing and I suspect taking short positions. It is in the best interest of the market to correct down 10%-15% from today's levels and re-base. For it to go lower, a major financial event would need to happen - such as a major (perhaps eastern European) country defaulting or a major bank failure. I also think the dollar move has not baked into the equities market yet - or the dollar move is false.
We'll see.
Have a good weekend.
Hi David, I agree a break out of the box should send them running ,
maybe to the gap at 74 ish ,
Trying to look a move ahead , if we pause or consolidate just under the box, something else would be at play.
Take a look back at last Dec - Jan 5 , lots of events last year , but its still interesting to compare
Also I find it interesting how much the patten we put down the last 2 days looks like the 1100-1107 on rally leg up, 12/10 12/12. I hope this one is a coil spring continuation ( down ) pattern too.
The $ is interesting for sure ,
I thought last week it was 5 waves up , but at a much closer look ,
I still only see 1,2, and 3 now .
there is hardly any % pull back sence the currant up leg started .
(a lot of sideways to the other side on the channel and back, that at first look I counted as waves )
some corrective move could and or should come at anytime .
Unless I am wrong , $ down great for the carry trade, instant buying on the weak $.
But the $ moving up , would in my view, slow or stop the carry trade buying , but not need to turn the carry trader into a seller of what ever stocks they bought with the weak $, as the rise in the $ would raise the value of the equity s, in the currency of origin.
If that is correct , we would or will see SPX move down when the $ starts to correct. as it would be time for the carry trader to sell.
That is just my 1.5 cents
Cheers
As short term TA does not tick all boxes up or down, broader evaluation is needed. Pension, market and souvereign Funds will need to consolidate to close their books better or at least not worse than bench marks.
Only a few trading days left in the year.
This means that providing no big events occuring, low volume, even distribution will keep market moving sideways till 010 in a more or less contolled way by the big boys.
US$ (big) down again against € looks difficult as a few euro counties are very close to defaulting. As there is no way the ECB will raise interest when euro economies are still shaky.
So patience or scalping looks safer for now. Light up the fireplace and relax!
Good luck and thanks for sharing!
Hey Paulus,
I think you are right - sideways with the emerging triangles. As a rule, I try not to get caught tradng in the triangles - but the range seems wide enough at this stage to carefully scalp the ES. We just have to be on guard for any sudden breaks - such as what happend on Thanksgiving!
Cheers!
Paulus and David,
I think we are all in sum saying , Patience,Caution , and enjoying the family into the New Year is what is important ,
Best of Holidays guys
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