Possible Setups

I have been traveling and relatively disconnected from the intimate price movements in the market. That means that I can not "feel" the sentiment and force of the participants. Although that should not matter in technical analysis, it is a major source of confirmation for me when I arrive at technical conclusions. So having said that, absorb these setups with caution - as I can't add any personal confidence rating to the mix. I'll be watching the action on Monday and Tuesday closely to verify on my own.

If you have not read my prior post regarding the topping process, please do as it is relevant to the analysis on the hourly chart - which I will present now. Open the 20 day hourly:




The key features of the chart are the obvious and sharp down channel that is bound by the yellow upper and lower trend line. Take a moment to appreciate how "sudden" and "violent" price movement is during down trends. Compare that with the other side of the mountain where up rallies are more prolonged and incremental. This means that major distribution is taking place and it is being controlled in a range of about 30 points. That is wide and presents a great profit opportunity for smart traders. The rule is to trade the channel until it breaks.

Also note that I have placed red resistance lines at four levels. These resistance levels have been chosen bases on the price action in both prior up legs and in the recent down legs. Any support shelf created in the uptrend becomes a resistance in counter rally efforts of the down trend.

If my H&S topping theory is correct, we must see a counter rally at some point soon. If we rely solely on the hourly chart, the logical point for a counter rally start is around the lower trend line of our down channel. That is at point A in my chart. This is somewhere near the 1020 area. It can be several points below or several points above. The key is to look for a bottoming process early Monday. Once we see a reversal forming - which will include a new bottom followed by the first retest failure, you can expect buyers to step in. These buyers will likely be the swing traders looking for the channel move to B.

I have circled and labeled B on the chart should play somewhere in the 1050-056 range. We need to watch for a break of the upper trend line - which must happen with a CLOSE above the line and a follow-through the next day. If this happens, we are set for the creation of the right shoulder in my H&S pattern (discussed in prior post).

The targets for the the right shoulder top are labeled C, D and E. A break of E would be bad in my estimation and could very well signal the end of this correction. C is a very likely target and I would seek exhaustion and reversal somewhere around D as anyone who gambled at the top (1080 and above) and did not exit will do so at the first signs of distribution. From there we can expect to see the second major push down and a possible breakdown at the neckline (which will be the lowest price set on Monday).

How do we play this possible setup?

1. The short play assumes that there will be a final down move towards the bottom trend line at A near 1020ish. The opening on Monday is critical to this setup. If we open up and rise to 1040, this may be a great short entry point with a stop just above 1042. From 1042 and above there is some congestion which should either forcefully reject price action or slow the rise. If it slows the rise only, get out. Other wise, ride the push down to a test of Friday's low around 1031 and be quick to asses a bottom possibility. This alone is a 9 point move with a 2 point risk. If we see a break of the low expect a test of the bottom trend line.

2. If we open and break out above 1042, I would expect price action to rise first to and slightly above the 20p MA on the 60 minute chart. That will likely be around 1050ish. If it reaches this level it will likely overshoot and be met by my first line of resistance at 1053. Here we could see some sideways movement and an eventual test of the upper trend line in the down channel. The ride up is worth about 10 points, and I would highly recommend a trailing stop loss with this move up - as I think it would be initially quick as the smart money wants in right away to catch the move. A break above this top trend line will require a bit of work and the longer it takes, the better the chance of an upside profit to the price level labeled at C. If you are smart, take the money at the trend line test and re-enter long if we break out above the line and pass a retest during a retreat. In other words sell at the line, prepare at first break, but after the first retest of the line.

My positions is a bit more complicated, as my core shorts are supported by complex option spreads, resulting in additional trading strategies to maximize my profit potential. I will go into those later today. But they are all based on the above analysis.

Once again, I did not have the benefit of watching the market action during the last several sessions. This is disturbing to me to say the least, and I can not say with confidence that these setups will play.

Good luck out there!

Still Topping...

What - Still Topping? Sounds ridiculous - but I think we are still in a topping process. Remember this rally was huge - 440 points in 7 months (roughly 63 points a month non stop). It is unlikely to reverse without a decent struggle. It is more likely to consolidate in a broader range and regroup for the next wave, and I think that is consistent with the price action over the last 20 days.

Right now, what we are seeing now is a nice distribution effort that started around 1100. Smarter money selling into the dip buying as we roll over. I don't see a panic sell-off - which means there is more distribution to come - but at higher prices. That is why I think we are still topping. The buying on the Thursday GDP number shows there are sufficient participants who are willing to stay on the ride. This provides more distribution opportunity for the smarter money. More importantly, I do not see a proper topping pattern on the daily chart - YET. However, I do see the obvious head and shoulders pattern forming on the daily. This pattern would imply a test of the 1017-020 zone followed by one last counter rally to as high as 1080. If rejected at 1080ish, we would see the an actual correction begin - including tests of several prior lows. Open the chart:



I've crudely drawn the right shoulder. If this shoulder is to materialize, we should see some down action on Monday with a reversal starting Tuesday. Don't expect a picture perfect sequence of events - rather look for the broad manifestation of the pattern over the next 5 or so sessions. If we see the shoulder form and get rejection, we can expect tests of the following lows:

A: 1019 (Most important failure is here - complete retrace of last rally leg)
B: 991 (Complete retrace of the prior rally leg)
C: 978 (Major milestone as this break would lead to the biggest portion of the correction)
D: 869 (The lowest low that I would expect in the correction)

So what happened to 920? Why isn't in the diagram? The answer is as follows. If we are in fact reversing, the focus needs to be on the lows that were set during the rally upwards because those lows are the freshest tests in the minds of the bulls. Another words, the psychology of the participants is still rolling over. Only after confidence is completely broken do we switch to the "support" model. That does not mean that price action ignores support - in fact we are sitting at support near 1030 now. We'll see price action slow as we descend at the following levels:

1017-1019
960
920 (Biggest test of support)

The 920 test is the biggest test for several reasons:

1. It is right around the 200p MA
2. It has the broadest ceiling and was the site for the longest consolidation period in the full rally.
3. It is the 62% retracement of the first rally after consolidation.
4. It is the bottom band in the dense upper price action region - below this band, we have a major density gap down to 880. That is a 40 point gap - though it is through the price May -July price consolidation.

In my next post, I'll address the hourly chart and see if I can't present some trade setups for the coming sessions.

It is good to be back - thanks for all your comments while I was traveling!

Heading West...

Not the markets, me. I have some business on the west coast which will keep me off the desk for the balance of the week. Very bad timing, but a must do.

Check out these 15 minute charts from my futures station.



The top graph is the ES (S&P mini), the middle is the US Dollar Index, and the bottom is the YM (DOW mini). I can spend hours on the analysis here but time does not permit. I have instead highlight some "at a glance" observations.

1. The ES and YM have experienced very sharp declines on high volume.
2. The US Dollar Idex has experience a sharp rise on high volume.
3. All three consolidated overnight in a tight range.
4. All three are forming triangles (each of a different type)
- The ES is forming a descending triangle. The price action falls to the bottom line, bounces to a decreasing high. This is a bearish pattern and has a high percentage chance of breaking down with a drop equal to the prior move. That would be the sharp decline seen on the left of the graph.
- The dollar index is forming an ascending triangle. The price action rises to the top line and is rejected to a rising bottom trend line. This is a bullish pattern indicating that a break out is likely with a rise equal to the prior move. That would be the sharp rise to the left.
- The YM is forming a symetrical triangle. The price action is centered and alternating between a rising low trend and dropping high trend line. This is a nuetral indicator with a slight tendency towards the price price move - which would be the sharp decline seen on the left.
5. Note that the volume on the down moves is signficantly higher than the volume to the upside. This is also bearish.

So we have a bullish US Dollar Index pattern, a bearish ES pattern, and a nuetral YM. I think we go lower.

Unfortunately, I will not be in a position to trade this action. More importantly, it will be difficult to make important decisions if key levels are reached. I will be working through a game plan that I can monitor and execute under the circumstances.

No time tonight for the setups - however, we did drop out of the channel today and touched the 50% retracement level as I expected. If we continue down from here (and that is what I expect) a full retrace is in the cards - whch is about 1020ish. Watch for a pit stop in the 1048-50 range as this is the 62% retrace level and the intersection with the 50p MA on the daily closing chart. On the upside - there is substantial resistance in the 1075-1080 range now and the top trend line should also serve as a containment force. Do not be surprised if action rises above the 20p MA on the hourly (say 1072 or so) - in fact, if it does and is turned away at that point - you can almost guarentee a signficant correction will follow next week.

Good luck out there!

Tracking Too Precisely...

The S&P behaved exactly as the channels suggested it would - and that scares me a bit. Too orderly for my taste. Take a look at the hourly:




For those who follow the futures market and the dollar index, you knew this mornings rally was going to pull back. The pre-market futures were basically flat and the dollar index was showing strength from the prior week. Once we broke the top trend line on the dollar index I knew we would have a substantially drop on the S&P. Also, the up volume on the S&P was very weak. I managed a very nice gain on two short positions taken on the ES. I was confident in the position because of the analysis last week.

Look at how the 20p MA crossed the 50p MA on Friday. That is a signal that we will see continued - usually sharp - selling. Notice how the first candlestick of the day failed to rise to top trend line in the down channel? This was also a tell. Then the second candle shortened up and showed a balanced wick on top and bottom. This showed market indecision. The volume on that candle stick (as measure on the futures contract and the SPY issue) confirmed that the rally lacked conviction. Then we had a sudden and very violent move down. If you were at the desk monitoring the ES, it was probably one of the quickest descents you have seen in some time. I was elated.

Several folks were calling for a bottom at the 1072 area. Rather than engage in that dialog, I silently disagreed. 1072 is well past the far side of the prior gap and there is only a small support shelf in this zone. The selloff happened early enough in the day that slowly this congestion would be cut. A more substantial shelf can be seen in the the September 28,29,30 time frame - which is around 1065 - corresponding to the last local high in the prior rally leg. That is what held this down trend from falling further today.

At this point, we are sliding down the back side of the last rally leg. We have cleared the 38% retracement and will test the 50% retracement at 1060. I am surprised that we did not see it today. I should say I am concerned we did not see it today. Corrections are usually more violent than what we are seeing today. I think the is a lack of confidence in the dollar index move. I do not think the up-trend is sustainable in the short term. Participants will not move their money to the dollar until they are confident in it's bottom. Too many folks are banking on a test of 72.

Looking at the weekly chart:




If this is a correction underway, we can hope for a retest of the 1017-018 level. This is the 38% retrace level on the weekly closing line chart. It is also the approximate full retrace of the last rally leg.

Now, this feels "very orderly" and if it continues in this "orderly" fashion, Expect continued price swings from bottom to top of the channel. This mirrors the up side of the rally as well. I prefer to see some very violent selling - this would validate the move for me.

A work of Art...

Here is a snapshot of what I saw today. I snapped this at the time of my final trade - short the ES again...




As the session finished out, we saw another attack, rejection and LOD. We then closed bouncing off the line.

Here is another chart, the hourly candlestick, that clearly illustrates the roll.



Look how smooth the topping process has been. Also, we have numerous tops and numerous levels of resistance - this should help contain the rally. At first glance, you may be disappointed with the close today. I know you would have liked to see 1074 breached and 1071 tested. I know I did - however, something very important happened. Despite the final gyrations, we set a new CLOSING low. The prior closing low was on 10/21 at 1081.40 - we closed today at 1079.45.

For now, no further analysis - just a bottle of wine!

Cheers

Down Trend Continues

As I posted on HMS blog, today did not reverse what I believe to be a rolling process. Open the hourly:



1. Price action failed to retrace 100% of yesterday's down leg.
A reversal would require a 100% retrace, and a bullish move would add another 38% to the upside. That would require a retest of the 1100+ high. It may happen tomorrow, but it did not happen today - and to break a high, you need momentum.

2. We closed within the top trend line on a down trend channel which can be seen on the hourly chart. I drew the top trend line at the top of the candlestick wick - but a more parallel channel may be formed at the closing level. It is early, and what matters most is that we travel down along the line or get rejected strongly.

3. We set a new intraday low.
If we keep setting intraday lows and don't make new highs - we are in a downtrend.

4. The closing candlestick on the hourly is bearish
This is a shooting star. When a shooting star follows a long green candle, it is a sign that a reversal is likely - especially if the shooting star sits above the prior candle. Generally, a closing star is often followed by a gap down. I don't know about that today.

5. The 20pMA is about to cross the 50p MA
Generally, this is bearish. It is a sign that short term price action is sharply dropping relative to mid term price action. Last time we had a cross like this we shaved 40pts in 2 days. Also, looking at the daily line graph of the closing price (not shown here), you will see that we did not make contact with the 20p MA. At no time during this entire rally have we turned to the line and not touched - not once. This suggests that we have at least a trip to 1070 ahead of us. Most of the times we crossed below the 20p MA we met the 50p MA - opening the possibility of 1040.

I also highlighted something very interesting. Notice the area labeled A on the chart? Look how closely that zone resembles where we are today - zone B. Look how there was a failure to completely retrace the first down leg. The next bar that printed was a shooting start. The bars that followed were substantially down. Now notice the relationship between the 20pMA and the 50pMA at that time. Very similiar conditions.

One final note, we still have a gap down below 1060 - which is the 50% retracement level of this last rally leg. We have not left too many unfilled.

Let's see what tomorrow brings.

13 Stops to Sub-1000

The Daily Line Chart gives a pretty sobering view of just how strong this rally has been. The wedge and channel show a different picture than the candlestick charts. Here is a snippet form the 180 day closing line chart:



Notice the upper and lower RED wedge lines. This means we are still in the wedge, having been rejected from the top trend line. Note also the yellow channel lines. We recently popped out of the channel and are re-entering. I talk about that phenom in prior posts.

If we are headed south, there is a heck of a lot in the way. The list of support levels includes:

1081ish - Top channel trend line
1071ish - 38% retracement of this very last leg (1018-1100)
1071ish - Top of prior leg (994-1071)
1065ish - 20p MA
1062ish - 50% retracement of this very last leg
1062ish - Bottom of the wedge
1053ish - 62% retracement of this very last leg
1040ish - Bottom channel trend line
1040ish - 50p MA
1040ish - 38% retracement of the prior leg
1032ish - 50% retracement of the prior leg
1032ish - Bottom BB
1024ish - 62% retracement of the prior leg
1020ish - full retracement of the very last leg
994ish - full retracement of the prior leg

That is a lot of support to break.

Nice when it happens...

I want to thank all the folks who have made comments about some of my recent calls. It is of course nice when the market behaves according to the analysis - but important not to expect it!

One thing that I have noticed is an increased arrogance in the bull camp. This is very encouraging and my experience has taught me to get ready. Enjoy the last wave of suffering as it is the first of several obstacles to come before you can truly profit from your short position. Painful is the topping process, filled with more than a fair share of failed reversals and price lunges to infinity. A good top makes the average short so nervous, that they exit just as the fun begins. It is the opposite of the greedy bull diving in to catch the falling knife. We saw that in the final hour. The fearful bear just doesn't want to miss a chance to get out before the price reverses to the upside. Of course as soon as the fearful bear covers, the market continues it's descent with twice the force. Have a price target, be patient, and be prepared for a rough ride.


I can not say that we are correcting - we have been here before and one day of volatility means very little at the top. As KPH pointed out, we need to see follow through tomorrow and the balance of the week to support a correction theory. Payline notes a double top - and is correct - but I would like to add that this second top was set on a day that featured a major same day reversal - very bearish...

One interesting anamoly, the dollar index did not rise - this is a divergence from the prevailing trend. This either means this selloff lacks conviction or the dollar and stock indexes are decoupling - as I suggested would start to happen in several of my most recent posts. I suggested first a decoupling and then a reversal in the driving forces. Right now falling dollar creates rising stocks, soon falling stocks will drive rising dollar.

A bear raid would be terrific right about now. It is also a terrific move for the smart money - as they have been exiting their long positions for the last 6-10 weeks dumping cooly on the remaining "suckers" and the short covering "buyers of last resort" . It is a terrific move because they are also aware that the cautious and crowd are waiting on 1120 to take profits and/or short - why would the smart money carry price action to that level? Why let the masses get on board the train? Rather, the smart money can have better control of the downleg with a good, unexpected head start. The head start combined with some well placed initial gyrations should do the trick.

Anyway, I do not like to speculate too much about these forces. Fact is we will never know all that contributes to the market movements. I much rather let the technicals tell the story - however dry or exciting it may be on any given day.

Let's see what tomorrow brings!

I'll try to update the blog with my charts late tonight. I want to switch my view to the weekly and daily line charts of the closing price. I want to see what levels stand out and overlap with the hourly candlesticks.

Good luck out there - and thanks again for your acknowledgements and comments. I hope you are making some money on the calls!

We are rolling...

Earlier today I mentioned on the HMS blog that if we closed below 1092, I would be happy. Well, we did - and I am happy. The reason is purely technical - as you might have guessed. Open the horly chart for the last 20 days.



I have referred to this chart several times in the past. It provides a very nice representation of this last rally leg which started on Oct 02 - down around 1020. The key feature of the rally is a pretty steep price channel that started as soon as we broke out of the wide down channel last month. This up channel is bounded by the parallel yellow trend lines rising through todays action. I have also added a red trend line that ran from the 1020 low through the lows set up until the 13th. This line combined with the top trend line of the channel formed a rising wedge.

The wedge tells me that we have a rally that is going to exhaust and probably give back everything - meaning down to 1020. The channel gives me a second measure to confirm when we have reached the top.

I was encouraged when we saw a break of the wedge line on Friday. At the same time, I was pretty sure that this rally had one last wave to it. We saw that final wave on Monday - which enabled me to increase my short position with a high percentage chance of a gain today. The final exhaustion wave was the weakest of the series and it failed to break 1100 - falling short of the upper trend line. This also was encouraging. The icing on the cake was the break and close below the bottom trend line of the channel today. These can be seen on the chart.

So, we are definately rolling. How far and how fast are unclear. Fact of the matter is that this is an earning parade with companies hitting home runs each and every day. Thankfully, the rally is tired and can not react any more than it has. It needs a breather.

So let's say the market wants to take the balance of the week to regroup. This is not unreasonable. The weekly cycle usually gets set with a turn-around Tuesday. We should expect down days tomorrow and Thursday. (I know futures are up right now, but technicals and cycles tell me it should be down tomorrow and Thursday). If we head south, the next logical target is the gap/support at around 1080. I would not be surprised if this combination causes us to cross down to 1076 with a bounce and settling around 1080ish.

If this happens - things will get stirred up a bit and most program trading will expect a retrace to at least 1070 - which is the 38% level of the last rally leg. If we get that, I would not be surprised to see a run at the 50% level at 1060 - which just so happens to sit above another gap.

The obstacles that we face on the downside are:

50p MA at 1086ish
Lower BB at 1082ish
Gap and Support at 1080ish
38% retracement and Support at 1070ish
Gap, Support and 50% retracement at 1060ish

I would watch for a pullback (as high as 1096) in the morning, and short with a stop at 1100. This provides opportunities for 10pt, 14pt, 16pt, and 26 pt moves.

Good luck out there!

PS> Check the prior post regarding the daily chart - we are head-banging along the top trend line as I suggested. This is also a good sign - we are very overbought on the daily.

Next 5 Sessions are Key

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

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



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

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

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



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

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

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

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

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

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

Think of your trading moves for either case...

Good luck out there...

Only One Problem...

It is hard to believe but we are finally at the level on the S&P where we "technically" should pullback. There is only one problem; everyone is talking about it. Everyone has 1120 pegged as the breaking point. Everyone is aware of the 50% retracement. Everyone is aware of the top trend line. Everyone is aware of the over-bought stochs and the peak in the diverging RSI. No chart says it better than the weekly line chart of the closing price.



The only good news is that I am worried. If I am worried, this means everyone who is short is worried as well. If we break 1120, there will be a HUGE short covering event - the buyers of last resort. Only the most resolved shorts will survive.

In retrospect, I wish I would have waited before putting on my full position. I also regret not holding out with my insurance. I let 70 points go for a relatively small profit. However, these events are in the past. Now you have to ask - if you had no position today, what would you do? Would you go long? I would not.

Good luck - and try to survive the final stages of this bear market rally.

Have to laugh...

I was thinking about the profits that GS, JPM and even C are making in the i-Bank divisions (investment banking) and I just had to laugh. Their recorded profits are based solely on trading activity. This trading activity was/is financed largely by the tax payer - thorugh bail-outs and a variety of "critical programs to prevent economic collapse". The banks pay 0% interest to use the money, and yet they don't lend a dime of it to main street. Rather, they use the back stacks and their program trading to rob the retail investor and eat the slow moving funds alive(your mutual funds, 401K, pensions, etc.). This is kind of a double dip into your wallet. In return, we reward them by buying their shares (as the insiders bail at higher prices) and all the shares they recommend (as they rotate out and start to position short). We are such a good herd of sheep!

Hey, good thing Obama won't tolerate any Wall Street non-sense. How big is his GS bonus anyway?

I'll hit the technical analysis later tonight - we are getting close to the end here.

New Top - 1092

Well, there you have it. A nice rally to a new top on expected earnings surprises...

We have touched the top BB on the daily close line chart of the SPX. We may drift a bit to the right (within a 10-15pt range), but this puppy is cooked. Let's see if price action can survive BAC, C, and GE. I have a funny feeling that the party is over.

I am going to add to my short position this week. I am short the ES, short SPY, short DIA. I am going to buy some Oct, Nov. and Dec. puts AND add shorts on specific equities. Which equities? Any equity that is 20% or more above it's 200pMA and 4% above it's 20p MA is a good candidate.

Look for reality this week.

Good luck.

Enough with the weekend already!

Who knows what to make out of today's action. One can argue that it was a significant day in that the intra-day high of 1080 was tested and rejected with force. Others can argue that today was simply a holiday and everything that happened should be discounted. Look at the daily chart:



See the blue fib line on top? That is the intra-day high from the 23rd of September. Notice how close to the apex of the rising wedge this level sits? Well, I guess it got too tight for comfort and when asked, market participants decided to wait until earnings reports before running any higher. Either that, or smart money wanted to get a head start on the selling. Either way the push was firm and it found support just above the 20p MA at about the local top seen on Thursday. So we can conclude that there is still buying on the dips.

The break of the the bottom trend line in the wedge was significant and accompanied by volume. It is hard to discount this event. For me, it is evidence that there is at least one big seller that decided not to take holiday. Open the 1 minute chart:



You can see on the 1 minute chart how this was a pure sell - quickly eliminating 7 pts on the index. If you look closely, you can see a 5 wave EWT. Unfortunately, I was unable to identify it in real time and did not ride it with an early short. If I am not in position already, I try to catch the pause in the middle of wave 3.

The down leg did retrace to the 38.2%, 50% and 62% levels. I tried to scalp some ES action at the second test of the 50% retrace. I got a small piece - nothing to write home about. I did the same at the 62% level with better results. Tight stops really limited my profitability today.

We finished the day conveniently testing the 62% retrace level and the 200p MA after popping through the top trend line in the final two minutes of trading. And one final note, WTF happened with the index during the first hour of trading?

I really do not know what to say here - you can discount the day entirely or you can argue that we have just seen a preview of what is to come.

Your call...

The Battle at the Top

For the second time in under 3 months we are in a battle at a top. Remember, a top is a "relative" phenom and can be considered forever local. Over all time periods local tops are set, challenged, overcome and retraced. To be successful at trading, we need to master these local top battles to both profit and protect.

Regrettably, my short position in the S&P is early. This creates a sense of urgency and can often cloud judgement. It is times like this where two things are most important. First, know your levels and thresholds. Second, examine your past experiences in similar scenarios - studying success and failure.

It just so happens that I documented the last significant battle at the top, starting in early August. That top resulted in a fall of the S&P from a intraday high of 1018 to a closing low of 979 in a three week period. At that time, I was convinced that fundamentals, sentiment, and technicals were perfectly aligned for a significant pullback. Some pullback, 39pts!

Though the current top is very different in several important technical ways, the methodology of evaluating levels and risk is the same. We start with the levels. I have chosen the weekly closing line chart for discussion:



On this chart I have labeled several features. The most important features are "Full Crash Fib", "Last Major Down-Leg Fib", a fib grid for the entire up-leg since March, a fib grid for the last rally up-leg, and levels A, B, C, and D. The MAs are as always, pink 20p MA, blue 50p MA, and white 200p MA. The closing price line is in green.

If we think of the "Full Crash" as the drop from 1564 to 685, the most important levels are indicated in the fib at 1124.67 (50% retrace) and the 1019.22 (38% retrace). These levels are labeled A and B respectively. When a leg completes and reverses it will generally retrace first to the 38% level. Many times the retracement is halted or stalled at this point as market participants battle for direction. We can see some evidence of this phenom in the price action in August. The vertical rally topped and started to roll. However, instead of reversing - price has started to bounce. The last bounce off of the 38% line happened last week. Of course we are all speculating what will happen next.

If price action is able to break-out above the 38% level (B) - it will try to reach the 50% level (A) - which is the 1120 area. This is why so many folks out there call for 1120. It is also important to note that many legs retrace to the 50% before resuming the original trend. This may result in a retest of the March lows, or simply result in some consolidation between the 50% and 38% levels. Neither case would surprise me. If we retrace to the March lows we'll have a classic Big W. If we consolidate we'll set a base of a major bull run such as what we witnessed in 2004 forward.

Analyzing the "Full Crash Fib" levels is a good start, but I like to break that crash into several components. After all, it was not vertical. I count at least 7 reactions in the down trend. The final three reactions have been retraced fully already - meaning that our current price level is above the final three reaction tops of the Full Crash. (The reactions can be identified as local tops working backwards from the March low - Feb 2, December 29, and Oct 27). This leaves the next reaction - which was the local top set in August at around 1300. We had a massive drop after that reaction, and it is a very appropriate move to analyze with a fib.

I call this the "Last Major Down-Leg Fib" - measuring from the high of 1301 to the low of 685. As we speak, we are head banging with the 62% retracement level of this grid. If we move beyond this level, odds favor a full retrace to 1300. I know, hard to believe but the technicals are the technicals and it is wise to be prepared. The good news is that the 50% retracement level of the Full Crash will be a significant resistance and therefore my trigger for exiting my short positions if we fail to reverse. I simply can not justify sitting short for a run from 1120 to 1300.

Now, I do not believe for a moment that we will see 1300 before a correction. Rather I believe that levels C and D are more likely. Level C represents the 50% retracement of the "Last Rally Up-leg". This rally up-leg is measured from the July low of 880 to the current high of 1071. During this up-leg we bounced off of the 20p MA and have not come back to touch it since. We have topping symptoms and a highly over-bought condition. Even if we were to continue to rally, this last up-leg will likely retrace soon. If it does, we should see the 38% level (990's) and more likely the 50% level (975). I have represented this level as C on the chart.

C is very important. It is the 50% retracement of the Last Rally Up-leg. It is also the 50% retracement of the last Major Down Leg. It is also the location of the 20p MA. It is also about dead center of the BB. Whenever you have so many technical points converging, there is a good chance that price action will find it's way to the level.

If we do retrace to C there is a high probability that we will see D (880). In addition to being the full retrace level for the Last Rally Up-leg, D is also the 50% retracement of the full rally since March. Finally D is also very close to the 50p MA. Reaching D over the next several weeks would provide much needed price consolidation and greatly improve the support base for any future rally. It will also provide a good entry point for the cash that remains on the sidelines. Finally, it buys time for much needed economic healing.

=================================
A discussion of trading strategies around these levels to come later...

Important Day...

Today is an important day for the S&P. I know it is Friday and the futures look pretty flat and we had a big rebound week and it is looking like a lazy session. However, we are at a junction that may very well determine the direction of the market for the balance of October.

Open the daily line graph:



Closing price action is of course in green. I have added two sets of trendlines. The YELLOW trend lines show the rising wedge that has been in tact since the March lows. The RED trend lines suggest a possible new channel for current price action.

Payline shared a link with yesterday's post to one analysis of this formation. In a nutshell, the rising wedge is often seen in bear market rallies. In fact, Edwards and Magee suggest that most traders confuse the rising wedge for a new bull market and the mere presence of the rising wedge is itself confirmation that the primary trend remains down - and a correction/retest of lows can be expected.

Notice how the yellow trend lines rise and converge? This is the wedge. Now notice that we broke out of the wedge last week when price action failed to react at around 1048. This is a sign that the rally is losing vigor. In theory we can still rise from here, but price action will begin to roll and eventually fall more dramatically.

The red trend lines represent a new channel for price action. Notice how the trend line angles are less extreme and parallel to each other. If price action were to remain contained by this lines in coming sessions - we have a "rolling of prices" at a possible top. If price action falls through the bottom trend line of this red channel, we may get our sell-off. It seems to me that 1048 is the critical level of support.

Now let's look at the hourly chart.



Here I have included the YELLOW channel lines associated with the break from the wedge. As you can see, the last reaction in the downtrend broke the top trend line and has tested the prior reaction high. In doing so a new channel has been formed during the reaction and is bounded by the RED trend lines. If price action follows this channel higher we will get a test of the 1080 intraday high. If we close above 1072, we will have re-entered the wedge on the daily. If price action breaks down and out from the bottom trend line, we may reach back into our down channel below 1048 through 1061, and 1056-54.

At first glance on the hourly that may not seem so significant. I mean, 1048? That price level is still at high end of the down channel. Don't we have to get down to test the last local low at 1024? The answer is no, 1048 is much more signficant, for now.

Yes, 1048 gets us back into the down channel - but it also breaks the lower trend line of the up channel seen on the daily. This is very, very important. Remember, the up channel on the daily represents a "rolling" of prices at the top. If we are able to break out of its lower trend line, the correction will accelerate. These are all levels that trading programs will react to. This could trigger a major selling wave.

Anyway, I hope this makes sense to folks.

Good luck today.

Brain Surgery 101...

Today's price action presents some real concerns for me. We broke the intraday high of September 29 and we closed higher than we did on September 28th. This is a threat to our downtrend which is now clear on all time frames - Hourly, Daily, and Weekly. If we do not reverse course next week, we may see another leg on the rally and a strong finish to October.

I have decided to look at the weekly chart again to get a glimpse of how bad it could get and determine how I might handle my core short positions if this keeps running.



As you can see, the closing price action (green line) suggests that a full rebound of last week's pullback has occurred. This suggests that we had a 1-week correction. Hmmm. Is that all we get? Last week I listened to a Bloomberg interview with a bullish analyst who said "I hope we get a full 10-15% pullback, anything less spells greater trouble for the sustainability of the rally in the near term." I would like to agree with his thinking, but it is getting tough to agree with logical statements in this market.

From a technical standpoint, we are right up against 50% and 62% retracement levels of the last two fibs, that should help to contain the rally - and I believe it has been doing just that in the last couple of weeks. We also hit resistance from a prior price level in 2004 - where the market consolidated in the 1000-1150 range after a 1 year bull rally off the 2003 lows. Don't let the time period phase you, it does effect current price action. The market's memory is much better than our own. We are also smack against the middle blade of the fib fan that stretches from the high in 2001 to the low in 2009 (a weak, but not insignificant, technical level). We are also approaching the top trend line of the downward channel formed during our crash of 2008. It seems price action could intersect with that trend line around 1120 - which happens to be right about the 50% retracement level of the entire crash when viewed on the weekly closing line chart.

I have highlighted the 1120 level several times in past posts. I have also stated that the end of October is my time frame for holding my short position. If we reach 1120 and do not reverse before the end of October - I will begin "rolling my short positions". This means phasing out my current holdings and adding at higher levels. I will target the next logical level which looks to be from 1200 - 1300. This is the 200p MA and the full retrace of the last support shelf in this crash.

I will go on record as saying that I do not believe this should or will happen. I believe the market should reverse soon and the S&P should be below 1000 before the end of October - possibly to levels as low as 900. Remember, these corrections happen when you least expect and usually after the last short has given up. They are violent - taking down the indexes by as much as 5% in a day for several days in a row. It is time to watch the smart money and specific sectors such as financials and technology - when they roll, so will the index.

Having said all of that, I circled the start of the bull run in 2003. In comments that I made many weeks ago, I suggested that this bounce resembles the bounce we saw in 2003 more than any other in history. Though the economic drivers are completely different today (we are not recovering and unemployment is rising) it would be prudent to study that run carefully. Note the relative positions of the MAs then and now - very similar. That run didn't slow down until the 200p MA was reached and even then, it only consolidated. It took 5 years to see sub 1000 again. I am not sure I want to hold my shorts that long!

Let's hope for some sanity next week! (I just finished chapter 1 of "Brain Surgery for Traders")

Good luck out there.

Congestion Above Should Contain Price Action

I'm going to keep this short (no pun intended) and sweet. We remain in a downtrend and the market has a great 3Q "baked-in". The market is poised (and over-due from a technical standpoint) for a pullback. Any negative news, or even less than stellar news, will get this correction rolling. The sellers have their fingers on the trigger. Nobody who rode this pony this far plans to give up too much of their fat profits. There will be a line forming at the exit when this thing gets started. We will see sub-1000 on the S&P this month.

I offer only one chart today - the 15minute chart for the last 20 days.



This is not the holy grail of charts. It is merely good for a simple, but very important observation. For the very first time in a very long time, the market actually consolidated at several levels on the way down. These consolidated levels should provide just enough resistance to keep any rally attempt in check. We see the 1059-1060 level working already - holding us to the top trendline of the down channel. Levels at 1062-3 and 1067-68 will also keep us contained if we break out from here. To break these levels, there will need to be a lot of buying. Who in their right mind is buying now?

Finally, we are of course over-bought and a quick glance at some of the major financial firms shows we are trading within 20% of ALL TIME HIGHS. Yes, 20% of ALL TIME HIGHS. Look at GS if you do not believe me. This is very important, because Financials have led this rally and they are simply running out of head room.

I am now going to short individual stocks - with an eye on the financials. This combined with my broad based shorts on the S&P and the DOW should pay handsomely in the coming weeks.

Having said all of this, God knows this has been an irrational period, and if we break out from here to new highs on volume, I will give up my career as a trader and get into something far easier, like brain surgery!

Good luck - and no worries!

When do we worry?

People have terrible memory and are easily swayed by the latest headline. It never ceases to amaze me how in one day we can go from "a 10%-20% correction is a good thing and overdue" to "global economic growth is fueling a rally". This is why I try not to listen to headlines - rather, I will read economic reports and listen to a conference call or two to get my economic bearings.

Anyway, today's action was again pretty predictable. Yes, I would have prefered a closing below 1052 - or even 1048, but I'll take what the market has offered. Though I have been focused on the hourly for my trading, I do want to look at the Daily price line chart. This chart uses the CLOSING price of the S&P and is in line format rather than bar format. Open it up in a new window.



Some basics - the green line is the closing price of the S&P on a daily basis. The pink line is the 20p MA, the baby blue is the 50p MA, and the white line is the 200p MA. Some day price action is going to cross down through both the 50p MA and the 200p MA. (I can say this with certainty, though I can not predict when!).

I have added two trend lines on the daily. One runs across the descending tops we are seeing lately. The other runs across the descending bottoms. These trend lines are getting WIDER as time progresses. This is a sign of EXTREME VOLATILITY. Normally, we see parallel lines (as can be seen on the intraday hourly chart) or lines that are converging. Converging lines tell us that the market is calming down to contemplate the next move. Diverging lines that get wider tell us that the market is reaching a very unstable state and is about to blow - one way or the other. Note how the bottom trend line is dropping steeper than the rise of the upper trend line? This should clue you in to what may happen.

Not to long ago, maybe 3-4 sessions ago, I said that volatility was about to get very serious and if you are not careful you will get bucked off your positions. We are seeing that now and I suspect that a big down leg is on the horizon.

I circled the last correction attempt and the current attempt. Note how the down thrusts occured in three waves (labeled 1,2,3) with the third wave being the most significant. I am not saying that this is what will happen in the current correction. I merely point out that this is how it happened then - and the market (and it's participants) have memory. Also, note how the correction did not end until the price action crossed the 50p and 200p MA's.

If we are to see a third wave down in the current correction attempt, and if it is going to be worse than the first two, we should look for the following:

1. a break of the 50p MA near 1025
2. a break of the down trend line near 1013
3. a break of the lower BB at around 1005
4. a break of the psychological support of 1000
5. a complete retrace of the last rally leg at around 993

These 5 things I predict will come to pass. The real question is "Do we head down to the 200p MA near 900?"

Only time will tell, however if we break resistance at 1060 and 1070 - we could see another rally leg - believe it or not.

I sold my insurance today at a very nice premium, looking for price action to head downward. I guess that is putting your money where your TA is!

Good luck out there.

Prepare to Cash-in Insurance...

We got a nice bounce off the bottom trend line today. So much for a clean drop to the neckline at 993! Still, this is actual pretty good news. Why? Because price action continues to behave according to the technicals. Open the hourly chart:



Notice how we bounced cleanly off the bottom trend line? We had a pause at the 20p MA, then the consolidation in the 1036-37 range, ending with a pop-up attempt to take 1042 with turn around back to 1040. What I really like about the price action is the range. We had another day with a 15pt swing. Lots of opportunities for ES scalping.

Focusing on where we are headed - it seems to me that we could very well get to a test of the top trend line near 1048 or so. I expect that we'll see some significant selling at that level and I plan to cash out my insurance if we see a strong rejection. The selling will be triggered by several technical issues including the trend line, the 50p MA, and the 38% retracement level for the last major rally leg. The 1048 level is also right around the midway point of the BBs. Finally, Stochs are back in the oversold zone.

We'll see what happens tomorrow!

Slip sliding away...

First, I want to thank those of you who have been following my posts. I do appreciate the comments and recognition when we hit targets identified in my analysis.

Let's start with a snippet from the 5 minute chart...



Friday was a tricky day (predictable in hindsight) - as we closed near the bottom of the descending channel Thursday and were due for a bounce around 1025. Of course, the jobs data did not cooperate and caused an extreme downward move on open. You can see this on the 5 minute chart with a clear break and acceleration as it crossed the bottom trend line. Once the major sell reaction completed, price action retraced but was met with a fair amount of resistance - as it is stuck in a price gravity band which I do plan to publish a paper about some day.

Interestingly enough, we closed at 1025 which is exactly where I predicted at the start of this week. Again, this is significant because it shows that the market is starting to behave according to technicals again.

Many folks are speculating that we are in the start of a 5 wave EWT - with waves 1, 2 and the first half of 3 complete. It is possible and such an EWT could put us down at my target zone of 990-960. I think the best view of this is on the hourly if you want to make trading decisions on the theory. I have supplied it here for your review.



I am more focused on the Daily closing price line chart right now. Open that here:



As you can see price action has closed below the 20p MA and is headed for the 50p MA. We are also right on the bottom trend line of the prior up channel. We have to watch carefully here for a break and an attempt at the lower BB - around 1000. I think this is very possible and could represent the completion of an ugly head in a H&S reversal pattern that I have anticipated. If this is going to happen, I expect we get to 1000 in a solid thrust - closing at this psychological level before a bounce and attempt at the right shoulder. Why did I suggest a solid down thrust? Two reasons. First, there is a low density gap sitting right below the 50p MA and trend line. This means that there is no natural support from prior price action here. If we break 50p MA and the lower trend line, program selling kicks in hard and there are no stops until 1013 - and that is a relatively weak 38% retracement level which has failed in the past. The second reason is that market price mirrors past action. Look how sharp the ascent was on the left side of this head. We should see a sharp decline on the right side.

Longer term - we see the lonely 200p MA way down around 900. You can now hear analysts making statements that touching the 200p MA would be good for this bull market and not to worry if and when it happens. This is a good sign.

I expect a down move to 1000 and then a bounce. If we do not get that - I am skeptical of a correction and will re-evaluate.

Good luck out there!

How strong do you like your coffee?

Now that we have a pullback , how far can it go and how long can it last?

I can't pretend to have answers to these questions. I can only try to model some possibilities. If you are looking for my short term levels - please read my PRIOR post concerning the hourly. If you are looking at the big picture - continue reading.

First, we must assume that this downtrend will continue. This requires that we see a continuation of lower highs and lower lows. If this is a CORRECTION, we should use the weekly chart as our guide - as a correction of the last 7 months will require several weeks. Anything less and we will have too many skeptical investors to resume a strong rally.

If we correct on the weekly, we are talking about some substantial price movement. Open the following chart where I have circled 2 possible targets for a correction.



Zone A represents a very logical zone because several technicals intersect in this region. First in line is the bottom BB - we nearly touched the top and it sure seems like we are headed for the bottom. This is a natural oscillation and it seems like we are a bit overdue! Second in line is the 20pMA. We haven't touched this line since we crossed through it in March - over 7 Months ago. Price action tends to the 20p MA after extremes. Again, we seem overdue. Finally, the center of this zone happens to be at the 50% retracement level of the the major rally leg that started at 880 and ran to 1080. This is the orange line. (I had to move the fib out to the right to allow viewing of the numbers.) Seems that a correction in the 960 to 990 range is very possible.

A more aggressive target is represented in Zone B. If we have a second panic wave in this bear market - the entire rally of the last 7 months must be tested. This will require a test of the 50% retracement - which is the swing point. This is the orange line at around 880. It also represents a full retracement of the 880-1080 rally discussed above. Finally, it aligns nicely with the 50% fib fan blade which is cast across price action as a result of the first major breakdown in the crash. If we are going to have a "W", it will start with a correction to Zone B. That is where the balance of fear and greed will be weighed!

Anyway, IF we CORRECT these are my two target zones. Looking at the Stochs and the RSI, I'd say we have plenty of room for the bottom to fall for some time to come.

Watch the lower trend line...

Well, we got the breakdown out of the symetrical triange as I suggested. It is very nice when technical analysis comes together - even nicer when you commit your trades to your beliefs.

We officially have a downtrend. The downtrend was set when we closed below 1041 today. Well below I might add. We now have to look for support - as markets do not travel in one direction forever. Open the hourly chart:




Note that we broke out of the bottom trendline near 1048. We saw a slight pullback (which I warned to expect) and then strong continuation bar heading south. If you shorted below 1048 and held on, you would have a very nice gain. Notice how the price moved nicely through 1041? Remeber, one you full retrace a rally leg with the kind of price momentum we are carrying - there is no stopping the train.

The analysis called for support at 1036 (the 50% retracement of the main rally that started on the 4th and ended on the 23rd) - which you can see in the form of price indecision across the final 4 bars. This is a major pivot point - if we were going to reverse today - it would have been here. This goes back to yesterdays post regarding the importance of the 50% retracement of price waves.

Once we broke 1036, there is no support until we reach the intersection of the bottom trend line and the 62% retracement level of the main rally. This is right around 1025. I expect to see a bounce there and it will be the spot (roughly) that I plan to add insurance in the form of October calls.

If we break that trend line - I think 993 is a fair target short term. If we bounce off that trend line we will see a retest of the 1036, 1041, and 1047 resistance.

I hope everyone has profits from the volatility!

Good luck.