Could be one of the last great shorting opportunities in 2009...

The market technicals are so weak that I can not see a strong rally to close the year. Any rally will likely be met with substantial selling. The year is ending and many fund managers have already been sneaking out the back door, and those that remain in the game have their eyes on the exit. I think it is time to short aggressively.

Looking at the hourly chart:



There is no change in the prognosis. The S&P has formed a double top, and is struggling in a resistance band formed by prior consolidation. Although there is ample resistance to contain a rally attempt, there is very little supporting the current price level - leaving the market vulnerable to a sell-off. I believe a fall below 1085-084 will start a mass exodus. I can see this baby unwinding down to our 1029 mark. Of course, the chart posted on Friday still applies, including support at 071ish, 061ish etc.

For now, I am focused on the 20p MA crossing down through the 50p MA at point A. I expect this to trigger some selling. On the flip side, I am concerned about the possible breakout above the top trend line at a retest of the channel bottom at B (1110). I say I am concerned, but I am not overly concerned.

Let's look at today's action:



The futures market was down, then up, then down, and up. What a roller coaster. Kind of like the open of SPX itself, down up, down, up, down, up, break away - total rejection. This is one weak market. Anyway, one of the oldest tricks in the book is to show signs of reversal right as we enter lunch. This is to bait the retail crowd and dump shares. This is not "conspiracy theory" or "tales of the specialist" - it is just fact. Look how the market found a double bottom and simultaneous strength in the RSI right before noon. A pop followed by a sell wave. After 15 minutes of healing, another pop followed by a sell wave. Believe me, there is quite a bit of distribution happening quietly on days like today. However, the best is always saved for last. Look at how hard it was to break the down trend line. I count 5 hits - each met with selling - but once it broke there was an obvious short covering rally. Note how the gappy price movement diverged from RSI each time it formed a peak. This was a clear signal to short this end of day pop - which I did and the ES sold off nicely after the close.

Anyway, today's session (and perhaps a few sessinos to come) may simply be some of the last "great" shorting opportunities on the S&P in 2009. Remember, when we start to fall, it will be fast and furious. I hope everyone is in position!

Cheers!

Hard to read the dollar...

Here is the daily Dollar Index chart.



If you recall, the red trend lines are the boundary of the main down channel. The pink lines are the inner wedge. Over the last month or so of trading, the dollar looked like it was strengthening (or at least finding a bottom). The lower channel of the main trend line hasn't had a visit for over 20 sessions. In addition, the upper trend line has been attacked three times in the same time period, if you include the remarkable reversal we had on Thanksgiving evening. I think the dollar is at a very critical juncture. We have had a test of the lower wedge trend line and a test of the upper trend line of the channel - all within 24 hours. That is a swing from 74.200ish to 75.700ish - or 1.5% in 24 hours! Think of the wealth creation and destruction with that swing!

We now sit with a nasty gravestone doji near the top of the upper trend line within the wedge and the equities markets are in a state of indecision. Where does the dollar go? Do we retest the bottom of the wedge or are the last two breaks of the upper trend line a sign that the dollar is going to breakout on a third attempt?

I wish I knew! I am inclined to believe that the dollar will sink - but until the equities market decide on a course, I will not take a heavy position either way. I am going to watch for a break down or bounce off of 74.750.

Good luck next week everyone!

Don't buy Dubai...

Thanksgiving - I time to give thanks for the blessings in your life. Those of us who live in the US are very lucky to enjoy the freedoms and opportunities that we have. It is very easy to take them for granted. For this reason, I made a conscious decision not to trade Wednesday night or Thursday - and it is funny that the markets decide to sell off exactly then!

Anyway, I am back at the desk and have quickly put some analysis together. I want to emphasize that the events of the last two sessions are very hard to interpret and this volatility can, and will, likely work in both directions. Also, I do not "buy the Dubai" story. There are bigger things happening on the currency front.

If this is part of the correction process, the hourly charts will help us understand what to expect. Open this chart - which includes the opening 30 minutes..



The chart features several technical studies, including:

1. The yellow up channel which has been in place during this last rally leg.
2. A fib grid showing the retracement levels for the last rally leg
3. The Overhang Supply Band in red which is formed from the price consolidation at the current reaction highs.
4. Key Support/Resistance levels in yellow and red

Before we get into the discussion, let's all watch volume. This is a holiday week and volume is extremely low. This does raise questions regarding the strength of the move (or reaction to the move).

OK, first we observe price action and look for any symetry and clues in the mirror side of the current move. One thing I notice is the completion of a double top that formed over the last 10 trading sessions. Not bad in terms of technical qualification. A double top forming over ten sessions with decreasing RSI - this is especially supportive of a correction when considering that this top is the fifth top in a weakening series that started in July. Further examination of the symetry suggests that we should find support at the 1085 area and have a pullback to the 1100 area. This also makes sense, as that would bring us back up to a retest of the bottom trend line of our up channel. It would also be the last line of resistance to the upside. I would not be surprise to see a test of the line - though the overhang supply is heavy and it may not happen entirely today.

Now, looking at the Fib grid, we see a 38% retrace would test the 1081 level at point A. We almost had that test in the open and are seeing an expected pullback. If we see another test of that level today, after a pullback to perhaps 1095, that would most certainly open the possibility of 1071 at point B by the close. I say this because there is very little congestion between the 081 and 071 levels and reversals after failing to move through overhang are often followed by panic selling. The road to 061 at C will be harder, as there is congestion there and we all remember the major buying and selling that occured at that level by institutions. The good news is that a break of 061 will bring the big test of the 029 level at D, which is the full retrace of this rally leg. This is a must for a trend reversal.

The real story is the currency market. Wednesday was absolutely insane. It included a massive spike in the EUR/USD, a massive dip in the USD, followed by an immense reversal. At the same time, Japan is likely intervening on the JPY. I am not sure what to make of these swings - but I can say the dollar is abiding by the major down trend line that I published several sessions ago. Amazing how it ran down to the bottom and back to the top in 2 sessions. Again, I am not sure how to read this - but that is the story, not Dubai.

Nothing to Analyze (or at least no desire to)...

Let's face it - this is a net sum zero proposition this week. We are moving to the right - with some ups and downs in-between. This is really a vaction week - and I personally do not want to work.

With that in mind - have a happy Thanksgiving everyone. Enjoy some down time with your family and friends (with only one eye on the market!).

Cheers!

A bit higher than expected...

Most of us expected a rise in the market today (and this week). Seasonally, this is an up week. I think I read 80% of the time from one source. Regardless, the technicals all suggested a rise today though I was surprised to see an attack of the high of the year. In retrospect, perhaps it is reasonable. The short squeeze was in play and the volume is light. So what is the good news?

The good news is that there was no follow through on the buy side. Classically, when we have a strong thrust up at the open, followed by a sagging flag, it is a safe bet that we get a second rally. Not today. Even the close was just short covering. Look at the chart.



We blasted off, exhausted and just creeped lower. We seem to be bouncing along the 50% line. In fact, I was surprised that the inverted cup and handle did not cause a break lower - as I would have been happy to eat my words about the 1103.5 support level holding.

Anyway, the pattern seems to be playing out in the futures during the early part of the session. I have a position, but may close it out with a small profit. Not sure what to expect overnight and the morning.

I do believe that shorting every rally is a low risk scenario.

Good luck out there!

Follow Through is Important...

Good day. Enough said on that.

I really wanted to see us close down under 090, but I knew it was not happending today. I called the LOD at around 089 and sadly I was correct. Having not closed below 090 is not a big deal. It just would have sealed the deal for this reaction high. Reason being that we would be sitting below a substantial layer of congestion - which is essentially supply. Now we sit on top of the congestion and it serves as support. Hopefully we will get follow through tomorrow. We are one sell wave away from a very nice breakdown.

I have two charts today. First the hourly chart, as I think it provides a good summary of why the price acted as it did today.



This chart was originally posted many days ago. In fact, the red support/resistance lines remain un-modified. I have added only one technical study, which is the fib grid traced from the low to the high. It is funny how well these things work. Note that the key retrace levels align nicely with specific support and resistance levels. The 38% level sits right around 085 and the 50% sits right around 072. Does anyone remember the significance of 072? That was the level that we saw some real selling. Funny how it becomes the 50% retrace point of the last rally leg.

Anyway, I have three color zones on the chart. The first is the "Overhang" in red. Based on today's closing price, this represents the supply that will keep further rallies in check. Now you know why I wish we fell below 090. That would add to the supply side of the equation. The next area I wish to highlight is the "Support Base" in green. This is the next area where we see consolidation (at least in the last 20 days). That is the 029 to 072 area. That is going to be an interesting 40 points if we reach it. The final area is called "Butter" and is appropriately represented in yellow. Note the lack of recent consolidation in this area. In theory, if we break 085, we should cut like a warm knife down to 072. Bread anyone?

So, can it happen? Sure. I like the fact that RSI is not oversold here. I also like the Bear Flag formation we have today. Further, the short covering at the end of the day failed to make a decent dent into the overhang. These factors, combined with a miss be Dell, falling financials, and a tech sector give-up are all pretty encouraging. How does OPEX fit? I don't know. All I know is that a technical case was built, price action seems to be following, and the surrounding "stuff" seems to align - except for the dollar index performance today.

Now let's step back and examine the daily chart.



This chart is also from the archives, with no modifications. The red channel was the main up channel that was violated a couple of weeks ago at the prior reaction low. That was a good sign, though it would have been much better if we got lower than the low set in early October. That said, we did break the lower main trend line and a new channel started. This channel, in yellow, was created by connecting the reaction lows of October and November, duplicating the line and placing the copy on top starting with the last reaction high. This gave us an idea of where the most recent reaction high would end. Sure enough, it did - though it burned a few of us as it formed.

So, we now "seem" to be heading south into the target zone that I have identified. And looking at this zone, it really is butter - provided we get below that white dashed line! Look back to every time we have approached the 20p MA (red line) - we have always crossed. This is to be expected on a daily chart. Now, look at the last four (4) reaction lows. See how each time we cross a bit further. Also note how the distance between the 20p MA and the 50p MA (blue line) has thinned over time. The last reaction low saw a break of the 50p MA - NICE! Now, the 20pMA is just above the 50p MA, price action is bearing down, and it looks like we'll easily break both. Low and behold - if we break both, doesn't that also break the red channel line? Sure does. If we break the red channel line - look out! The selling begins.

Let's take it a step further. If the selling begins, what will happen with the 20p MA? It will break down below the 50p MA. When that happens - wow. This is very, very bearish! Finally, if price decline accelerates, say hello and goodbye to the bottom yellow trend line and we may even get that break of 1029.

Wow, this may really happen folks!

Good luck out there - sorry I do not have a bull case for you tonight.

S&P and Dollar Rolling...

Let's pretend you had no money in the market - long or short. Take a look at this daily chart of the ES and tell me what you see happening:



I see this rally rolling over. The thick red channel is the "master up trend" that has been in place for the last 8 months. The dark pink channel was formed over the prior two reaction highs (two months of price action). The light pink channel is forming now with the completion of the current reaction high. Note how the trend's slope dPrice/dTime is decreasing. We are rolling.

Now look at the dollar index and tell me what you see happening:



I see a similar phenom - obviously in reverse of the ES. Note the rolling of the bottom trend lines. The only difference is that the dollar index is actually wedging. Meaning the reaction highs are not breaking the top trend lines yet. At some point, the dollar and S&P will decouple. I spoke about this several weeks ago.

Anyway, this is my second post tonight. If you have not read my prior post, you might want to check it out. I talk about the action today and some of the trading decisions that I made.

A day in the life...

Well, today was another good day for me - at least until this point. We'll see if my short ES contracts perform for me this evening (once all the last minute short covering is complete).

Today was a day-trading day. I was hoping it would be the start of the down swing - but no such luck. I guess a 10% decrease in housing starts when the economists were expecting 1.2% increase is really no big deal. So on days like this you have two options:

1. Sit out and wait for your breaks
2. Get in there are fight for every dollar

Since I am working to erase a terrible loss on Monday, I had to go to the front line. On such days, I only care about the 1 minute chart of the SPX and a variety of charts on the ES. I do not trade cash equity on these days - futures contracts only. Open the 1 minute on the SPX:




I have tried to highlight the features that I used to make trading decisions. First, my bias was that the market would see pressure during the day. I maintain this bias because all of the technical indicators suggest that we are at or near the top of this last reaction wave. This combined with the dose of reality from the housing starts data, in theory, should have resulting in a good deal of selling. With that bias, I took a short position ahead of the open. I actually took the position ahead of the report. For me, it was a low risk entry as the noise following reports always dampens in a few cycles and I entered with the intent of starting my swing position anyway. Anyway, here is the daily:

After a few moments we saw I quick pop followed by sell significant selling. In the process, a gap opened up "intra-day". Now, this is different than a gap that spans two sessions - however, it has similar effects on price action. Whenever I see such a gap, I immediately think of EWT theory and assume that the gap splits the price thrust in half. Hence, you see a fib grid dragged across with the 50% level bisecting the gap. As soon as we hit the bottom of the grid - I took my first profit for the day.

Of course, price did continue downward over the next 10-15 time slices - but it was choppy and the RSI was touching oversold and it was no longer making new lows. This made it clear for me NOT to enter short at that time.

Once price start to rise our attention must turn to above. Where will resistance be? Of course we watch the support points on the mirror side of the price action, but what big tests are there? For me, I like to watch price interaction with the MAs (moving averages) and the BBs (bollinger bands). In this case, we also had a GAP! When price only hiccuped at the 20p MA, all eyes to the 50p MA. By the time price reached the 50p MA, the 20p MA was already turning and we had already passed through all of the support levels on the mirror side of the price. That meant that the GAP was a likely target. The location of the 200p MA supported that theory.

We blew through the gap but price was met with some resistance at the top. This is a good sign - however it is important to let the price action fully explore the gap and decide what the heck it wants to do. In today's case, the price action re-tested the bottom of the gap and shot up - in bits and spurts. Whenever I see that kind of action (spits and spurts - short little price bursts) I get ready to short. Note how much stronger the price action was on the sell wave following the weak second thrust through the gap. I know it is hard to look at it on screen in static form - but if you traded the session today you know what I am saying.

At this point, I decided to start my first trend line - connecting the opening high with my suspected first reaction in a down trend. This line served me well throughout the day and was used in combination with the ES charts, volume and RSI to make most of my decisions. I will not go into each one as I traded 8 setups with 7 wins and 1 loss. I will say that the 7 winners occur ed prior to the trend change.

The trend change - ah yes, the trend change. It is funny that I spoke of the RSI yesterday and last week. Guess what tipped me to the trend change - in advance. You got it, the RSI. Even on the minute chart this baby can be very useful. Today, the RSI helped me three times (actually, only twice so far - I am hoping for three tonight). I spoke of the RSI and how it created concern in the opening session lows. Now look at the middle of the session where we set reaction lows, one after another, with flat over-sold RSI indications. That was the signal for me to cover all shorts for a trip to the top trend line.

At that trend line a break-out was signaled when price started to congest along the line. The 20p MA started to act as support for price action, which when combined with the fact that we broke through the 50p MA, almost guaranteed a break-out. I did not trade long as I refuse to take long positions when I am convinced about a swing change. Price ran to the bottom of the gap where it consistently met resistance due to the price consolidation that we have been seeing for the last couple of sessions. We even saw a classic retest of the down trend line. Once we bounced off of the down trend line, I created a new uptrend line connecting the last reaction low with the bounce point. I then duplicated the line to project the top line of an up channel.

From 3:00 forward, we saw some strength that carried price action back through the gap - short of the channel top. I noticed that again the RSI was diverging and took my final short position in anticipation of a selling wave. Unfortunately that sell wave did not materialize, or was absorbed by a greater amount of short covering.

We closed the day at the top of the channel - and I have decided to short the ES overnight - anticipating some selling pressure into the open.

There you have it.

Good luck tomorrow.

I trust the RSI

Several posts ago I pointed out that the RSI was diverging from price on all charts. I explained what RSI was and that was that. Yesterday, after punishing myself for making some poor trading decisions, I blogged about the few technical indicators that remained bearish. I spoke of the 20p MA crossing down below the 50p MA on the 5 minute chart, the fact that we remained outside the lower trend line of the upward channel on the hourly, and that the RSI continued to diverge.

Today I offer the hourly chart:



We remain outside of the channel and are migrating to the left. This remains a bearish sign - but is not the most important indicator on the chart. Again, the RSI shows a divergence.

For those of you who do not believe in using the RSI - please re-evaluate your thinking. RSI divergence is about the only leading indicator that actually works a high percentage of the time. For example, look at the low price points on the left of the chart. See how we were setting now lows in price? Now look at the RSI. The lows of the RSI started to rise. This simple divergence was an early warning that trend change was about to occur.

Now look at the reaction highs on the right side of the chart. See how we are setting new highs? Now look at the RSI. The highs of the RSI are dropping. This divergence is an early warning that the trend is about to change.

Does it work 100% of the time across all time periods? No - nothing is perfect. However, you need to watch the RSI in all time frames and note when it IS working. When it is working, you can leverage it to your advantage.

The chart also features support/resistance levels that must be broke if we are to change direction.

I recouped a decent portion of my loss today through non-emotional technical trading. Though the market stayed in a tight range (compared to days of late), I was able to extract 10 pts. by scalping the ES. This is a high stress activity, but then again so is being short the market.

Cheers.

Got Crushed...

Once a month or so, I get crushed. Today was that day.

1. Ben said that he does not see evidence of a bubble in the US - anywhere.

2. Ben sees no issue with banks having both security investment divisions and traditional lending divisions - in fact, it is good and he will continue to supply liquidity.

3. Ben still wonders what is the value of the toxic assets. (and jokes)

4. Ben will keep interest rates near zero for a long, long time.

5. Ben thinks jobless recoveries are the norm and to be expected.

6. Ben will sacrifice the dollar without concern.

It was an ugly day and I do not like the technicals.

- We set a new high.
- We are back firmly in the main up channel
- 1120 is a reasonable target

I see only a few reasons to be short into tomorrow:

- 20p MA has crossed down through the 50p MA on the 5 minute.
- Price failed to penetrate the lower trend line on the up channel on the hourly
- RSI continues to diverge on all charts

Sorry no illustrations today - I'm too beat up right now! Perhaps later after I get my strength back.

Cheers.

As Expected...

We had a very nice, and predicted, pullback today. No sense in throwing a party though - there is too much work to be done.

Right now I am focused on the hourly chart for the SPX. I have also rearranged my trading desk layout to better monitor the dollar, EUR/USD pair, and the mini contracts for the major indexes. The arrangement allows me to view trends of each in several time frames at once (specifically daily, hourly, and 15 minutes). Open the hourly candlestick chart for the SPX:




Looking at the hourly chart of the SPX, we see more evidence of a possible double top. Price action failed to reach yesterdays intra-day highs and of course we set new intra-day lows for the first time in over a week. We see a very nice local double top with floor formed today and yesterday - setting up a nice resistance point at 096ish to contain the next reaction high. Another important feature is that we have broken all the support levels from the reaction highs of the last rally leg (formed on October 18,19, 21, 23, and 26). There is no real support until we reach the "Pivot Zone" down around 072 (extending to 058ish).

My guess is that we will trade within the containment zone 096ish to 072ish during the next session or two. There is a lot happening within this zone and we must watch price action carefully. My plan is to sell the rallies whenever price moves up through one of the red lines on the chart. For example, if price action rises to or slightly above 096 tomorrow, I will add to my short ES line. The same applies for each subsequent retest of a red line once price passes through it on the way down. Judging from past price action, we will see the 50p MA which is near the 38% retracement of this last rally leg at 076ish. We may not get a bounce here as some would expect. Reason being that I have noticed forceful breaks of the 50p MA by price action during these pullbacks. Rather, I think we may see a direct run to the 068 level - wich is the 50% retracement of the last rally leg and a major break of the bottom BB. If this happens, we may see a strong bounce and retests of the various red lines.

If this is a major double top we will need to see a break of the 1029 floor. A break of the 029 level would be the first time in the last 8 months that a reaction low broke the level of a prior reaction low. If this happens - look out. We will see the 9 handles again.

Anyway, thanks for the kind sentiments for Trisha - she is home recovering as I type.

Good luck with the markets!

RSI Divergence...

Open the daily closing line chart.



Note the divergence in the RSI. RSI is an oscillating index that measures internal market strength by comparing the total gains to the total losses in a given period. It is an index, meaning it can be expressed as a percentage. I used a 14 day period in this chart.

I trust the RSI more than most technical studies - not for the overbought/oversold condition jazz (though that can supplement my analytics). For me, the RSI is a warning service. In a healthy confirming market, price action and the RSI should be setting relative highs (or lows) together. In a upward trending market, if you begin to see new reaction highs in price but lower corresponding RSI levels, you get your warning. At a minimum, you should start taking profits and prepare for a minor trend reversal.

This single indicator has worked very well during this rally. If you look back to July and follow each reaction high, a divergence occurs in advance of every minor trend change. Today I notice the largest divergence in RSI since this rally began. I labeled it in purple. Just another one of those signals...

Anyway, today is a short post as more important things are happening in my family's life. I am wishing Trisha a speedy and healhy recovery from surgery!

Cheers and be well...

Betting on a double top...

A quick glance at the December ES:



We are seven bars into the reaction wave, up in pre-trade, but I still think we have a double top forming and I have opened a short line on the ES. Volatility has been very high, volume show a divergence in the last run up, and I'm measuring a short top.

If we are not at a double top, we are close to the end of this reaction wave anyway. I will build my short position carefully.

Let's see what happens here. I will be away from the desk most of the day, so stops are in place just in case.

MIssing Follow Through...

Yesterday I posted the hourly chart and illustrated the last congestion band before we set new highs. Looking at it yesterday, I had my doubts that it could stop price action. Never underestimate how difficult it is to set new highs. Today, the bulls needed to follow through on yesterdays rally. That did not happen (yet).



What did happen is an interesting pattern called firt rise - first failure. Like a double top, it does involve two local highs, but the second high fails to reach the level of the first high. A "floor" is left between the two peaks. The benefit of the pattern is that it allows us to create our setups.

From a short standpoint, we are looking for a break below the floor - which is around 1088. A break at the floor usually results in the unwinding of the first peak to it's base. The path to the base runs through several important technical points. I have identified two possible targets for a short setup. Target A is in the range of 084 and 080. This includes a possible re-touch with the 20p MA and a re-touch with the true trend line folloing the rally bottoms. We had a little bump and run action that needs to calm down. Target B includes what I believe to be the base of the first peak and the gap left when this puppy ignited. That is of course in around 072-068.

Though I don't want to think about the possibility, a long setup would include a break of today's high near 095 with a run to of course 1100 - with a real chance at 1120. Remember if the floor is not taken and a retest of the 095 level is made, it is likely going to break out (3rd time a charm). If we break out above our 1100 high, you can expect up to 28 points in the run (not necessarily in one session!). This is calculate by multiplying the difference between the high at 1101 and the low at 1029 by .38 (I approximated).

Well, there you have it. Tomorrow should be interesting without the FED desks and the boys at the banks.

Good luck.

Quite a Pop...

Well, I expected a test of the upper congestion band and feared the weaker short hands (or perhaps smarter ones) would cover at the first sign of the failed right shoulder. Volume was of course low, but there is no denying the tenacity of the rally. Looking at the hourly chart we do not see a single red bar. No pullback.




The final congestion band in the 1095 to 1100 range presents a possible double top, but a break and close above 1100 would likely negate that possibility. The gap left down between 070-072 combined with the distant 20p MA may give enough pause to for a pullback tomorrow. If a reversal is going to happen in the week, it is often a Tuesday - hence the expression turn-around Tuesday...

Again, for those who remain short, check your loss limit and time table. For me, a break out and close above 1120 this week is enough to adjust my positions - not abandon.

Good luck out there!

What to make of the Averages...

Another moment of truth is upon us. Seems we have been here at least two other times in recent months. Will the indices reverse?

Most of my blogging relates to the SPX - as this is the index that I primarily trade. For most of my daily setups, I usually stick to correlations between the US dollar index, the ES futures contract, and the SPX itself to enter and exit trades. When I am evaluating a possible trend reversal (primary or secondary), I like to look at much more for confirmation.

Original DOW theory tells us that the DJI and the DJT need to confirm with each other. At the time that the theory was developed the averages consisted of the DOW and the Transports (Rails). If either index was showing a trend change while the other does not, you must assume that a trend change is not happening yet. In many ways this technical confirmation makes so much sense. If industrials are performing well but not the rails - what does that suggest about the true state of economic activity?

The principle of confirmation works today and can be applied to many indexes. Though transports remain valid, the COMPX is also important. Transports are more than shipping product from point A to B. Transports represents INFRASTRUCTURE for conducting business. Today, INFRASTRUCTURE includes our electronic networks - meaning technology. The COMPX tracks technology fairly well. Also, at the time of DOW theory - the US was still an industrail nation. Though this remains as a core component of our economy, we have become very much a "services" nation. As such, the SPX has become the primary index watched by market technicians and economists.

Having said all that, I think it is important to take a look at the DJI, DJT, COMP, and SPX today and see what is going on. I'll try to perform a quick assessment on each index in three time frames. Let's start with the 3yr weekly CLOSING line chart of the DOW:



Keeping it simple, we are about to test the top down trend line near A (10100ish). This happens to intersect with the top trend line of the wedge we are climbing. It also marks the intersection with top bolinger band - which has flattened more so than ever before in the last seven months. All of these technical intersections occur just below the 50% retacement from the bottom to the DOW's October high. Finally, we we are oversold and see a divergence on the stochs. All of this combined with the facts that we have not touched the 20pMA since crossing in April and we have not come back to the bottom trend line of the wedge since July - leads me to believe that the DJI still could be topping here - perhaps forming a double top. This becomes a thesis to test against other time frames and averages.

The next chart is the 100 day daily CLOSING line chart for the DOW:



On the daily chart we get a better look at the wedge that has formed over the past 100 days. Note how we break down out of the wedge last week and bounced off the 50p MA and 62% retrace level at A to test the bottom of the wedge line at B (where we are today). This is a very typical pattern in the break down of a wedge. It is also important to note the intersection of the wedge bottom trend line with the descending top trend line that has formed since hitting the highs in late October. Also note the decreasing volumes in the last three sessions and compare the volume levels with the price gains. Note the higher volumes have been on the sell side. The daily chart seems to agree with the double top thesis and a test at B is underway.

Finally, does the 3 day 3 minute graph jive?




On the 3 minute we see another wedge that has been broken. The break is labeled at point A. If we draw a new bottom trend line across the session lows of the past day and a new top trend line across the session highs over the past day - we get a triangle with an apex well outside and below the highs of the wedge. This triangle must break up or down. If it breaks up, it will reach the bottom of the wedge at B - which would be a double top moment - provided the touch was simply a retest before reversing. Any reversal would need to break C (10000ish) on volume which could start the ball rolling to the downside.

OK - what about the transports - do they support the notion of a double top? Do we see a top forming there? Before I reviewed the chart, I had expectations that we would see the transports signaling new highs. I assumed that the Buffet acquisition would have been the catalyst. Surprisingly, this is not the case. Open the daily chart of the transports:




I think we may have seen a double top already form on the transports labeled A and B. At a minimum, we seem to be rolling. Today, we are in a downtrend with the 20pMA about to cross down (or bounce off) the 50p MA. Whenever I see this happening, price action usually rises above the 20pMA and then reverses sharply making a run to the 200pMA. Key resistance will be the hypothetical down channel top line (which was made by duplicating the lower down channel line that passes through the last two lows). From a technical standpoint, this channel is not yet valid. I can go into a deep explanation, but until we see either a new high or new low on this line, it is not 100% reliable. Regardless, the chart is bearish in my estimation.

Now let's jump to the COMPX. Technology is on a cyclical tear, but when you look at the 3yr weekly chart, you have to ask "Where to next?":



The most important feature of the chart is the substantial overhang that exists from the 10 month consolidation prior to the crash. In fact, if we draw a trend line following the tops of that period and extend to our current date - we see that price action right against the line. COMPX is more volatile, so expect that the line to be tested, broke, and retested. When we study the price action around the line in the last several weeks, we see another H&S pattern with the right shoulder being formed now. Of course, until that shoulder heads south to test the neck line at 2044 again, it is not officially a pattern. Of course, we see the divergence in the stochs and like the other indices we have not touched the 20pMA since the cross in April. Unlike the other indices, we are approaching the 200pMA. Often, price action is reversed before a touch of the 200p MA - a touch is only likely if there will be a strong cross and in this case, a cross is unlikely because of the overhang.

Looking deeper at the COMPX, open the daily:




We dropped out of the up channel last week and seem to be forming a right shoulder. There are many technical resistance points that support the theory. We are at the 50% retrace level of the last down move (good reversal point), we are up against the 20p MA, the 20p MA is headed down toward the 50pMA, and price action is also approaching the down trend line formed along the last reaction highs. Don't rule out a test of the up channel bottom line near 2150. When I look at this chart and think how technology and finance led the rally - I can only believe they will lead the reversal. I will be adding to my short position near A - 2130-2150ish.

Finally, we move to the SPX, starting with the Daily chart:



Many folks use a wedge to illustrate the last 7 month rally. I acknowledge the wedge, however I have been more focused on an up channel that ahs dominated the core of the rise. That channel is in red and features many price touches and reversals along the line. Yes, we have seen the breaks above and below the line, but for the most part this channel represents the rally slope. We recenly broke the bottom trend line have come back to test the channel again. Many of us are hoping to see the right shoulder form here and a expect a substantial correction to follow.

For the shoulder to form, price action must round and then turn sharply lower. Starting with the "round" portion - we have three resistance levels/points. First, we are hitting the 20pMA during a reaction wave in a down trend. Second, we are near the top trend line that is heading down. These two forces may be enough to cause the shoulder to round over. The "sharp" portion will occur if price action crosses the 50p MA and the bottom trend line of my hypothetical triangle is breached somewhere in A (035-044 range). A firm break below 1035 (62% retrace of prior two rally legs) and a new low below near 026 will almost guarantee a reversal. Rule of thumb is to expect a reversal equal to the height of the head as measure from the neck line. That will give us a solid 70-80 points - putting the reversal somewhere down around 960. I am expecting a minimum of 990 which is the complete retracement of the last two rally legs.

The question is, will the shoulder form? Looking finally at the 10 day 5 minute chart:



The most important feature of this chart is the rising wedge that we see leading to the close on Friday. As expected, this most recent down trend did an awesome job of layering resistance in the form of price consolidation. We rose to the congestion and as it seems, we are bending as we approach the end of the wedge. Here we see the final battle being staged. As I have watched this action I see strong forceful sell bars followed by buyers nibbling the price action higher. This feels like distribution. The key will be if we are able to break out above this congestion at say 073 and make a run up to the 080 area. Thankfully, price action will be met by congestion again so I do not think we'll see an explosive break-out. If, we roll out of this wedge and experience even 1 day of heavy selling I think we'll get our right shoulder.

Draw your own conclusions here. For me, the charts are all pointing to a bearish near term. I think the COMPX offers a particularly low risk short opportunity and will add to my position this week. I'll leave you with some common understandings regarding bear market trends:

Bear markets are characterized by three phases. First is distribution. This phase is where far sighted investors recognize that the business earnings are at peaks and it is time to unload while the getting is good. The second phase is panic. This occurs when dip buyers suddenly realize that the trend has actually changed and sell to an increasing smaller number of buyers. As a result, prices suddenly accelerate into a seemingly vertical drop. The final phase occurs when after prices have reached an apparent bottom and begin to move sideways in a range. This range often includes ups and downs which test the final resolve of those who held through the fall. Eventually, for a variety of reasons the final weak hands are broken and the selling comes to climatic end.

This bear market phenom can play out at the primary or secondary trend level. I wonder if we'll see it soon...

Good luck

Much Better...

Lots of things went well today. Most importantly, trading was much cleaner and profits much higher. Of next greatest importance, a clear pattern has emerged over the last three days that supports my thesis of a H&S formation.

I started the day creating some charts. I like to do this during the opening while the cash markets catch-up with the futures markets. NOTE: these first two charts do not feature today's price action - they were created in the morning. I decided to start with the weekly closing chart:



I like how the H&S pattern is taking shape on the weekly. Notice how it s forming nicely under the top trend line? Many folks have cited that the last attempt at a H&S pattern in June/July failed - and feel the same is going to happen now. Perhaps, but I never viewed the June/July topping formation as a H&S. For one thing, the neckline gave way before the right should had a chance to firm. Also, there was no significant resistance sitting on the top. Compare that with our current situation. We have a much better neckline, our top is right around the descending top trend line, and we seem to be bouncing along the 38% retracement level. As we move to the right, the trend line puts pressure on price action and the bottom trend line in the down channel falls deeper away. The longer it takes - the greater the downside potential. I also think it is time to close below the 20p MA and perhaps get a test of that 50p MA - don't you think? Looking at the weekly chart, I see a real possibility for several months of consolidation in the 800-1100 range...

The daily closing line chart was next on my list. Again, this chart was created in the morning, so no price action for the day. Funny enough, my drawing shows what I thought would happen - and it played fairly well!




First, note the up channel which we broke last week. Also note the two fib grids that I placed on the chart. One grid (right) stretches from the base of our last rally leg to the high. The second (left) stretches from the base of the prior rally leg to the high. This last rally leg is as good as gone - it will retrace 100%. When it does, we'll be sitting at about the 62% retrace of the rally from the prior leg base. Funny enough that coincides with the neckline of our expected H&S pattern. Generally speaking, rallies that retrace 62% retrace fully. Generally, H&S tops have a greater chance of reversal than continuation. When you have more than one technical indicator pointing to the same conclusion, chances are good that the conclusion is likely - still not a guarantee.

The following chart was prepared at the end of the day and I think it is beautiful. It is the 3 minute for 3 days. (Yes I look at all time frames and all intervals all the time - it is a sickness). Open the chart:




What have we here? A rising wedge! What is good for the goose is good for the gander. If this plays out as I expect, the wedge will break in the next session, or two, or three - and we will get the back side of the right shoulder that I have been visualizing for some time. I did highlight one artifact on the chart - that is the FOMC rip. Boy did a lot of traders get crushed with that action. I think the most important thing to recognize is that someone sold the news. This is distribution folks and I expect much more to come.

I suggest everyone check out this prior blog post I made to see where I think things are headed...

Cheers

Tough Trading Markets...

Rule #1 is never trade FOMC days. Whipsaws do not describe what happens right before, during, and after the announcement. There is simply no good reason to try and trade this action. The best thing to do is wait it out, let the amateurs get burned and let the market reveal its true intent. Today, of all days I chose not to follow the rule. I took advantage of the volatility to buy back some of the puts I wrote against my shorts for a gain. At this point I have closed all of my options except for a large number of puts on the SPY and DIA. These puts are bought and paid for through the profits made on the other options in the spread. Ideally, the SPX will see 1000 and the DOW 9400 so I can really make some decent change.

OK, I have decided to post the 20 day hourly chart as an understanding of all the recent technical’s is vital for trading going forward. Before discussing it, I would like to indicate that we are slowly forming that right shoulder. If you recall I suggested that it would take 5-7 sessions and would top in the range of 067-077ish. We'll see if that still makes sense from the hourly:




Important features of the chart:

1. There is a new - widened down channel in play that is labeled in dark red. Red because the trend is down. Note how the highs today line up nicely with the falling highs from the top. Whenever you create a channel, it must be parallel and it must involve at least two reaction highs/lows. I started with the top line and then "duplicated" it to ensure parallelism. Moving the duplication down I was able to find a good fit with the most recent reaction lows. Hence, we have a new widened channel.

2. I have also left the falling wedge (in green) on the chart. This wedge was the early indicator that price would move to the upside. You can always double check my posts for that discussion. The key is that the reaction highs started to sink and the reaction lows started to rise. This is generally a bullish indicator and alerted me to expect the sudden break.

3. The original down channel also remains in tan/yellow. Never give up on a channel - price often comes back to visit. I did label a very important event at A. That was the break of the original top trend line on the channel. This was expected once we broke from the wedge. Look how we popped through the line with this mornings rally.

4. As soon as we popped through the line, I immediately drew the bottom trend line following the lows of the rally that started from the last reaction low (1029). Unfortunately, I have "blackened" the wicks on these candles, but check your charting program and you will see that the bottom trend line touches nicely. Applying the "duplication" rule I discussed earlier, I started a duplicate trend line from the prior reaction high (047ish) at the wedge top. Note how well this trend line predicted the very top of today’s rally. We now have a new Up-Channel in green!

5. I labeled B because it demonstrates a first rise/first failure event. As soon as the second attempt failed to take out the rally high - it was a signal to go short. If you had the nerve on FOMC day - you could have made a good chunk of change. I did partake in this move - though I only nibbled at the top for a few points.

The most astonishing thing about today is that we did not reach the base of my right shoulder range. I have highlighted that with a trasnparent box. I really did expect a run at 067 resistance. Not.

What does this tell us? I am not sure. I can say that we are now in an Up-Channel - contained within a Down Channel. I suspect we triangle our way out of this with either a break to the upside (across the wide channel top line) or a break to the downside (across the down channel bottom line). Do note that we are sitting at the 50% retracement level for the last reaction and if you follow my blog, you know that this is a decision point. Trading rule of thumb expects a bounce from the 50% level and an up leg equal to the prior reaction. So that would be about 33 points from here – or around 1080. Adding support to the possibility is the fact that we are sitting on the 20p MA. If this happens, we could get a high right shoulder – perhaps too high for my taste.

Alternatively, price action could continue down from here – retesting the original down channel top line near the 62% retracement level. That would invite further breakdown to the start of this last reaction (or a full retrace) at 1029ish. If this happens, I would say we see that test of 1017.

If I were a betting man, and I am, I think we see a firmer shoulder than what we have so far.

Good luck out there!

Controlled Turbulence

Inevitably when you fly you encounter turbulence . The plane lifts, drops, shifts, and shakes in a random manner. All the while, the pilot (we hope) has total control of the plane. That is what it felt like today. I thought yesterday was difficult because I was away from the desk most of last week - but I now realize my trip had nothing to do with it. The markets are shaking - just look at the action on the 1 minute today.



Could we get anymore price direction changes, MA crossings, and gaps than this? I'm not sure.

Anyway, as I looked at the charts I struggled to find convincing patterns. When I did find patterns, I struggled to believe them. Even following my long setup plans from last night felt wrong - despite having come true (note, not at the same price levels, however at the same points of technical convergence).

At best, I was able to find a consolidating triangle and one bull flag. Open this five minute chart to see:



The triangle turned out to be a continuation of the rise from the day's low. Note how the lower trend line of the triangle was broken, then found support on a higher scale trend, reversed to test the triangle bottom again, rejected, reversed again and shot right across the apex. This is an end around and has killed many a trader who acts to early. I stuck with my belief that we were going to break the upper trend line of the wedge I showed yesterday and was able to grab some of the up action once we broke the apex. (If you follow the HMS blog, I posted a comment that recognized we were hugging the upper trend line and that it was a bullish indicator.)

The quick vertical rise off the triangle formed the flag pole of our next pattern. As should be expected, the price action slowed at the 200p MA. This slowing of price action (between the broken top wedge line and yet to be reached top line of the down channel) formed the flag itself. In retrospect, I should have taken a long position during the flag formation - I simply did not trust what I was seeing. Naturally, the breakout did occur and a run for the top trend line of the channel did occur. I used a fib grid as it broke out to see where it might cap. When I saw that the wave would exhaust at about the top line of the down channel (on the 1 minute chart) I decided to take a short position and benefit from the pullback - which I did.

One final note, we are hitting some resistance at 1046 - stronger than I expected. If you look at the 5 minute charts for the past 5 days, you'll see an an Adam and Eve pattern that was formed from Monday's sharp high at 1052ish followed by Eve's rounded failure in around 1048. The center low between these two tops sits around the two highs of the day (046ish). This is our resistance.

On the whole, I am actually pleased that we broke from the wedge but remain contained by the down channel. Perhaps we'll see our downtrend continue? Perhaps we'll see a break of the upper trend line tomorrow and the start of the shoulder?

I really can't hazard a guess right now - the trading is simply too turbulent. For now, keep a watch on the upper trend line of the down channel.

Cheers.

Possible Long Setup

As I indicated in my prior post, I do not what I see on the charts today. I also did not like the intra-day price action. Things felt very asymetric - which usually means that I am missing the bigger picture. In today's case - I was out of tune with the market and too anxious to return to trading. Worst thing in the world. I would have been better served if I waited a day and just observed. If I had, I would have objectively concluded that the falling wedges are a sign that the down trend is headed for a turn. Of course, I could be wrong - but statistically and technically the case for a short term long play is strong.

I worked the 5 minute chart a bit to illustrate what may happen. Open it:



Several features of the chart worth noting:

1. There is one bottom trend line that serves as the approximate base for the falling wedge with a top line that intersects with A and a channel top line that intersects with B.

2. There is a higher top trend line that intersects with C.

3. The consolidation that took place early last week in the 1060-072 range is now congestion that should provide resistance against any rally attempt.

4. I have highlighted the last three times that the 20p MA moved up through the 50p MA using purple boxes.

5. I have highlighted where we stand with the Stochs and RSI.

When we observe these features we note that the 20p MA has just crossed the 50p MA. We are at the top of the wedge with rising RSI and though the stochs are in over-sold terriory, we see that they can get and stay there for some time (see the prior example).

It is my expectation that we will cross up above the wedge top line at A (043) and price action will pass through the 200p MA (048ish) with a likely test of the top channel line at B (052ish). If shortly after that time the 20p MA does not cross down below the 50p MA, we can expect a slow test of the top trend line at C (072) though the congestion band starting at 060.

I think the move from 043 to 048 will happen quickly as breaks of upper trend lines often happen with volume and force. The 200p MA sits in-between the wedge top line and the channel top line. There may be a pause just above this MA, allowing the 20p MA to catch price action. The question is will the top trend line of the channel hold as resistance and force the 20pMA back down through the 50p MA. If so, we are back to a short setup. If not (more likely), we can expect price action to stick it's head into the congestions and test the high of Thursday at 066ish.

Anyway, just one possible setup to consider.

Good luck out there!

Kinetic Energy..

The trading was a bit too hot for my taste today. In fact, there was only one period of consolidation that lasted for about 15 minutes - the rest was up and down. You have to be an expert to trade in these waters - and I was happy to get out of the day with just the fees.

I don't like what I see. On several charts, we have started to form a falling wedge. First the hourly chart:



Notice how the down side action failed to follow through to the bottom of the down channel? Also, note how the reaction highs failed to carry to the top of the down channel. These failures show that the market is starting to think twice about the current trend. The presence of the wedge is considered bullish.

Now the 5 minute chart for the day:




Note how the setups I suggested yesterday did play out - unfortunately very quickly. I did manage a short at location A at around 1042 and I did get to play it for a couple of points, but got stopped very early and did not get the full ride to B at 1037. News then sent the index rising too quickly for me to enter a long at the 1043 (point C), and I missed the long ride to the days high at D - 1052. I hope someone did a better job with these setups than I did.

Anyway, the real problem developed when we started the wedge pattern on the 5 minute as well. This is a bullish pattern - and suggests we may be at the end of the latest down trend. I think we can expect that right shoulder to form this week. From here on out we look for a breaks first in the new wedges, then in the old down channel. This applies to both the long and short side of the equation.

Setups later...