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.