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.

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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.