Possible Setups

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

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




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

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

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

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

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

How do we play this possible setup?

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

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

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

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

Good luck out there!

Still Topping...

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

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



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

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

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

1017-1019
960
920 (Biggest test of support)

The 920 test is the biggest test for several reasons:

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

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

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

Heading West...

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

Check out these 15 minute charts from my futures station.



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

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

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

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

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

Good luck out there!

Tracking Too Precisely...

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




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

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

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

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

Looking at the weekly chart:




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

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

A work of Art...

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




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

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



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

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

Cheers

Down Trend Continues

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



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

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

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

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

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

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

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

Let's see what tomorrow brings.

13 Stops to Sub-1000

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



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

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

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

That is a lot of support to break.