What an Opportunity...

We all know what happens to rising wedges that build with low volume. They collapse. Just look at this daily chart for the March ES. I highlighted the volume for the last seven sessions. This classic pattern that is fairly reliable.



Good luck!

Let the games begin...

We are at the end of the year. S&P has pushed to it's 2009 highs - trading at 1127 as I post - yet, we all know that this amazing 9 month rally is changing. It is tired - running on fumes and built on low volume. The fundamentals are not in place, the government is now faced with a tremendous debt burden and has much more to finance going forward. For those of you who have not read the news this morning, a very important signal has been sent to the market by El-Erian - get out of equities.

El-Erian of Pimco

Having placed my short equity bets early, I have an especially difficult challenge. My first target for the S&P is around 960 followed by 880. My average short position is slightly above 1000. The risk reward profile of this setup is a horrible and in retrospect, I should have abandoned the position three throw backs ago. The question now is how to maximize profits as this corrects. The answer is leverage and the solution is the ES. I will be matching 1 ES contract to every 500 shares of SPY in an effort to compound my gains and/or mitigate loss. This is a dangerous solution as it involves leverage.

I will be trading in a 20 point range based on a core short position, scalping to keep in the money when needed. I have been using this technique for the last 10 sessions and I have managed to build my core short position at 112250 - with no losses recorded. This is important as I opened my core position much earlier at a much lower level and have scalped to effectively raise my entry more than 15 points.

Though I could have waited until the first week of January to enter this position - avoiding some of the hard work scalping - who is to say that a sell-off is not in the cards before Jan. 1? The technicals sure suggest it is possible.

The fact of the matter is that calling a top or bottom is a losing game. You can wait and miss it. You can jump all in too soon and lose it all. To succeed in a trade such as this, you need to anticipate change and scale into play - fighting as hard as you can against the tide to be in position when it moves your way. That is where I am right now - and it is where I trade my best.

So, let the market drift higher on low volume as the VIX starts to perc. I'm trading in lock step, building substantial potential energy in my positions. This will break soon and I will profit from the big move soon enough. Bring it on baby!

Good luck out there...

Stick to the Swing Trade...

I hope everyone is ready for the holidays. Despite the terrible end of year performace of my accounts, I am very content and looking forward to the food, wine and company of my family. I am also comfortable with my positions - though I am getting a bit sick and tired of waiting for a correction. Seems like the administration, through the FED and media, will do everything necessary to promote the equities markets and spin the economic realities into fantasy. Eventually, things to square away - but it is disturbing for a technical analyst to trade in this environment.

Open the 60 minute candlestick chart of the March ES futures contract.



As you know, I maintain a small short position which (through quick scalping) remains about flat as of this posting. It seems obvious to me that we are at the top of a channel and about to head south. I see only two levels of support standing in the way of a trip down to 094. Those are about 111150 and 110275.

I note that we missed the top this morning following the consumer spending news. I suppose the gross miss on the GDP also contributed to a tame X-Mas rally. The technicals reflect that this puppy is puffed and ready for a throwback.

The rising pattern is very, very weak - completely unstructures and has a volatility diamond dead center. The RSI is clearly diverging over the last three peaks and the volume is rolling opposite to the price (meaning as the price declined volume increased and while price rose volume declined). These are signals to reduce long and shift short.

Let's see what happens today. Barring a breakout to the topside, I will ride my current swing to 094 - but due to the holidays, I will not add to my short position. I simply do not want to carry any stress into the weekend.

Good luck out there and Happy Holidays!

Swing Trade...

X-Mas rally? What a funny thought. Amazing to me that this dominated the headlines - as if it has any merit. They say 12 of the last 15 years we rallied into the New Year. The logic is that "odds favor a rally". Funny as heck. In fact, I once flipped a coin 10 times to humor myself. It turned heads 7 times out of the 10. I guess that means that odds favor heads in that game.

Anyway, here is a very simple closing line chart for the last 30 days of the S&P. One rule comes to mind - trade a channel until it breaks.



I opened a short line on the ES - one (1) contract - just as a humorous test to see if we stay in the channel and extend back down the range. I am in at 1108.25. I have an OCO (order cancels order) trade in play with my stop loss at 1112 and my target at 1094. This is about a 4 point risk for about a 14 point gain. The risk-reward profile fits - let's see if the range from the last 30 days stays in tact.

Ho, Ho, Ho...

Quick Post on VIX

I was curious to see the latest with the VIX. The VIX as you know is a measurement in the volatility of the S&P options. It is really a measure of sentiment and a rise in the VIX usually accompanies declines in the SPX. The VIX reaches it's lowest levels when participants become complacent - our confident in their positions. Many folks put a lot of stock in this reading as a contrarian indicator - meaning if the VIX is at it's lowest levels, we should not be surprised by a down move in the index.

This is really an over simplification and I think a bit dangerous. The reality is that folks rush to options to protect and/or profit from sudden market moves. The VIX measures sentimental reactions to market moves - it is really not a leading indicator. Having said that, we should always keep an eye on the VIX and see what it can tell us.

The chart I put up with this post maps the VIX and the SPX over the past 120 days.



The VIX is the line chart (based on closing values) and the candlestick chart is the SPX. The 200d SMA for the VIX is in white and the 10d SMA is in red (bounded by a 10 period bollinger band). I have added very basic trend lines for both instruments.

Looking at the SPX bottom trend line, we see that the VIX shows a reaction high at each of the related reaction lows of the SPX. This is to be expected - however notice how the spike in the VIX in each reaction high is INCREASING. This indicates that the level of anxiousness with each SPX throwback is increasing. In fact, if you look at the last 20 days or so, you will see that even though we are near our lowest levels on the VIX, the bottom levels of the VIX are also RISING.

If we were to follow the VIX top trend line we can expect a MAJOR spike in the VIX very soon - to levels above 30 - which is a 50% increase from where we are today. A spike in the VIX of 50% would imply about a 10% throwback in the SPX. (You can do the extrapolation from the prior three VIX spikes and SPX reaction lows).

This simple calculation seems to jive with many of the other observations and levels that I have calculated in recent weeks. I may consider playing the VIX along with my short positions. This quiet period may be the best time to take a position.

Enjoy!

Holding Pattern or Clever Distribution?

Though I have not been posting, I have been trading lightly in the range. All of my core short equity positions remain in tact and I have been range trading the ES with steady success. The holiday season gives us all a good reason to proceed lightly and with less stress. I like to take this time to enjoy what we have - which is family, friends, and good wine.

At the same time, I keep an eye on the broader market to make sure it doesn't drift too far from it's current holding pattern. The market is behaving like drivers in a NASCAR race during the lap after an accident. Weaving side to side, but no major moves allowed. At some point, the pacer is going to leave the track and all hell will break loose!

I actually think some of the big boys are cheating a bit. Most of the real action has been on the sell side. I see no conviction to support a break-out to the top side. The momentum has consistantly faded at the reaction highs and the relentless push higher just isn't there anymore. Add to this that the most optimistic of fund managers are calling for a 10% gain in the S&P in 2010. The risk is much lower today for shorts than it has ever been during this rally.

Looking again at the hourly candlestick chart for the S&P - we see our all too familiar trading range.



I have made some very minor adjustments to the top and bottom horizontal trend lines. The levels have been adjusted to the most recent intraday high and low respectively. These values are 1116 and 1089 respectively. I did this because these levels are breakout targets. I expect that when we break from this rectangle, we will gap (up or down) through these levels. These extreme range levels are the last points of resistance and support - therefore they do not help us during intraday action.

For this reason, I have added two more trend lines on top and bottom. (Note color coordination GREEN on top RED on bottom). These trend lines reveal inner triangles that are forming more aggressively within the broader rectangle. Eack trend line servers as an early warning for a potential breakout. If price is going to break out to either side, it must first break out of the inner most triangle then the outer most triangle. It is relatively early in these formations, so as time moves on and price action becomes more constricted, these lines will validate themselves.

So, we closed pretty darn close to the center of the broad range. Where are we headed? Let's try the bull case:

1. We are headed higher because we have bounced off the bottom trend line of the inner-most triangle.
2. We are headed higher because we saw price reversal occur as the 20p MA dropped down through the 50pMA.
3. We are headed higher because price action is about to break up through the 20pMA.
4. We are headed upwards because we successfully penetrated the 38% retrace level of the last down thrust.
5. We are headed upwards because the RSI showed a slight divergence as price action reached the floor.
6. We are headed upwards because there is a gap to fill from 12/16.

Let's explore the bear case:

1. We are headed lower because though price action rebounded at the end of the session, it failed to break out above the the three bar range following the gap down. (This range is surrounded in a box on the chart). This failure statistically suggests a continuation in the direction of the gap - which is down.
2. We are headed down because price action did penetrate the bottom of the three bar range twice during the day and statistics suggest that further declines are likely.
3. Though we bounced off of the bottom trend line of the inner most triangle, this triangle has not yet officially formed and therefore is only a possible support/resistance boundary. The rectangle has been predictable for almost 20 sessions and a test of the lower rectangle boundary at 1089ish should be expected.
4. Price action has yet to recover to the 50% retracement of the latest down thrust. The 50% level is a level where price action reverses direction to follow the original trend.
5. The 50% retracement level is below the gap - which was not filled during the session. The longer it takes to fill a gap the greater the chances of the trend to continue in the direction of the gap - down. Reversal at the 50% retrace level will strengthen the gap.
6. The 20p MA is below the 50p MA and heading south into price action. This tends to put resistance on price action and can cause reversal in price direction.
7. The 50p MA is below the gap and is a natural point for price action to stall.
8. The RSI divergence, though present, is minimal and did not occur in "Over-Sold" territory. Divergence is more reliable when it occurs in over-sold or over-bought territory.
9. The run-up at the end of Friday's session was preceeded by a substantial sell impulse - which triggered momentum traders to go short. That initial impulse exhausted quickly, and as is customary at the end of a session (and end of a week) substantial short covering kicked in. This warrants caution in the closing levels - which failed to reach the HOD.

Funny enough, the analysis is a bit of a toss up. I will look to the futures on Sunday to assess reality. Generally, Mondays have been "gap-up" days so we will see.

The most important areas to watch are the 50% retrace at 1105 and the gap between 1106 and 1108. If we fail to reach and close the gap in the early session Monday - I expect price action to continue down and test the 096. Failure at 096 followed by a break of 093-094 would be a strong signal to short. If we fill the gap - I expect a test of 1110ish where we get confirmation or rejection of the inner triangle. A break out above this level would invite a test of the highs - with an increased chance of an upside breakout. (The reason being that this would be the third major test of the highs with the the latest reaction low failing to reach the bottom of the range).

One final note, though I rely on the technicals as much as possible, "feel" is also important. If "feel" does not confirm your technical analysis - apply it with caution. If it does confirm - APPLY IT WITH MORE CAUTION! For whatever reason, I feel distribution at the tops.

Enjoy the holidays folks!

Taking a Break...

I know folks have been wondering where my posts have been lately. Well, I am here and somewhat inactive. It is that time of year and I, like many others, am taking a breather from the rigors of trade. Judging from the hourly, we remain range bound as it seems and I have little confidence that the market is going to make a major move either way between now and the New Year.



All my analysis now focuses on my accounts and how to best realize gains and losses for tax purposes. I am also in the process of an "end year review" to see exactly how well (or poorly) I traded.

A much more important activity is celebrating my son's acceptance to SUNY Geneseo for the fall of 2010. Geneseo, a well kept secret, is ranked as one of the nation's top public colleges - and one of the most selective. He plans to study physics and mathematics in pursuit of a career in research and teaching. He is a bright and warm person who deserves nothing but the best. May he never be tempted to apply his analytics to the markets!

For the rest of us, let's keep an eye on that 1113 level. A break above would invite the run to 1120. Let's hope the break down below the 20p MA on the hourly leads to a more aggressive run through the 50p MA and all the way down to the final break of support at 085ish.

Good luck folks!