Crude Oil has been, and is currently, the focus of an extraordinary amount of coverage in the media, and is a dominant topic at the watercoolers and at home.  Ask anyone you see and odds are they have a strong opinion about high crude oil (or gasoline) prices - and it’s probably strongly negative.

This year has been quite exceptional for the crucial commodity - only 8 weeks have shown negative prices, and if you count since February 2008, the commodity has only seen 5 down (negative) weeks.  That is remarkable for any stock or commodity, given that roughly 25 weeks have transpired so far in 2008.

On the daily chart, any pullback (retracement) - which has usually resembled some sort of flag continuation pattern, has led to the expected ‘measured move’ price objective.  Let’s look at the powerful positive price action in Crude Oil this year so far.

I highlighted the late March ‘flag’ pattern which had a measured move price projection to around $125, and I remember taking ‘heat’ for that projection (Price will never go that far!) and even feeling slightly silly for making that projection, but indeed that’s what happened.

Price retraced in late May only to complete yet another measured move flag style pattern.

At the end of May, price created a more powerful (and more pronounced) bear flag which met its price objective violently and rapidly two days later (when oil had a record two-day price move).

Price consolidated through most of June,  but has now broken a rectangle consolidation (or flat-line bear flag) which has a potential price objective (measured move) of roughly $150 (the measured move is estimated and simplified to be $15).  That’s currently $6 away (of course there’s no way to know for sure whether it will achieve that target).

Higher gasoline prices are causing consumers and businesses to cut back on purchases and trips they otherwise would have taken, which means there’s less money flowing in the economy, which - obviously - puts a drag on the broader US and Global Stock Market Indexes.

One would think that with all this media attention and virtual ‘one-sided’ bullishness on the price of oil, that the contrarian mentality would prevail and prices would at least come off a little, but there’s so much going on from a supply/demand (fundamental) and ‘price discovery’ or speculation/trader driven moves (including momentum players) that it could be very difficult to turn this trend easily.

And so we continue to watch the struggle unfold - and realize the effects and possible opportunities within this environment for our trading and investment accounts.

Shockingly to me and many traders, US Steel (X) violated a breakout pattern in a strong uptrend to create a reversal and strong plunge, suddenly invalidating the pattern and shattering support in a short period of time.

US Steel broke a potential triple top and horizontal resistance pattern at the $185 per share level, drawing in anxious buyers and forcing shorts to cover their positions.

Shortly after the break, price retested the breakout zone, which actually set up a higher probability trade because it prevented the need to ‘chase’ price, and it also gave a clear stop-loss level just under the breakout zone, or in this case also beneath the rising 20 period moving average.

All bullishness evaporated as the stock plunged over the last two sessions to take out both the breakout zone support, 20 and 50 period daily EMA support, and the lows of the consolidation pattern (resembling a rectangle) support.

Also, yesterday’s sell-off was accompanied by the highest volume level the chart recorded saw so far - not a good sign for the bulls, as today’s action is showing us.

The intraday chart shows two bear flag patterns and a strong down-trend for educational purposes:

This stock ’scorched’ the buyers by reversing after a valid buy signal (resistance break) and shows us that we as traders deal in probabilities - never certainties.  Even if we perceive the odds of a successful trade at being 75%, there is still a 25% chance the trade will fail and take out our stop.

This is where money and risk management come in to help make a trader have a higher chance at success than not.

Study valid trades that fail, and try not to be upset when a valid set-up results in a stop-loss.

You cannot win every trade, unfortunately.

Research in Motion (RIMM) was in the news prominently last week as the stock plunged after slightly missing earnings expectations.  The stock has now found temporary support about its 200 day moving average.  How far will the bounce go?

The logical reaction after a large volatility momentum move down is an inflection (retracement) back to key moving averages, which would be located around $130 per share.  Today’s intraday action has the stock falling back for a potential retest of the 200 day average, which would be a bearish development - violation of the 200 day average would likely be a strong sell signal for funds and other traders who may have stops beneath that key level.

Nevertheless, should price retrace back to the upside, there are a few key price levels to keep in mind:

Again, the $130 per share confluence of the 20 and 50 period EMAs

The 38.2% Fibonacci retracement is at $126.75
The 50.0% Fibonacci retracement is at $130.80
The 62.8% Fibonacci retracement is at $134.84

(These numbers are close approximations)

Notice again that the $130 per share level would seem to favor a strong potential for resistance for this stock in the short-term - that area was also support (horizontal) line previously, and support - once broken - can become resistance.

Keep your eye on this stock and what it might mean for the broader market, and do be careful if you’re trading this highly volatile stock in any aggressive capacity.

Today was quite the interesting and surprising day in the major US Indexes.  Why?  They flip-flopped more than a politician campaigning.  Let’s reveal the intraday action and see if there’s anything we can learn from today’s action.

DIA - Dow Jones 5-min chart:

There really is so much to say about today’s action.  Let’s start with the obvious - the Gap Fade.

The first play when there’s an overnight gap is to try to fade the gap back to yesterday’s closing price.  This strategy tends to have dual edge in the form of producing winning trades more than 50% of the time, and producing larger winners than losers.  This was the case today, despite a relatively large gap (greater than 100 Dow points).  I have trouble fading such gaps with confidence, but odds still tend favor filling over not.

After a large volatility bar took you to a profitable exit, the market rolled back over sharply to the downside as expected, but then rocketed unexpectedly back to the upside, leaving many traders (especially those with tight stops) bewildered.

Price then found resistance at yesterday’s close (which is the expected play after a gap) and then formed a ’shooting star’ bearish candle before rolling back over strongly in the direction of the original gap.

After making new lows on the day past noon, a positive momentum divergence formed, and a small consolidation pattern, which I interpreted at the time (especially on the SPY chart) to be a sort of bear-flag pattern, which actually broke strongly and shockingly to the upside, triggering a ‘range expansion’ trade (though in the opposite direction as expected).  That’s why it’s often critical to wait for the break of a consolidation pattern because it’s impossible to know which direction price will break.

After surging higher than expected, and violating key moving averages to the upside, price rotated back to the downside before ramping back up into the close - with all the wild action, the fact remains that the market closed on its highs of the day, providing a bullish catalyst, especially in the face of potential Fibonacci support from the monthly 38% retracement.

The SPY chart tells a similar story, though I have added a few more annotations:

For those keeping track at home, the 1,260 level on the S&P 500 chart represents the 38.2% Fibonacci retracement off the 2002 bear market lows.  Coincidence?  My guess is that many funds had buy orders at that level and see it as a bargain area and expect selling to cease there - temporarily, it did.  Let’s see if that level holds.

The S&P 500 was 4 points away from making a new low for 2008.  Surprisingly (or not so much), the hammer candlestick at these levels represents a strong short-term buy signal (in addition to the oversold signals registering on most oscillators).  Don’t be surprised to see a (potentially strong) bounce off these levels.

Remember that trading will be light during this holiday week, so market moves may be wild and volatile.

Be safe out there, no matter what your bias remains on the overall indexes - there’s risk in playing the market both ways here.

Last month was the worst June since the Depression - the Dow fell 10% in one month alone.  Let’s look at the structure of the monthly index charts to see what their story tells us about the possible future.

Dow Jones:

The key feature of this chart is that price has closed beneath the rising 50 period EMA for the first time since 2003.  Also, there is no longer any moving average support from the key 20 or 50 month moving averages.  Two times in 2008, the 50 period average served to halt the market declines (which magically corresponded with the Fed bail-out in both occasions… but there were also likely program buys at those levels).  This time, buyers were unable to overcome supply.

The path of least resistance now appears to be to the downside on a longer-term basis, and the closing of the month of June has declared a more ominous sign:  It officially confirmed a downtrend in the Dow Jones Index (in terms of a lower low in January, a lower high in March, and taking out the lower low in June).

The situation looks slightly more sinister on the S&P 500.

Although the Dow is just slightly under its January 2000 peak (at around 11,750), the S&P is clearly and undeniably beneath its 2000 peak (at 1,550).

The past appears to be repeating itself in this chart, with price first failing at the 20 period moving average, supporting at the 50 period, and then crashing through it for the next two years (it served as resistance in early 2002).

Price has broken its rising 50 period moving average and is around 30 points shy on making new lows for the year, but taking out the lower (intramonth) low from March.  On a closing price basis, the market has already taken out its closing low.

Also, notice volume in all indexes has surged above its yearly average, as we can see increased participation, but also increased urgency as prices have fallen.

The S&P is down 8.6% for the month - not as poor a showing as the Dow, but stunning for long-term investors nonetheless.

Continue to monitor the larger (primary) trend very closely, and note that its structure will help shape analysis and opinions of direction on the shorter or intermediate timeframes.

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Today’s action slammed both bulls and bears… more than once!  It was another rough trading day, which can be expected during the summer months of low (relative) volume.  Let’s view some of the price structure trades that could have been taken, in an effort to familiarize ourselves and trade more appropriately next time.

Let’s use the DIA 5-min chart as our trading proxy:

They day ended as a ‘doji’ or ‘indecision’ day (which could also be called a range or consolidation day).  Also, the day was just shy of being classified as an ‘inside’ day on the daily chart.

The day opened on all the indexes with an opening gap, which was quickly filled.  The range was around 150 Dow points ($1.50 DIA) which allowed plenty of trading opportunities, though not all trades ‘worked’ as expected.

1. With a new momentum low and a large impulse down, one would expect price to inflect off yesterday’s close, which also happened to correspond with the 20 and 50 period moving average.  A proper trade was to short at this level.  Unfortunately, not all trades work and the market is beyond our control, so after a slight red candle (triggering short-sales), the market rocketed higher to make a new momentum high on the day and stop-out all those properly executed short trades.

2. Momentum then began to diverge negatively, as price failed to clear the $114.20 level with any conviction, and a triangle consolidation pattern formed on the index, which set-up a ‘breakaway’ or ‘range expansion’ trade - in this case, price expanded to the downside, as was hinted by the negative divergence.

3. Price formed a large volatility move down which found support at yesterday’s close, setting up the short-sell exit and triggering a potential ‘buy’ trade to target the moving average consolidation zone, which worked quickly.  Price then formed a 45 degree angle movement (retracement) back up, which set up the final structural point of the day.

4. The violation of the parallel trendlines signaled entry for a ‘bear flag’ or ‘measured move (A to B equals C to D) style trade which targeted the $113.20 area (which was achieved quicker than expected).  One could have also targeted yesterday’s close as a potential ‘trade exit’ or target.

It was an interesting day with clean set-ups, but not all ‘idealized’ trades worked as planned, which is fine.  It was a relatively difficult day in the indexes, but all in all, price failed to close far from where it opened.

Gold prices and the Gold ETF (GLD) broke an interesting descending triangle early this morning that I wanted to highlight to you.

GLD 5-minute chart (StreetTracks Gold Trust Shares):

Price began the day with a morning gap that was almost instantly faded for the opening trade.

Price then rebounded off Friday’s close and the 50 period moving average, which set-up another short-term ’scalp’ trade, but failed to reach above the intraday high, and inflected back down to retest the rising 50 EMA and yesterday’s close, and then began to consolidate into a tight coil with numerous doji candles forming close by (red arrow).

At this point, you could have drawn the converging trendlines which set-up the descending triangle classical chart pattern and either

1.  Entered aggressively (short) inside the triangle, in anticipation of a break

2.  Entered conservatively (short) once the break occurred.

In either case, your stop would have been above the upper trendline (wherever you were comfortable) and the target would have been set for a ‘measured move’ of the height of the ‘right’ triangle, which was around $91.00 (the corresponding value for the futures contract @YG would have been $910 per ounce).

In this case, momentum carried price further to the downside than expected, and overshot the target by $0.40 ($4.00 for the @YG).

Price then found support about the rising 200 period moving average and then inflected back up to retest higher moving averages.

For reference, a negative momentum divergence and a Low ADX reading (less than 15) preceded the triangle and eventual breakdown.  This example serves as a reference for a classic descending right triangle and appropriate intraday trading tactics.