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SPY Trendline Angular Momentum and Bull Bear Psychology

Mar 17, 2010: 1:06 PM CST

While the title might not sound that interesting, it can be important to watch “Angular Momentum,” or in simple terms - the change in the angles of rising trendlines - of the current SPY and S&P 500 intraday charts, which highlights an important point about the recent rallies.

Let’s take a look at the recent “Angular Momentum” chart and see what I mean:

(Click for Full-Size Chart)

The way to create one of these charts is to draw rising trendlines to connect as many price swing lows as reasonably possible, and be sure to draw additional trendlines as needed.

Usually, you’ll come up with three or four separate trendlines you can draw on your chart… and this works for all timeframes.

Keep in mind that - depending on how you scale your chart - your angles will be different, but it’s most important to pay attention to the rate of ascent or steepening of the angles instead of the absolute angles themselves.

What I’m showing here is the three dominant rising trendlines that show the recent shift in character or behavior of the market… to one of urgency to rise and despair on the part of short-sellers/bears.

Often, these type of cycles often progress in the following order for the Bulls:

Phase 1: Doubt, as in “This is a bear market rally and then price will fall.”

Phase 2: Realization, as in “Ok - so the market is going higher, but the moment I get long is when it will reverse.”

Phase 3: Euphoria as in “Oh my gosh I’ve been so stupid to miss this rally that I have to buy NOW! NOW! NOW!”

And, as you might suspect, the cycle takes a different turn for the Bears:

Phase 1: Doubt, as in “Here we go! This is a rally to short to plunge the market to new lows!”

Phase 2: Confusion/Realization, as in “Ok, so I know they’re driving it higher, but I’ll keep trailing my stop higher because the market will turn at ANY point now and the moment I exit my short is the moment it will fall, so I’ll hold on.”

Phase 3: Capitulation, as in “*$^%@! They did it to me again! AHH, I have no choice but to take a much larger stop than I thought - gosh there I go again losing money.”

This type of logic has been explained in many different forms, but it still surprises me at how many times it plays out in text-book fashion.

That’s why the first ‘phase’ often has a smaller, more reasonable angle which gives way to a steeper angle which then finally morphs into an absolutely unsustainable angle as price climaxes while bulls pile in and bears capitulate.

No one knows where the absolute top will be, but when you start to see angular momentum increase like this, it’s a safe bet that we’re in the third phase and to monitor your emotions very closely and follow price and be aware of any sudden shift and not get caught in a downdraft.

Take some time to study this principle in more detail - it could save (or make) you a lot of money.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

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Recent Popped Stops Again Reveal Character of Market

Mar 16, 2010: 9:51 AM CST

Aaaand we’re off! Buyers pushed prices higher to trigger yet another round of ‘popped stops’ not only this morning, but over the last few trading sessions.

Let’s take a look at the recent ‘popped stops’ rallies and how they reveal the character of the market… and what that matters to you more than indicators or anything else.

(Click chart for full-size image)

I started this chart on March 8th to today, showing recent false breakdowns that have resulted immediately in a sharp rally that triggered the stop-losses of the shaky bears.

The “Popped Stops” phenomenon occurs when two conditions are met:

1. An ‘obvious’ (or at least reasonable) sell-signal is given

2. Sellers place stops at roughly the same (tight-stop) levels

The ‘trigger’ comes when buyers - in whatever manner - step in to overpower the sellers and thus drive price higher (often with surgical precision) and then create (manufacture) a rally due to the bears (short-sellers) buying to cover their positions.

These are always temporary plays, but can allow quick profits for those traders ‘in the know’ when these set-ups (situations) trigger.

We had a trendline break and overnight downside gap to start March 9th, drawing sellers in and then buyers immediately popped them out all day long in a massive short squeeze.

Price fell later in the afternoon and then into the next day, where an almost identical short-squeeze formed (in equal proportion).

See my prior post for a detailed summary:

“Measured Move AB=CD Example March 10″

Price then consolidated into two triangles, a smaller and a larger structure:

“Get Ready for Range Expansion Play in SPY Intraday March 11″ (a great lesson in breakout tactics)

“Second SPY Intraday Triangle Forms March 12”

Price did expand/breakout as expected, and then formed a mini-exhaustion gap on Friday, marking the high of the day and then trailing off into the close.

Monday’s action gave us a “Rounded Reversal” that was a perfect mirror image and then a “Bear Flag” and second trendline break which triggered in the short-sellers…

only to pop them out violently into the close and into today’s session, which has broken above the key 1,151 level on the S&P 500 which could set off sparks, triggering longer timeframe swing and position traders (who are short) to cover, and cause others - who have been on the sideline so far - to ‘capitulate’ and buy this market, driving prices higher.

Finally, why is it important to understand the current market character, which is ruled by ‘popped stops’ and almost making a mockery of short-sellers and sell signals?

Simple - if you put too much faith in sell signals and bearish positions and even classic sell signals, you will likely continue to suffer the same fate in terms of ‘popped stops’ and losing trades.

If you are aware of this reality, you’re far more likely to profit from it than someone who is not (who keeps taking the same short-sale set-ups, keeps calling this market overbought, and keeps stopping out).

To brush up on this concept, study my prior posts:

“Lessons From Failed Signals and Popped Stops”

“What Happens when Resistance is Broken?”

“Opportunities from Popped Stops Intraday”

Those posts summarize the “popped stops” lessons.

For application of the principle and to further your knowledge, review the prior “action” posts:

The 12 Failed Sell Signals on the S&P 500

“Recent Bull Traps and Sell-offs in the S&P 500?

“Recent Failed Sell Signals and Short Squeezes in the SPY

If History Repeats, Will it Mean New Highs for S&P 500?

“New S&P 500 Highs Forecast by Fifth Sprung Bear Trap”

“Could S&P 500 be Building Yet Another Power Move?”

Assessing the character of the market is far more important than using indicators - after all, certain indicators do better or worse in certain market environments.

Knowing the character can make all the difference.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade Continue Reading…

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The Positive Relationship Between Short Term Rates and the Dollar Index

Mar 13, 2010: 7:36 PM CST

I wanted to highlight a few quick recent charts of how the US Dollar Index positively correlates (moves in the same direction) with the 3-month Treasury Bill Discount Rate.

It’s not the most fascinating topic, but it’s definitely important to know of this relationship, so let’s take a look at a couple of recent charts.

First, a ‘zoomed in’ view of the recent action:

You can view this comparison in StockCharts with symbols:

$IRX for the 3-month T-Bill Discount Rate (short-term)

$USD (US Dollar Index - a basket of 6 FOREX pairs)

What’s interesting is that - relatively - the indexes move almost in lock-step with each other, which makes sense.

While this isn’t the “Fed Funds Rate,” in general higher rates translate into a more attractive (expensive) currency, and lower rates translate into a weaker currency for a country.

We’re seeing this in the recent charts of short-term Treasury Yields and the Dollar Index as expected.

This is in line with talk of the Fed “eventually” (at some point in the future) raising the Fed Funds Rate… but that is an entirely separate discussion.

Let’s step the chart back to see the one-year comparison in yields and the Dollar Index:

In both charts, the US Dollar Index - green - is scaled on the left side of the chart while the 3-month T-Bill Discount Rate is scaled - in percentage terms - on the right side.

Thus the current 1.4 value corresponds with 1.4%.

The 3-month T-Bill Rate - and shortly after the Dollar Index - bottomed at the end of 2009 to give us the current simultaneous rallies we’re seeing.

I wanted to call this to your attention as an interesting comparison and method to sharpen your inter-market analysis skills.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

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A Quick Look at the Daily Euro Chart Feb 17

Feb 17, 2010: 10:27 AM CST

With the US Dollar Index completing its daily Bull Flag, the Euro completed an opposite bear flag. Both currency indexes are at key inflection points, so let’s take a quick look at the key level to watch now in the Euro Index.

Euro Index ($XEU) Daily:

We see the Euro Index making a “measured move” bear flag pattern (near-perfect example for reference) into the 136 index level, as a positive momentum divergence in the 3/10 Oscillator forms.

This is a bullish chart signal, and suggests that we could see a bounce from this level - the prior two days have shown that bounce.

Overhead resistance levels to watch include the 139 level - the 20 day EMA and 140. Any move that rises above that level will be viewed as a bullish confirmation signal that odds favored higher prices.

Until then, we are just seeing an oversold ‘bounce’ off of a price projection target and a positive divergence.

But there’s something else important about the 136 level….

Euro larger daily view:

The 135 index level reflects roughly the 61.8% Fibonacci retracement of the March 125 low to the November/December 2009 151 high.

That adds more importance to the 135 level as key support.

Should the Euro break through 135 to the downside, we would then expect lower prices ahead, as a failure to hold this powerful potential support level would be a telling sign.

I also showed the past Elliott Wave count (identical to the dollar… but in reverse) along with the lengthy negative momentum divergence - both of which indicated odds strongly favored the downward correction we just witnessed.

To follow along with recent updates on the Dollar Index, view the following posts:

January 18: “Bull-Flag Forms in the US Dollar Index”

January 27: “A Bump in the Road in the Dollar Index Bull Flag?”

Feb 4: “A Quick Quad-Market Assessment of the Thursday Sell-off”

February 9: Dollar Doji Sell Signal

Especially view the following comparison posts:

December 19: “Year to Date Elliott Wave and Momentum Look at the US Dollar and the Euro”

November 1: “Color Daily EURUSD Shows Lengthy Divergence (with Elliott Count)”

October 19: “Andrews Pitchfork Update on the US Dollar Index”

These posts show how the analysis tracked and how the concepts played out in real time as we formed reversals in both these markets - great for reference and education.

To keep up with more detailed analysis each week, become a member to the Weekly Intermarket service.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

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Three Day in a Row SPY Pattern Yields Profit or Peril

Feb 12, 2010: 12:55 PM CST

If you feel like the market is in Déjà Vu mode intraday, rest assured that you are picking up on a repeating pattern so far over the last three trading days, particularly for intraday traders.

The script is as follows:

Weak open,
rally into EMA resistance,
‘fake’ down-move,
burst above resistance into new intraday highs,
finally a pull back into the close.

And… Action!

(Click for Full Image)

For those who have picked up on the pattern, it has yielded simple profits, but for those repeating the same mistakes, it has been a Groundhog’s Day of sort - repeating the same pattern over and over.

This post looks at why it’s important to assess the “Character” (behavior) of a market as best as possible.

I mentioned this pattern in last night’s Idealized Trades Report and discussed the importance of seeing history repeat almost literally the next day.

Little did I know the pattern would repeat almost exactly into the third day in a row!

I first posted on a similar failed Bear Flag set-up in a February 6th post:

“A Lesson Inside the Failed Bear Flag”

which takes a closer look inside a failed pattern.

Generally, in a down-move, we look to short rallies into overhead resistance, such as Fibonacci levels or - as shown above - the 20 or 50 EMA intraday. Trades are often triggered when a reversal candle forms. Traders place stops above the EMA levels and anticipate retests of the lows.

However, the market has instead been setting up Bull Flags that pull back into resistance areas instead of expected bear flags, and the resulting rally after resistance is broken results in some “Popped Stops” for those shorting the morning retracement into resistance.

One day - no big deal. Two days, you think something strange is afoot. Third day? You should perhaps EXPECT the rally into resistance to fail and then capitalize on the surge to the upside once resistance is broken.

It reminds me of the old quote:

“Fool me once, shame on you. Fool me twice, shame on me.”

More than anything, this lets us know the importance of studying the ‘character’ or behavior of the market, which attempts to answer questions such as:

“What indicators or patterns is the market favoring? Which are the market “mocking?”

“Is there a particular strategy (gaps, flags, breakouts) that is working better over the last few days? Worse?”

“Is the market in a volatile, trend move or a more subdued choppy range?”

History does repeat - that is a fact. It’s just unusual and perhaps worth noting that we’ve had (so far as of noon Friday) three days in a row of the exact same pattern.

Browsing “Trade Set-Ups”

SPY Trendline Angular Momentum and Bull Bear Psychology

Recent Popped Stops Again Reveal Character of Market

The Positive Relationship Between Short Term Rates and the Dollar Index

A Quick Look at the Daily Euro Chart Feb 17

Three Day in a Row SPY Pattern Yields Profit or Peril

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