Is it the indicators?  Is it moving averages?  How about candles?

And when you are looking to put on a trade, are you taking a moment to address the context in which you’re placing the trade?

Is it a counter-trend fade?  A pro-trend retracement?  A breakout from a consolidation pattern (like a rectangle or triangle?)  And when playing the breakout, are you looking to play a trend reversal breakout or a trend continuity breakout play?

Mike Bellafiore of SMB Capital recently shared a candid post from a trader about the importance of understanding Market Structure that inspired me to share a few tips on how to discern the current situation.

Let’s take a quick moment to review the foundational principle regarding trend structure that guides your answers to all these questions.

Here is the current “Structure” Chart of the Dow Jones over the last year:

Click for full-size (large) image.

Let’s step back to the most basic aspect of a price chart – price itself.

Stretching back to Dow Theory, an Up-Trend is defined as a series of higher swing highs and swing lows, while a Down-Trend is similarly defined as a series of lower swing highs and lower swing lows.

By extension, in an Up-Trend, the “Up” swings tend to last longer in both duration (time) and price (percentage moves) when compared to down/retracement swings in an Up-Trend, and vice-versa for a Down-Trend.

Translating that to trading opportunities, the BEST opportunities tend to occur IN the direction of the prevailing trend (relative to your timeframe).

However, not all trends last forever, and all trends will eventually reverse.

By definition, a TREND REVERSAL occurs when the following conditions are met:

When reversing an Up-Trend, price must make a Lower Low, Lower High, THEN swing back down to TAKE OUT (trade under) the recent Lower Low.

When reversing a Down-Trend, price must make a Higher High, Higher Low, THEN swing back to TAKE OUT (trade above) the recent Higher High.

In other words, a Structural Trend Reversal is a Three-Step price process – from this, we define not only Market Structure, but by proxy trading opportunities.

In the chart above, the first Trend Reversal Down occurred on August 2rd, 2011 when price broke and closed under the late June swing lows, the first lower low.

Notice that price formed a Lower High in July THEN swung back to take out the prior swing low to create the official Daily Chart Trend Reversal signal.

After a continuation down-move into October, price again reversed to the upside in mid-October after breaking above two mini-swing highs from July, forming a tight swing low on October 18th, and then breaking the final mini-swing high at the 11,700 level.

Price is currently labeled as a structural Up-Trend with a key “Make or Break” resistance challenge at the 12,200 recent swing-high level where we are now.

These are larger-scale, Structural Reversals on the Daily Chart.

A major key to understanding Market Structure – a big secret to trading – is the realization that Higher Timeframe Structure is BUILT by Lower Timeframe Structure.

In other words, the recent up-swing from 11,250 was built by – or comprised – its own Trend Reversal Signal and series of progressive swing highs and lows.

Let’s see that on the 15-min Intraday Chart:

The 15-min chart above shows us the November to present period which consists of a Structural (intraday) Down-Trend which reversed (ahead of the big end-of-November move, by the way) to an Up-Trend as labeled.

When viewing this chart, put it in context of the Daily Chart above – what we’re seeing is a simple down-swing which reversed into an up-swing in the context of a brand-new Up-Trend Reversal.

Even after the Trend Reversal AND the end-of-November rally, price has continued its intraday bullish structure with an additional progression of shorter-term swing highs and lows so far in December.

Continue to watch the current structure – particularly as it interacts with the key prior resistance swing high at 12,200 – for any breakdown in the swing high/low structure above (namely, a move under the 12,000 area that results in a future lower swing high).

You can also see the educational example of how the intraday structure reversed from Up to Down on November 17th (notice the sequence of Lower High, Lower Low, Lower High, then a breakdown of the 11,950 Lower Low).

Price declined – in basic structure – towards the 11,250 low after triggering an official intraday reversal under 12,000.

Identifying or Quantifying Market Structure is just the beginning – from there, you’ll look for confirmations/non-confirmations (including divergences) and other signals from your favorite indicators or methods to help you find low-risk, high-probability trades in the context of developing – or reversing – price structure.

However, if you’re not at least thinking about market structure, you could easily place yourself on the wrong side of a trending move and pay an unnecessary price for it.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

That’s what’s happening at the moment as the S&P 500 consolidates/pauses in a sideways/symmetrical triangle price pattern.

Let’s review the pattern and the current trendline reference areas and develop a game-plan of what to do with a future breakout.

First, the pure S&P 500 Triangle Pattern:

We’ll add more indicators to the mix later, though it’s often helpful to start any form of chart-analysis with a “pure price” chart free from clutter.

In this case, we see the 30-min intraday S&P 500 chart with short-term compressing (converging) trendlines that form a Symmetrical Triangle Price Pattern.

The current Red Upper Resistance Line comes in around 1,265/1,270 while the rising Green Support Line trades around 1,230/1,235.

That makes the “Midpoint” level 1,250 (the Center of the developing pattern).

The simple play would be to trade short-term within the boundaries of this pattern intraday and then prepare to trade the initial breakout – a down-break quickly targets 1,215/1,220 while an up-break  targets 1,290.

Triangle Patterns tend to produce breakout/impulse moves that travel beyond the initial targets of the prior imediate swing highs and lows, and for that, we’ll need to turn to the higher frames.

But first, let’s take a look at the SPY ETF and throw volume insights into the mix:

I added a yellow horizontal “Fair Value” or “Midpoint Value Area” mark at $125.50 which is roughly the 1,250 area in the S&P 500.  Otherwise, the breakout area is $127 and $123/$123.50 respectively.

Volume has a tendency to decline in the context of a consolidation pattern and that’s what we’re seeing at the moment.

Specifically, we’re seeing a form of distribution volume wherein volume steadily declines as price rises higher and then increases as price declines.

Distributive Volume suggests a downside resolution, but we merely need to look back to October’s non-stop rally to see how price defied the odds and continued its upward march to where we are now.

With the levels and volume insights above us, let’s now jump to the Daily Chart for more chart-facts:

The Daily Chart not only puts the current Symmetrical Triangle in context, but it also gives us extra reference levels that help us understand WHY price is consolidating at the moment.

Above price is the confluence resistance from 1,275 (200d SMA) and 1,295 (a price polarity level and October swing high).

To over-simplify, you can refer to 1,300 as the key major resistance level that – if broken – should lead to a “Popped Stops” breakaway move higher towards 1,350/1,375.

On the downside, we have rising support from a longer green support trendline as drawn as well as the rising 20 and 50 day EMAs (1,240 and 1,220 respectively).

Just as you can oversimplify 1,300 on the upside, we can oversimplify 1,220 or even 1,200 as the critical downside support confluence which – if broken – should produce an impulse breakdown back towards 1,120/1,100.

We can also see that Volume is suggestive of a downside break, but we make money trading PRICE (what actually happens) as opposed to indicators (which clue us in to what is SUPPOSED to happen).

Keep these dominant short-term reference levels in view as we trade the week(s) ahead.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

We’ll be using the @ES Futures as our proxy, but this example extends to any index futures contract or related ETF (including the leveraged funds).

Let’s take a moment to learn about this concept and see clear reference examples from October 20 and 21.

Here’s what we’ll emphasize in this post:

• Positive Divergence in Momentum (using the 3/10 Oscillator)
• Positive Divergence in NYSE TICK (Market Internal)
• Confirming Reversal Candles
• Price Confirmation via Trendline and EMA Breakthroughs
• “Stepping Inside” the structure using the 1-min chart

Trends (on any timeframe) often end with divergences, and in this case we’ll be discussing a very short-term intraday trend using the 5-min chart.

Using the 3/10 Oscillator (middle panel) and the NYSE TICK (bottom panel), we see a higher indicator low going into 11:30am while price pushed to new intraday lows on October 20th.

We call this a “Dual Positive Divergence” because both TICK and Momentum diverge with the new price low.

From a candle standpoint, we see a Bullish Engulfing Pattern, or as much as a 5-min bar can ‘engulf’ another one with the power-bar off 1,194.

You can see the resolution of a successful reversal into the session close, giving rise to a breakout trade (above 1,200) and a “Bull Flag” retracement trade at 1:30, but that’s for another post.

Let’s step inside the positive dual divergence action at 11:30am to see exactly what the 1-min chart showed in real time:

I froze the chart just after the confirmation breakthrough – a BUY signal – so you can visualize what this looked like in Real Time – which is your goal in understanding and trading this concept.

We use the lower timeframes to clarify or “step inside” any situation or pattern we’re seeing on the higher frame, and in this case the combination is the 5-min and 1-min frames.

Look closely to see the “inner-workings” of the clean positive dual divergence into the 1,193 low just before 11:30am.

It’s generally not advised to fight a trend on the SOLE basis of a positive divergence, but some aggressive traders do it.

Personally, I prefer to wait for price confirmation via a clean breakthrough of a falling clear trendline (as seen above) or through lower timeframe EMAs (we’re seeing the 20 and 50 EMA in all charts) before jumping in with a reversal trade.

The main idea of the lower frame chart is to see finer/clearer details that may not show up on higher timeframe charts… and also find the clearest buy signal via price confirmation.

Once you understand or see that price is likely forming an intraday reversal, you can trade accordingly – playing future breakouts or retracement trades in the context of the new intraday reversal.

At a minimum, DO NOT short-sell after clean positive divergences and breakthrough confirmation signals like the ones you see above.

That’s the main lesson from this example, and to make it even clearer, let’s see the same 5-min and 1-min timeframe charts of the very next day – October 21:

Using the description above, we can see a similar 5-min positive dual divergence in Momentum and TICK, this time going into 1:00pm CST into the 1,220 level.

We see a similar – yet far more powerful – Bullish Engulfing Reversal Candle, but this time we have a series of bullish lower shadow candles ahead of the Engulfing Candle.

You can see the successful reversal that developed off this positive divergence situation.

Let’s step inside the 1-min chart and freeze the session as it looked “in real time” as these divergences developed:

The 1-min chart gives us a clearer picture with more detail than the 5-min chart in terms of spotting dual divergences in real time as they develop.

We also see the confirmation signal from price via the breakthrough of the 20/50 EMAs and the intraday trendline – the preferred buy-in spot for a reversal play.

This is the kind of in-depth trade analysis and lessons we discuss in each evening’s “Idealized Trades” report for members.

It’s also the type of examples I’ll be explaining in much more detail at the upcoming Las Vegas Traders Expo in November, if you’re able to join us all.

Take a moment to study these charts for additional insights and apply the lessons to your own trading strategies.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

While this post will focus mainly on key lessons from the charts, it’s worth noting that trading around earnings increases risk, especially if a stock’s earnings differ greatly from what’s expected… or even in IBM’s case, when earnings are different by mere pennies from expectations ($3.19 reported versus $3.22 expected).

Let’s focus our attention on two main lessons – that of higher timeframe analysis and the massive multi-swing negative divergence that undercut the recent rally.

Let’s start with the “Over-extended” Weekly Chart:

Let me just focus on two things on the chart above:

• A Rising Primary/Long-Term Trend
• The Two Recent Closes (spikes) through the Upper Bollinger Band

When doing analysis or finding candidates to swing trade, it’s often best to start with the higher timeframe charts and work down from there.

Let’s focus on the two spikes above the upper weekly Bollinger Band – this simply indicates the stock is “over-extended” and generally more likely to fall in the immediate (next) move than rise.

As we look at the lower timeframe charts, keep in mind that price was “over-extended” above its upper Bollinger Band into $190.

This simply suggested it was NOT the time to get long IBM shares – and for very aggressive traders, it might be an opportunity to short-sale (or buy put options) if the lower timeframe charts showed bearish patterns/signals.

With that, let’s drop to the popular Daily Chart:

The Daily Chart steps us inside both instances where price over-extended above the weekly Bollinger Band.

The main thing to note on the Daily Chart is the power-rally into $190 which was undercut by a persistent negative volume divergence.  On each day of higher prices in October, volume was a little bit lower – volume divergences tend to precede reversals.

Ok – so we have the weekly chart showing a poke outside the upper Bollinger and the Daily Chart also showing an over-extended rally that is being undercut (non-confirmed) by declining volume.

Again, this is NOT a situation that would compel a long (buy) trade, but instead would have aggressive traders taking the timeframes even lower to see if a potential short-sale opportunity triggered.

Let’s see two intraday timeframe charts, starting with the 30-min structure:

I mentioned the negative volume divergence on the Daily Chart, but the 30-min chart makes the divergence abundantly clear – that’s one of the benefits of multi-timeframe analysis (the lower timeframes clarify the picture – or reveal more information than the higher frames).

I’m now adding the 3/10 Momentum Oscillator to the chart to get a sense of what Momentum reveals about the price swing in motion – momentum declines steadily (along with volume) as price continues its rally higher.

The 30-min chart reveals clearer negative Volume and Momentum divergences into an over-extended situation on the higher timeframes – once again, NOT a compelling spot to plan a buy trade.

Let’s see if the 15-min chart shows us a potential short-sale opportunity:

The 15-min chart is basically the same as the 30-min intraday chart with one big exception:

Price broke and closed under the 20/50 EMA structure early on October 17th, and then these EMAs crossed “Bearishly” later in the session.

Price then rallied INTO the EMA Crossover (what I call the “Cradle Trade”) into $188 just ahead of the close… ahead of the earnings report.

This sets up a “Make or Break” situation where price either continues its breakdown lower – in conjunction with a typical sell-swing as suggested by the higher timeframes – or otherwise does the ‘unexpected’ or lower-probability outcome with a firm breakthrough higher above $190 which would target $200.

The outcome this time was the expected or probable thesis:

Price had greater odds of falling/declining due to the higher timeframe “over-extended” rallies above the upper Bollinger Bands which was under-cut by negative volume and momentum divergences on the intraday/lower frames.

From that thesis, price gave a set-up or short-sale trigger on October 17th via breakdowns of rising trendlines and rising EMAs – along with an EMA cross-over (all of which were potential trade entry triggers).

The stop would go above $188 (tight) or preferably $190 depending on your risk tolerance.

To summarize, the main/quick lessons to learn from this situation are the following:

• Weekly Spike through the Upper Bollinger (over-extended)
• Daily Power-Rally on Declining Volume Each Day
• Intraday Multi-Swing Negative Momentum and Volume Divergences (clarified)
• 15-min EMA Cross-overs and Trade Triggers

Take time to learn the lessons from situations like these, as these lessons will repeat into the future on other stocks and markets… just the end-result won’t likely be such a sudden over-night resolution thanks to an earnings announcement to get the downward ball rolling.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Let’s take a look at the Daily Resistance Level along with a “step-inside” perspective from the intraday chart.

Let’s start with the prevailing Daily Chart trend – it’s a downtrend as evidenced by the progressive series of lower price lows and lower price highs, which is confirmed by the EMA Orientation (the 20 EMA consistently resides under the 50 EMA).

A down-trend is in force until clear signals prove a reversals – none of those exist at the moment.

That takes us to our present price swing into the falling 50 day EMA, which has turned back price three prior times since price reversed lower in May 2011.  Logic would suggest that the 50 EMA would again turn-back price a fourth time.

Also, I drew in little “bear flag” patterns which also have repeated three times in the past… although the current rally does NOT take the form of a bear flag – it’s still a move into the EMA resistance near $86.

It’s also worth noting that a Positive Momentum Divergence has formed into the late September low under $77.50… but you can also see how a similar positive divergence formed at the end of June, and the outcome through July.

So, the main idea is that the $86 level is a key resistance area that is a “Make or Break” between buyers and sellers.

Let’s now step inside the 15-min intraday chart to see if we can get a clearer picture:

Looking at the @CL Futures, we see the ‘inner-workings’ of the recent rally into the $86 daily chart target level.

As price entered (tested) the $86 price target, a clear Negative Momentum Divergence undercut the rally into $86 – that’s not something you want to see if you expect price to continue its rally.

In addition, this morning’s breakdown of the 15-min EMA and trendline structure – roughly at $85 – is a sell signal, and as of this writing, price appears to be confirming this sell/hedge/protect signal.

For an educational reference, you can see what happened in early October with regard to the $77 Daily Chart support level that was met with an intraday Positive Momentum Divergence as labeled.

The recent up-swing also began with an opening impulse gap.

Anyway, this is a good example of how it is beneficial to combine two timeframes to get a better picture of the likely/probable – though never guaranteed – next immediate swing in price.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

I wanted to follow-up that lesson with a great example of a “Creeper Trend” formation (trade entry), Trend Reversal (with excellent positive momentum divergence example), and re-formation of a Creeper Trend in the OPPOSITE direction.

While this is your standard “Trend Reversal” example, I wanted to take it a step further and explain it in terms of “Feedback Loops” and “Creeper Trends” which are important but often misunderstood concepts.

Let’s start with the 5-min “bigger picture” structure of Crude Oil at the end of September 2011:

For simplicity, we’ll focus on two main lessons:

1. The Creeper Trend Move (see “Lessons on Creeper Trend” for detailed explanation)
2. The Reversal of the Creeper Trend on Clear (Lengthy) Positive Momentum Divergences

The goal is to empower you to spot (and understand) a Creeper Trend in real time and then trade in the direction of the Creeper trend UNTIL a clear reversal signal develops (and what that signal is).

Starting at the top left of the chart, price formed negative momentum divergences, broke under a rising trendline along with the 20 and 50 EMAs, and then formed a “support shelf” above $83.00 per barrel.

Our conversation begins when price triggers a “Sell Short” signal at 11:00am CST with the break under the $83.00 support shelf.

What resulted was a bar-over-bar Positive Feedback Loop that evolved into an infamous “Creeper/Oozing” Trend that didn’t really give traders good entries, exits, or risk-management parameters.

That’s what a Creeper Trend does – it confuses many traders and leaves them sidelined, never quite getting that perfect retracement entry.

Let’s focus our attention on the overnight reversal off of lengthy (persistent) Positive Momentum Divergences (3/10 Oscillator) at the $80.00 per barrel level.

In a Trending Move – including intraday Creeper Trends – we look mainly to EMAs (exponential moving averages) to provide structure and trade entries on retracements.

We also look to these EMAs – I prefer the 20 and 50 periods – for reversal signals when price BREAKS THROUGH these averages.

We confirm the move by assessing the picture from Momentum – namely we want to see lengthy positive divergences AHEAD of a breakthrough.

We also want to see if the oscillator thrusts to a new relative high which accompanies the EMA (or trendline) breakthrough.  If so, this is a hidden signal of strength – hidden because traders who are not assessing momentum do not see the “burst” or “kick-off” signal in the oscillator.

A Momentum Kick-off occurs when an oscillator thrusts to a new relative high (preferably off divergences) when price is clearly NOT making a new relative high.

Traders should not remain short after a kick-off signal that accompanies a price breakthrough of a trendline or EMA structure – in fact, this is an aggressive BUY signal to play the potential Trend Reversal in Development.

Traders place stops under the swing low when entering on the Trendline/EMA breakthrough – in this case at $80.50.

An opposing or bullish Feedback Loop (“Creeper Trend”) developed to the upside, resulting in a similar bar-over-bar creeper/oozing price action until price developed a sideways support shelf around 6:00am.

Unlike the prior session, price actually HELD this support shelf, resulting in a breakout “Bull Flag” buy signal… but that’s another story for another day.

For additional reference, here are the 1-min charts that step-us inside both the down-move and the up-move:

Crude Oil’s Reversal Signal and subsequent bullish “Creeper Trend” development:

Lower timeframe charts provide a clearer picture of what we’re seeing on higher frames, allowing us to “step-inside” the price action seen on a higher frame.

The important thing to learn from this reference post is the development/ignition of a Creeper Trend, the Reversal Signal via positive divergences, and the official Trend Reversal that created – surprise – another Creeper Trend situation.

Take time to learn the lessons from clean examples like these so you’ll be better prepared to recognize then trade these situations when they develop in real time in the future (across all markets and timeframes).

I’ll be discussing similar situations/examples as these in my upcoming webinar presentation:

“Designed by Traders:  Trading Trend Reversals“  October 12, 3:30 CST

Additionally, I’ll be speaking specifically on Trend Days – how to spot them in real time, how to trade them, when to expect them, how to adapt your tactics/trades to them – at the upcoming Las Vegas Traders Expo in November.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Let’s take a quick look at the @ES (S&P 500) and @CL (Crude Oil) Futures contracts to see the overnight action that provided the framework for today’s continued “creeper” intraday trend moves on September 27th.

First, the Overnight @ES Chart:

Then the similar @CL Crude Oil Futures Overnight Chart:

What’s going on?!

In trading, we call this a “Feedback Loop” wherein bulls and bears are performing the same activity – buying – for different reasons.

In the case of an upside “Feedback Loop,” here is a breakdown of general trading activities:

Bulls/Buyers: Buying contracts so as to profit from an upside move, or are buying to remove a hedge (short-sale)

Bears/Sellers: Buying contracts either by taking stop-losses (painful) or taking profits from earlier position

Almost from a perverse standpoint, the longer the one-sided action lasts, the greater these forces (of buying pressure) become.

It often leads to a climax that results from a combination of buyers exhausting buying power (those who want to buy on the timeframe have bought) or sellers exhausting their short-sold positions).

However, until a reversal in supply/demand dynamics occurs – namely the “Feedback Loop” is broken – price will continue its “Slow Creep” or “Oozing Move” higher which often frustrates all sorts of traders.

Many traders like to buy price pullbacks (retracements) to support in a rising trend, but “Creeper Trends” don’t offer salient/obvious retracements.

Likewise, many traders like to buy breakouts above prior resistance levels to establish a new trade, but “Creeper Trends” don’t retrace enough to develop a meaningful short-term overhead resistance level.

So where does that leave trading opportunities?

From a standpoint of conservative, classical (simple) trading tactics/techniques, it doesn’t – there are neither clean pullbacks nor clean breakout entry opportunities.

Therefore, a classic/conservative chart trader would remain sidelined, missing the move due to no clean/clear entry signals.

Generally, that’s fine because “Creeper Trends” like this are quite rare in the intraday world – we may see them once or twice a month if that.

However, how does one actually trade a Creeper Trending Session?

Trading a Creeper Trend calls for creativity and past experiences with them.

Let’s look at the 5-min @ES Chart:

When faced with the chart above, one can split the intraday trading community into two distinct groups:

1.  Those wishing to get long into the trend but not seeing any clean entry spots to do so

2.  Those wishing to get short for an eventual reversal… that never seems to materialize

Perversely, those who DO try to fight a creeper trend in motion often wind up CONTRIBUTING to the creeper trend when they take their future stop-loss.

That’s an important lesson in why feedback loops continue – sellers are unable to overcome the buying forces at work, and as a result, end-up buying-back to COVER short-sold (reversal) trades.

So we can develop a hard rule for what NOT to do when you see a Creeper Trend:

DO NOT Fight or Fade it

That rule can save you thousands of dollars – one learns this either from experience or from listening to others who have done so.

However, learning what NOT to do is not necessarily identifying what TO do.

The general strategy almost seems to call for getting long on any number of shallow pullbacks to rising moving averages, trailing a stop under a longer-period EMA, and holding your nose until you’re stopped out via a trailing stop.

I’m showing the 20 and 50 EMA above,  though the 10 period or even 5-period EMAs (or SMAs) may work better for some traders (no one EMA or SMA is perfect).

Sometimes it’s effective just to remove EVERYTHING from your charts and simply draw a trendline connecting as many price lows as possible.  Establish, or add to, positions on tests (touches) of this rising hand-drawn price trendline.  Trail the stop slightly under it.

Ultimately, markets caught in “Feedback Loops” exhibiting Creeper Trend Moves (or oozes) will trump virtually any indicator – oscillators, divergences, reversal candles, Elliott Wave counts (how many ‘terminal’ 5th waves can you count above?), Fibonacci projections, Pivot Points, and so on.

Moving Averages and hand-drawn trendlines seem to work best in these unique environments.

Most classical chart indicators aren’t optimized for feedback loop moves – thus the overwhelming majority will have you avoiding a position (“I just can’t buy when the stochastic or RSI is in overbought territory”) at best or worse, fighting the trend by establishing a fade or reversal trade (we’ve already seen why that’s generally the worst thing to do).

Feedback Loops occur in all markets and all timeframes and they often require adjusting your typical trading strategies – it’s part of adapting to the volatility or characteristics of a market in motion.

Feedback Loops do not last forever, and they often meet a violent reversal/end… but never bet on a reversal UNTIL you see breakdowns under rising trendlines or EMAs where the market has ‘respected’ our “bounced off-of” previously.

Anyway, take a moment to study the charts above along with examples from other related markets today for additional insights about the structure, formation, and movement of “Creeper Trends” intraday.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Let’s chart that key resistance level to watch on the daily chart in Crude Oil:

Let’s start with the current structure and then take a moment to learn a few charting lessons from similar set-ups in the last few months.

Reference my prior update on the S&P 500 Resistance/Reference level for a lengthier explanation of this type of ‘retracement into resistance’ logic.

The main idea is that we have a dual type of simple confluence resistance shaping at the $90.00 per barrel index level.

Why?

The falling 50d EMA resides at $90.65 which forms a near confluence with a prior swing low at $90.00 from June 2011.

Does that mean price is required to fall down at this confluence resistance?  No, but so far, the downward swing is playing out as suggested by the overhead confluence resistance area on the chart.

Should the swing lower continue – which would be similar in the stock market – the next logical downside target would be the $80.00 price level which is just under the closing lows for 2011.

A firm breakthrough close above $92.00 invalidates this bearish swing in motion, however.

Prior Examples of Similar Retracements

Speaking of unexpected breakthroughs, let’s step back to late July 2011 where price formed a similar retracement swing into the overhead resistance of the falling 50 day EMA at $97.50.

Price stagnated here and then slipped above the falling 50d EMA, surging to the more important price reference level at $100.

Traders who shorted into the 50d EMA were trapped just ahead of the downward impulse they were expecting.

Ultimately, sellers defended the $100 level ahead of the sharp decline into August.

For fun, we can reference two similar small retracements into the falling 50 day EMA in early June – both of which resulted in downside price action.

Trading Retracements in Trends

In general, it’s safer to trade retracement plays/set-ups into overhead resistance in the context of a trending market – in this case, a daily chart downtrend.

The stop-loss is often located just above the expected resistance which allows for a relatively small/tight stop when compared to the larger target of a move to test a prior swing low or even go beyond (lower) than the prior support.

If anything, this is the type of logic that is helpful in setting up your own trading ideas/game-plan in any market or timeframe – Crude Oil is just giving us a nice example at the moment.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Let’s take a look at the current scan results of most extended S&P 500 stocks, starting with most over-extended:

To recap briefly, the purpose of this scan is to identify potential trading opportunities depending on your individual style of trading.

There are two schools of thought on this type of list:

1.  Overextended Stocks are overextended for a reason, and the expectation is the recent strength – or weakness – will continue.  Thus, this calls for trend-following/retracement style strategies in objectively strong/weak stocks.

2.  Overextended Stocks have “gone too far” and will soon snap-back to normal.  Thus, these stocks may be ripe for “Fade” or reversal strategies.

That being said, Cabot Oil and Gas (which has shown up on prior similar scans – adding credence to the “Trend Following” strategies) is the most over-extended stock in the S&P 500 from its rising 200 day SMA.

It’s also extended from its rising 20d EMA and (currently) forming a reversal candle outside the upper Bollinger Band.  That type of set-up favors short-term fade strategies that may create a buying opportunity on the pullback to its respective moving averages.

Let’s take a look to see what I mean:

There was a similar short-term fade/scalp opportunity into the July spike highs with little reversal candles which preceded a sharp sell-off back to prior price levels.

The subsequent bounce set-up a simple retracement pro-trend buy-in at the $65 level.

This is an example of how you can use this type of “overextended” scan list to play both strategies – pro-trend retracements and counter-trend fades – depending on your risk tolerance.

I highlighted the two stocks – MMI and NSM – that are overextended based on a gap.  Large gaps tend to skew the results of this scan, and it’s preferable to play stable trends that don’t show such wide price gaps.

Otherwise, CF Industries (CF) and Range Resources (RRC) top the most over-extended list.

Do you see a pattern with the Sectors?  Basic Materials stocks top the overextended list, which clues us in to broader sector/industry strength that you might want to explore on your own with similar charts.

With the bullish extensions above, what are the bearish under-extensions at the moment?

I went through and checked and none of these are showing significant gaps, and in fact, all are showing relatively similar price trends on their daily charts.

With unemployment as high as it is, it’s perhaps no surprise that Monster Worldwide (MWW) tops the list, and is followed by two Technology companies (AKAM and JNPR).

These companies – perhaps again unsurprising – have appeared on similar scans I’ve published on the blog.

Genworth Financial (GNW) and US Steel (X) round up the Top Five Most Under-Extended List, which encourage you to study the charts for potential opportunities depending on your style of trading strategy.

Scans are simple starting points for narrowing down the broad lists of stocks into manageable lists for trading set-ups and ideas – and this type of over extension scan is helpful in doing so.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Let’s take a look at another excellent example of this important trading concept/set-up that triggered successfully at $1,800 on August 11th and just recently on August 22nd:

Take a moment to review my original post:

“Lessons from Gold’s Three-Push Divergences into $1,800”

and the follow-up lesson/explanation post:

“Lesson on Trading Intraday Divergence Reversal Signals in Gold.”

Let’s take it step-by-step.  The main idea is that we’re combining three major chart/technical factors into a thesis/set-up:

1. Overhead Price Resistance at a “Round Number” Reference Level (like $1,800 or $1,900)
2. A “Three Push” common reversal Price Pattern
3. Multiple Swing (lengthy) Negative Divergences in a Momentum Oscillator

These chart factors combine to paint a picture of “Caution” at a minimum – or a signal to take profits on short-term open positions from traders.  Odds of trend continuation tend to drop-off when lengthy negative divergences appear.

Beyond the “Caution” or “Take Profits” signal for buyers/bulls, the triple-development offers a potential low-risk, tight-stop opportunity for bears/short-sellers to initiate a new position to fade the trend or play for a short-term intraday trend reversal.

In general, only experienced traders should attempt to fade a trend at predetermined conditions like this, while new/developing traders should adopt pro-trend strategies such as retracements (like Bull/Bear Flag Patterns in a confirmed trend).

Just like the prior example from August 11th, price ran about $10 over the “Round Number” resistance price on a “Third Push” or “Third Swing” to top-off a lengthy intraday negative momentum divergence seen in the 3/10 Oscillator (but seen just as easily in a standard Rate of Change oscillator).

Short-term bullish traders should be looking to exit (or at least take partial profits/scale out) a pre-established long position into the $1,900 resistance area as these divergences developed.

The final “Get Out NOW” signal from price was on the breakdown back under $1,900 which broke a rising trendline and the 20/50 EMAs (which crossed bearishly at the same time).

There was a later exit signal on the break of another rising trendline and price support shelf at $1,880 after the 20 and 50 EMAs had been trading in a bearish position.

By the same token as the bullish exit signals, Bearish (aggressive) short-sale entry signals developed accordingly.

What resulted was a sharp sell-off on August 23rd which resulted in a new price and momentum low at $1,830.

Price retraced in a “Bear Flag” price pattern into the $1,855 level and then broke the rising “Flag” trendline at $1,850 which triggered a simple “Bear Flag Retracement” Trade which took us – as of 9:30am CST – back to the $1,800 price level.

Do take the time to learn the lessons from these examples – both the “Three Push Divergences into $1,800” and the ‘history repeating’ example/lesson of August 23rd.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!