Browsing “Psychology”

Another Bull Trap and Lesson from Crude Oil

Mar 5, 2014: 1:08 PM CST

Bull Traps are the enemy of Breakout Traders, and it’s important to learn the educational reference lessons when these scenarios trigger.

Goal #1 is to protect yourself from escalating losses on a breakout opportunity that failed and Goal #2 (for aggressive traders only) is to profit from a trade outcome failure by playing into the “larger than expected move in the opposite direction.”

Let’s take a look at the recent breakout and failure – trap – in Crude Oil and step inside the price action to build a foundation for understanding what’s going on and how to protect ourselves.

Here’s the Daily Chart of Crude Oil and the resulting “Bull Trap” that triggered this morning:

Crude Oil Bull Trap Daily Chart Pattern Trade Failure Stop Loss

Without going into too much detail, let’s just reference the $103.50 area as an upper resistance key inflection level where a break above this level triggered a breakout opportunity into “Open Air” and a movement down against this level – especially with the divergences – triggered an aggressive “divergence into resistance” short-sell/bearish opportunity.

Monday’s Ukraine news thrust Crude Oil (and Gold) into potential breakout trade trigger mode as Money Flow took a Risk-Off posture.

Tuesday’s “Everything’s OK – Don’t Worry” news reversed these developments and Money Flow quickly shifted back to “Risk-On” Mode which thrust the S&P 500 to all-time highs.

Gold and Crude Oil suffered a reversal after initial breakouts, and buyers rushed to cover losing positions as short-sellers took the break under the $103.50 and $103 level as new trade entry triggers.

Here’s a peek inside the intraday chart with the Fibonacci Grid as a reference level:

Crude Oil Hourly Intraday Bull Trap Fibonacci Trade Failure

Again, a technical (chart) breakout triggered above $103.50 but failed just as quickly when price gapped and traded down under this inflection or pivot level.

The result – at least so far – has been a collapse straight down away from $103.50’s key level down toward the initial target which was just achieved (the prior price and 50% Fibonacci Level into $101.00).

Note the Momentum Divergences that preceded both the January low (reversal up) and the expected March reversal down that was thwarted by a day of Bull Trap activity.

Let’s step the perspective in one more time to a Pure Price and “Value Area” Profile Chart:

Crude Oil Market Profile value Area Bull Trap Outcome Targets

Fibonacci and indicators aside, we see a Clear Value Area with upper resistance into $103.50 and lower support near $101.50.  The Midpoint thus exists into the $102.50 level.

A break above the resistance high “Advertises Opportunity” (to use a Market Profile term) for buyers to step in and drive price away from Value.

On an initial break, buyers were unable to continue to push price higher and sellers became dominant on the “Everything is Ok/Don’t Worry” news.

From a price standpoint, sellers returned price to the upper resistance line ($103.50) and then pushed under it to trigger the resulting downside ‘collapse’ or return back to Value ($102.50) then the lower support target.

While we can’t predict which breakouts will succeed or fail, we can “predict” (at least from a high probability standpoint) that if price does trigger a Trap scenario like this, then we can expect price to return back to “Value” or a lower price target.

In other words, if you take a breakout trade opportunity like this, be ready to honor your stop if price does trade back under the breakout level.

Failure to trigger a stop-loss on a return under the breakout price exposes you to losses that mount quickly as price moves quickly down away from resistance.

If you didn’t take the breakout, or if you took the stop-loss without hesitation, aggressive traders have an opportunity to play the downward reaction that has trapped (in this case) buyers as they rush to liquidate losing positions at lower prices.

Use prior examples to continue to develop your knowledge on this important concept:

Lessons from the August SP500 Bull Trap

Quick Lessons from Three Bull Trap Outcomes

Always remember that it’s not your fault, and that the market isn’t “out to get you” if you get caught in a Bull or Bear Trap scenario.

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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 along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

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A Violent Tale of Three Trends of Commodities Corn Oats and Wheat

Jan 10, 2014: 3:07 PM CST

One of the main principles of Technical Analysis is tha t”trends, once established, have greater odds of continuing than of reversing.”

Recent price activity in Corn, Oat, and Wheat provide evidence of this concept, and even if you don’t trade these markets, it’s a good idea to take a look at the recent “violent” price action in the context of ongoing major trends in these commodity markets.

Let’s start with a brief overview of their Daily Charts before putting today’s volatile action in context:

Downtrending WHEAT (@W):

Wheat @W Wheat Futures Technical Analysis Trend

Downtrending CORN (@C):

Corn @C Commodity Charting Technical Analysis Trends Daily Chart

Uptrending OATS (@O):

Oats @O Oat Futures Oats Futures Daily Chart Uptrend Breakout Bull Market Technical Analysis lesson

The main idea from these three charts is to study the prevailing trend structure (compare highs and lows) and note the recent price action.

Particularly in commodity markets, trends tend to be salient (lasting) events which give traders opportunities to join the trends on pullbacks (retracements) or breakouts (as was the case in Oats recently).

We compare price with a momentum oscillator along with volume (paying close attention to strength or divergences with price and the indicators).  Pay close attention to the mini-divergence and reversal examples I highlighted in Oats (@O).

With the trend structure established, let’s now turn our attention to today’s ‘violent’ or volatile one-day moves that draw our attention.

Wheat continued the trend (failed reversal) with a power-sell day; Corn fought the trend with a big upside session; and Oats took a well-deserved pause after a stellar three-day impulse from a breakout.

Here’s the closer-view of the short-term structure as seen from the 30-min comparison charts (click “Continue Reading” to view the intraday charts): Continue Reading…

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Triple US Stock Market Check into the Zone

Feb 14, 2012: 12:08 PM CST

Technical traders across the world are monitoring current US Equity Indexes as they interact with the “Zone of Resistance” from their prior 2011 price highs.

Let’s take a quick check-up on where the “Big Three” markets stand at the moment in relation to “The Zone.”

First, the S&P 500 which hasn’t quite cleared the Resistance Area yet:

For reference, what I’m describing as “The Zone” is the cluster of price overlap or resistance from the mid-2011 index highs.

This level became important in 2011 as it resulted in price reversals in February, May, and July in the context of a “Range Consolidation” period in each of these indexes ahead of the August collapse.

Stocks reversed and bottomed in October and have since been rallying powerfully – in a “Creeper Trend” pattern – ever since.

At present, all indexes are either into the Zone of Resistance or else breaking gently above it as in the case of the Dow Jones and NASDAQ (the S&P 500 is the weakest index at the moment, relatively speaking).

As chart traders, we often start with price first and then move to other indicators as confirmation or non-confirmation of what’s happening with price.

Starting at the top, we see an overextended price rally into prior index resistance from 2011.

Going to other indicators, we see negative divergences in momentum and volume, which is a type of non-confirmation of the upward rally.

Strong rallies tend to occur on increasing volume and momentum, and that’s not been the case during the 2012 “Creeper Trend” rallies.

However, going back to our original foundation, we follow price (including trends) as traders and everything else is secondary to price.

This is an important distinction to make because traders who follow indicators first are likely to be short-selling or hedging (or taking profits) into these indicator-based caution signals.

Unfortunately, should price indeed continue trending higher – breaking freely through this resistance – then these same traders will be forced to buy-back to cover their short-sold or hedged positions as other traders will put on new buy-positions or else add to existing positions.

This is exactly the logic of a Positive Feedback Loop which supports these sort of ‘Creeper Price Trends.”  Be sure you understand this logic, as explained in the prior blog posts with plenty of examples of this concept.

Let’s turn now to a quick look at the Dow Jones Index, which has broken slightly above “The Zone.”

Again, we follow price as our top chart ‘indicator,’ and price is currently, arguably weakly, trading above the 12,800 important price level, placing it officially at “New Recovery Highs” not seen since 2008’s Bear Market.

The picture is the same in the NASDAQ, except the recent rally and breakthrough has been stronger, thanks in large part to Tech-stocks like Apple (AAPL):

Another point of comparison is that the NASDAQ is showing short-term strength (increases) in both volume and momentum in 2012, unlike the S&P 500 and Dow Jones which have shown continued declines in both volume and momentum.

NASDAQ Volume and momentum however are still lower than the levels seen at the end of 2011 during the October/November ‘bottom’ period.

So what’s the quick take-away?

Not much has changed since last week’s Triple-Index Market Update.

You can also view last week’s broader perspective view on the Monthly Picture in each of these indexes – it will be helpful in putting any sort of continued price breakthrough higher in context of the larger Bull Market trends since the 2009 official bottom.

The Equity Markets are in a continued conflict between Price (Trend) and Indicators (divergences/overextended rally), which makes it difficult to have strong conviction in your trading decisions, unless they’re on a very short-term basis.

Sometimes, new traders prefer to stand aside when there’s this much conflict between what logically should happened and what’s actually happening.

Stated differently, it’s unusual to see day-over-day ‘creeper trends’ without a meaningful retracement.

This makes it:

difficult to get long because you think the moment you get long will be the exact moment the market actually reverses lower;

and also difficult to get short because despite the logic for at least a retracement if not another reversal, you keep getting stopped out as price continues its ‘creeper trend’ higher.

For me, the solution is to stick with intraday charts and trade short-term opportunities that develop – and there have been some decent classical plays each day.

Of course, the situation would be different if we did see a strong rally and continued breakout higher – that would be expected due to “Popped Stops,” a “Short-Squeeze,” or “Positive Feedback Loop” logic.

It’s this “Price Stagnation and Indecision” within or near the “Zone of Resistance” that’s keeping us all on our toes, anxiously awaiting either a breakout higher or retracement (minimum) or even reversal lower.

Be safe and keep watching the developing structure as unbiased as possible.

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!

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Interesting Angles of Ascension in AutoZone AZO

Oct 26, 2011: 10:30 PM CST

AutoZone (AZO) is a stock I’ve been watching – and amazed by – for a while, mainly because it just doesn’t seem capable of a full trend reversal!

Let’s take a look at the strongly trending price action from 2010 to present, and note the change in “angular momentum” or “angles of ascension” (trendlines) and how the stock has behaved along the way.

Here’s the “pure price” angle of ascension chart:

I’ve mentioned the chart concept of “Angular Momentum” in the past, as seen in the previous posts (for some background reading):

S&P 500 and Angular Momentum April 29, 2011

Short Term Angular Trendlines in Gold and Crude Oil April 12, 2010

SPY Trendline and Angular Momentum Bull/Bear Psychology (good introduction post)

The main idea is that in ‘climax’ situations,  trends accelerate as emotions (and positions) run high, traveling through a progression of stages until the “angle of ascent” becomes unsustainable and the trend ends in a violent ‘climax’ reversal instead of the more common ‘divergence’ (clear signal) reversals.

You can chart this simply by hand-drawing trendlines that show a progression of “stages” of momentum – starting with a stable stage (a reasonable trendline) and progressing through stages where the “angle of ascent” in the trendline gets steeper.

In AutoZone, price travels the middle part of 2010 from $160 to $220 in a ‘relatively stable’ or at least consistent rise until the trendline angle increased steeply from October 2010 to January 2011, at which point price ‘collapsed’ in a steep retracement.

That wasn’t the end of the trend, however.  Price created ANOTHER relatively stable (steeper than normal) rising trendline that gave-way to another steep/sudden retracement in July.

But wait!  There’s more!

Instead of reversing/collapsing to a bear market (think Netflix NFLX in August 2011, Crocs CROX in late 2008, and many other examples), AutoZone dusted itself off and created the steepest angular trendline yet, moving from $260 to $330 at break-neck chart speed.

Technically, price broke under the ‘impossibly steep’ trendline angle on September 21, 2011 but price made it back to the upper resistance high at $330 where price stands currently.

Let’s look at the Weekly Chart of AZO for a better picture of what’s happened so far:

I’m not intending to give a big analysis of the stock, but mainly to focus the lesson on the strength/progression of the trend over time in terms of progressively steep angles of ascension over time.

To oversimplify the structure, price has continually rallied off the support of the 20 week EMA, with the exception of August 2011 when price supported strongly off the rising 50 week EMA.

Moving Averages are usually ideal reference points over time to judge trend progression, along with spots to enter a retracement buy-in trade.

Now, let’s add some classic indicators to the Daily Chart structure and note some interesting lessons:

When we’re assessing trend strength – on any timeframe – we’re wanting to know:

  • HOW LONG the trend has been in place (as trends can’t last forever)
  • HOW STRONG the trend is (based on momentum and volume, and other ‘internals’)

As a general rule, it’s best NOT to buy-into a rising trend when negative divergences are present, particularly when price is overextended into or beyond its upper Bollinger Band.

That’s a lesson learned numerous times in the Daily Chart above with all the highlighted areas – these were steep pullbacks that snapped the bulls after clear/lengthy negative dual volume and momentum divergences.

Here’s another lesson – those who tried to call tops in AutoZone were thwarted as the trend continued after each steep pullback.

It’s another reminder of “Trading 101” where we do best to trade IN the direction of a prevailing trend instead of fighting it (something about… “The Trend is Your Friend…”)

Anyway, Angles of Ascension, Dual Divergences and “snap” retracements, Trend Continuity against all odds, AutoZone has it all.

Use this stock as a reference example of these chart concepts.

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!

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Register Now for the Los Angeles Traders Expo in June

May 16, 2010: 8:02 AM CST

It’s that time of year again!  The Los Angeles Trader’s Expo is now two months away so it’s time to make plans now to attend!

The mid-year Expo will take place from Wednesday – Saturday, June 9 –  12.

The Traders Expos are great places to meet fellow traders, network with other traders and enthusiasts, speak to leading educators (whose books and websites you read), demo the latest trading software, and learn plenty of new ideas and concepts that you can use immediately in your trading.

Here is a sample of some of the free classroom training seminars you will be able to attend in person:

Tom DeMarkNew Market Timing Indicators

Toni Hansen“Is the Trend Really Your Friend?”

Toni Turner“Juice” Your Trading Profits with Leveraged ETFs

Scott Andrews: Using Probabilities to Trade Opening Gaps

Harry Boxer: Winning Chart Patterns for Stocks and ETFs

Dr. Doug HirschhornFocus on the Trade and Not the Money

Anne-Marie BaiyndUsing Bollinger Bands to Trade High-Profit Breakouts

Mike BellafioreThe Power of Simulation – Turning One Trading Day into Ten

And dozens more!

While almost all seminars are free (there is no registration fee to attend the conference), you have an opportunity to dig deeper in half-day premium sessions with select speakers (ticket required in advance).

I will be conducting an intensive, half-day seminar on Wednesday June 9th entitled,

Enhance Your Trading Edge by Locating and Managing Retracement, Reversal, and Breakout Trades on Any Timeframe”  (details on the Event Page).

Rosenbloom Expo Seminar

In addition, you will also be able to attend half-day seminars from:

Robert MinerHigh-Probability Trading Strategies with Multiple Timeframe Momentum

Martin Pring How to Trade the Sector Rotation Cycle Using ETFs

Larry PesaventoPattern Recognition Swing Trading

… and 6 other premium classroom sessions.

I’ve always had such a great time at the Expos both as an attendee for four Expos from 2005-2007 and as a speaker for the last three Expos, starting last year in Los Angeles.

If you haven’t been to an Expo yet, now is the time to do so!

I look forward to seeing you there!

Corey Rosenbloom, CMT Continue Reading…

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