I thought today would be a good chance to take a quick look at the daily chart structure of the S&P 500 and highlight the recent negative dual divergences into overhead resistance and the anticipated ‘mini-crash’ (can we call it that today?) that followed from that set-up.

Let’s see it:

Let’s lead up to today’s sharp downside move.

First, look at the absolute swing high that occurred recently on August 9th (vertical highlight).  If you look closely, you’ll see that volume and momentum (3/10 oscillator) along with internals (not shown) all declined as price reached its final peak.

It did so as price rallied squarely into clear overhead confluence resistance at 1,130 – and though the market held up for a few days, the crash (I use the word ‘crash’ to denote a sharp, one-day or longer downside move) was all-but guaranteed.

Those were the situations that formed ahead of the prior one-day plunge, and today we had a similar structure form, though it was more evident on the lower timeframe charts.

We had a push up suddenly into confluence resistance at 1,100 as additional reversal candles – notice the upper shadows – formed at the 1,100 level and momentum, volume, and internals all diverged (intraday charts) as price clawed its way to the overhead resistance.

A drop today was all but guaranteed.

When the market moves in these sort of conditions – falling after pushing into overhead resistance on negative divergences – we can say the market is ‘doing what it is supposed to do’ – or at least making sense from a chart standpoint.

That’s not to say that price WILL fall on similar conditions – but that odds strongly favor a fall.

In the event that price – in either instance – would have shattered resistance either at 1,130 on August 10th or above 1,100 today, then we would expect the market to rally sharply to the upside on a pattern failure, which would trap all the bears/short-sellers and force them to cover by buying shares.

I call this scenario “Popped Stops” which allows the intraday trader to take advantage of situations where the market “should” do something but instead does the opposite.

That’s how you trade – you don’t call out the future with 100% certainty.  You set-up and assess the odds from the charts as you understand them, develop an “IF/THEN” situation, put on a position, and then manage it when new information comes in, which sometimes means stopping out and flipping your position on a key unexpected break.

These are the kinds of lessons I highlight each night in the Idealized Trades intraday reports.

As I said in last night’s post, the more you learn these patterns by studying the charts, the better you’ll be in real time to identify and trade the markets as these opportunities/set-ups repeat.

They do repeat.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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Is it important to study today’s charts for insights and lessons to learn from the day’s structure and opportunities?

Absolutely.  Not only can you replay your performance and pinpoint where you could have traded better, but you’ll increase your pattern recognition and trade set-up skills by seeing these classic patterns repeat.

Case in point, in August there have been a pair of two days that are almost identical in every way – from the open to the close.

Let’s take a look at these “Pair Days” and learn a bit more about them.

First, we had a direct repetition on August 16 that we saw on August 12:

(Click for full-size image)

I won’t go into full detail – that’s what I do in my daily reports for members of the Idealized Trades summary reports – but will highlight the structural similarities (that sounds like an engineering term!) between the two days.

First, we had a downside gap from the prior day’s close.  In both sessions, the market pushed higher in break-neck speed to fill the gap, doing so successfully on the 16th but falling just shy on the 12th.

From there, we had classic dual negative divergences in momentum and TICK (internals) that gave way to the intraday high and “Rounded Reversal” pattern – one of my favorites.

Price then fell into the afternoon session as expected… but wait!  We had a sudden and unexpected break of the arc formation and rally into the close.

It’s almost like an omniscient and omnipotent hand traced out these full-day patterns – but remember that chart patterns – and price for that matter – are determined by aggregate supply and demand of all involved as they (generally) cycle through greed and fear.

So if that wasn’t interesting enough, we had a direct repeat today of what took place yesterday, as seen below:

Today’s repeat pattern wasn’t as clear as the prior, but compare the open, lunch session, and decline into the close.

Both days started with a small compression pattern that gave-way to a lunch-time price breakout, second pause, and push to new highs in a 5-wave fractal pattern, both of which ended on negative dual divergences (again) on the respective price peaks (intraday highs).

From there, price stagnated for an hour and then collapsed into the close.

Day structures that repeat are like little golden roadmaps into the future – but that’s another story.

These sort of examples underscore the importance of evening assessment and forming a ‘broader perspective’ mental picture of day structure, all of which I discuss in evening reports.

Though it’s extra work, I suggest all intraday index ETF or futures traders (all traders for that matter) print off and study each day’s chart and think of it in terms of patterns, opportunities (trades), etc.

The more you see these patterns – and believe me they do repeat – the better you’ll be able to recognize them (and act on entry/exit signals) in real-time as they develop and follow-through to pattern completion… or pattern failure if that’s the case too.

Study – it most certainly makes a difference.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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Shares of Goldman Sachs stock (GS) remain trapped between two key price levels as traders await a breakout from this range.

Let’s take a focused look at the daily chart of Goldman Sachs (GS) and pay specific attention to the two key levels to watch on the chart.

Taking a quick look, we see price compressed specifically between resistance at the 200 day SMA (and 50% Fibonacci retracement) at $157.50 and support from the 50 day EMA at $146.90 ($147 for reference).

Those are the key levels to watch for a larger range breakout, but there’s an even smaller range that short-term and day traders should be watching.

It’s the compression between the 38.2% Fibonacci retracement at $151 and the 20 day EMA at $149.30 (call it $150 for a round-number reference) and the same 50 day EMA price at $147.

Thus, the “IF/THEN” statements in GS may be the following:

“IF price breaks overhead short-term resistance at the $150 level, THEN expect a play up to the next higher resistance at $157.”

or

“IF price fails to hold support at the $147 level, THEN expect a further sell-off and break of support to target a retest of the $130 to $135 level.”

As a trader, you’re often better by assessing charts in terms of “IF/THEN” statements/expectations as opposed to “Well, there’s support at $147 so Goldman’s going to go up so I’m buying.”

What if it doesn’t?

If you want to dig a little deeper than the simple levels I’ve referenced here, then look at the classic negative momentum divergence that undercut (disconfirmed) the swing high at the $157 level.

The divergence and push into confluence resistance  set-up a good short-sale opportunity with a stop above confluence resistance at the $158 or $160 area to play for a retest of daily EMAs at the $150 to $145 area – which is where we are now.

Now we’re at another “technical decision node” where price can either bounce upwards off support here – placing a stop under $147 – or slice through the support (shorts would place their stops above $147 in that case).

What will happen?

The proper question should be “what do I expect and where should I locate my stop/what is my risk?”

Or wait for a breakout signal – above $150 or beneath $147 – to put on a trade and join the winning side – bulls or bears – rather than trying to make an educated guess as to whether bulls or bears will prevail.

Either way – watch these levels for clues as to the next likely move ahead in Goldman Sachs (GS) shares.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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I wanted to share a quick link to a post written by Mike Bellafiore of SMB Capital entitled simply:

“The Market Doesn’t Care about  Your Opinion.”

This is something we all as traders learn, but it is a helpful reminder, especially for new and eager traders, that the market is bigger than any of us and doesn’t really care if we’re bullish, bearish, or neutral on any position at any time.

Mike shares a personal story of a trader on the desk who voiced the statement:

“I had conviction that [the stock price] would reach my target.”

Conviction is fine – it can be helpful – but not if it blinds you to new information that has developed in the stock, or if the situation has changed after the time you put on the trade.

Trade Management – what goes on between your entry and exit – is one of the most difficult skills to manage as a trader.  You can make it easier if you don’t get blinded by bias or opinions that block access to new information, such as negative divergences, opposite trendline breaks, or other “things that shouldn’t happen” while in a position.

Concluding comment from Mike:

“Professional traders make good risk/reward trades and are not concerned with the outcome.   Nor are they under the delusion that they really know where a stock or the market is headed.”

It’s a good story and good reminder that we trade the probabilities, not opinions, of stocks or ETFs in play.

Corey Rosenbloom, CMT

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I feel like I’m beating the same drum, but Treasury bond funds TLT (20+ year) and IEF (7-10 year) continue to breakout to fresh 2010 highs – and this morning gave us another sharp gap up to new highs.

Let’s take a look first at the longer-term fund TLT:

This post just shows the specific breakouts, but look closely at the three recent clean price breakouts from overhead resistance.

First, we had the TLT stagnate between $91 and $87 for the early part of 2010 and then break with sharp gaps up as May began.

I know what you’re thinking – you say price broke out because of the Flash Crash (investors panic) but look extra close – price broke out BEFORE the Flash Crash which took place on May 6th – it’s that really big bar that goes from $93 to $99 in one day.  THAT was the Flash Crash.

Notice the price breakout and two gap-up days in a row BEFORE the crash.  The bond market often has a slight lead on the Stock Market.

See my prior post:

Want Clues to a Likely Stock Market Reversal?  Watch TLT and IEF

Or another prior post:

“Bond Funds IEF and TLT Nearing Key Breakout” (which they did)

Price broke out above resistance again in late June, but abruptly turned around when the stock market bottomed in early July.

Now, we have another key breakout above clear price resistance at $102 – so it’s if anything a caution signal for the stock market  – not necessarily forecasting a crash of course, but certainly signaling caution.

Let’s see the same progression on the shorter-term fund IEF:

Though I didn’t specifically label it, price broke out of overhead resistance at $89.50 in late April and off to new highs in early May – gapping up two days prior to the infamous May 6th “Flash Crash” – the same as TLT.

Bonds snapped lower during the ’snap-back’ rally in stocks and then continued higher as the stock market continued lower.

IEF broke out again in mid-June which coincided with the short-term market peak (the first time) at 1,130 on June 21 – no lead time there.

Recently, the IEF broke out of the resistance at $96 in early August prior to the second retest and failure of the stock market at 1,130 which (short-term) peaked on August 9th.

The IEF fund broke out with a gap move as seen here on August 6th – three days prior to the stock market peak and downturn (which actually began officially with a sharp sell-off day on August 11th).

And today, we see a continuation of the break and another gap higher.

What’s the main idea?

Sometimes – not always of course – bond funds will break resistance ahead of short-term peaks in the stock market.

We are seeing strength in the bond market and weakness in the stock market.

As long as this continues to be the case, traders should be aware that the stock market would likely continue to be weak going forward and to use caution in your trading decisions.

And the flipside – any sudden deterioration in the bond market would be likely bullish short-term for stocks.

Keep watching this situation closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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