It’s understandable if you’ve forgotten about the bond market with all the activity centered on the stock market along with the recent multi-month sideways “rectangle” pattern in Bond Prices, but if you haven’t checked a recent leading Bond ETF chart, now might be a good time to do so.

Let’s start with the popular 7-10 year Treasury Fund IEF to see the current structure:

We’ll break the chart down in steps to make it easier.

First, notice the sideways Rectangle Pattern that developed between the $105 Upper Resistance Line and $102 Lower Support Line.   The $103.25 level is the “Fair Value” or “Midpoint” of the pattern.

What’s been frustrating about this pattern is that price has “poked through” on both sides three times, yet returned back inside the pattern for a classic “Trap” in both directions.  Yikes.

The recent breakout today to new highs should draw your attention to the bond market – or at least the IEF and TLT ETFs for a simple question:

“WILL this breakout hold and continue higher… or is this the third bull trap since September?”

Let’s look to volume and moment for chart-based clues first.

So far, both indicators are diverging negatively – suggesting the probabilities from these variables suggest “Trap!”.  Dually noted.

Non-confirmations or negative divergences are caution signs at a minimum, and often are early warning signs of a price reversals ahead.

Adding another important indicator into the mix, we see a very BULLISH structure to the rising 20 and 50 day EMAs (green and blue respectively), along with a rapidly rising 200d SMA – all of which suggest higher activity as long as price remains ABOVE the 20 and 50 day EMAs.

Stepping back to a simpler observation of the trend structure, we see a persistent rising trend, though that’s best seen on the higher Weekly Timeframe:

We have a long-term or Primary rising uptrend (evidenced by bullish EMA structures and the series of higher highs and higher lows in price).

We’re also seeing the same persistent negative momentum and volume divergence that appears on the daily chart.

With Volume and Momentum suggesting caution/trap in an otherwise very bullish trend structure, let’s rewind to a very similar chart-based situation that developed in late 2010.

From August to November 2010, we see a similar bullish rising short-term and intermediate trend though Volume and Momentum showed classic negative divergences into November.

We can see the downward resolution in Bond Prices that occurred concurrently with the Federal Reserve’s “QE2″ or Quantitative Easing (round 2) program… but that’s another story beyond the charts.

The current lengthy negative divergences in volume and momentum cross-check the bullish trend structure in place, along with the dominant short-term trendlines as seen above in the daily chart.

For comparison, here’s the picture in related Treasury fund TLT (minimal annotation):

What’s the bottom line for bond prices/these ETFs?

Watch price relative to the $105 breakout area – as long as bond prices remain above the Rectangle Breakout, we have probabilities favoring the buyers/bulls…

but a return back under $105 suggests a third “Trap” and likely continued downward retracement lower as suggested by the divergences in momentum and volume.

Another way to frame the current situation is to ask the basic question:

“Will History Repeat (from late-2010’s similar situation)?” or the ever famous “Will this Time be Different?”

Corey Rosenbloom, CMT
Afraid to Trade.com

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Gold prices ejected downward from their Symmetrical Triangle bigger price pattern this week, resulting in a continuation breakdown move towards expected lower targets.

Let’s take a look at the original “Symmetrical Triangle” prior update (ahead of the break) and now update what’s happened and where we are now, starting with the “Pure Price” pattern itself:

Reviewing last week’s Symmetrical Triangle Pattern description, we observed the “Midpoint Value” area at $1,735 with converging ‘triangle’ trendlines narrowing from $1,750 to $1,700.

A breakdown under the $1,700 level would trigger a ‘range expansion’ or “feedback loop” sell-off towards the $1,600 target … which is exactly what occurred, giving us a good example of a bigger-picture pattern set-up and follow-through.

This is a big lesson in planning for any outcome, and not being biased that gold “must” break higher from the triangle pattern.

Yes, the bigger picture trend structure suggested an upside continuation, but this gives us a good opportunity to review one of my favorite bits of trading wisdom:

“IF something should happen but does not, THEN it often leads to a larger than expected move in the opposite direction.”

The simple logic behind the statement refers to “Crowd Behavior,” especially with a majority expectation that is not fulfilled.  What happens instead is a series of stop-losses that trigger a “feedback loop” I like to call “Popped Stops.”

The Feedback Loop – which occurs in virtually any breakout from a consolidation pattern – occurs in part because BOTH sides of the market are engaging in the same activity for different reasons.

In this downward break from the triangle consolidation pattern, buyers were forced to sell-to-liquidate unhappily which was joined by traders (bears) who short-sold happily.  This type of logic helps understand impulse moves in price.

Let’s pull the perspective up to the Daily Chart and see where we are in the broader scope:

The triangle developed cleanly, and price broke out ahead of the apex (point where the trendlines meet), which is the classical expectation.

In any consolidation pattern, traders often do best to wait for a breakout to occur, instead of trying to predict in which direction price will break – that sort of behavior is what helps propel feedback loops or “Popped Stops” of the side that loses the price battle.

Anyway, after breaking and closing under the $1,700 key level, price impulsively traveled towards the first downside target at $1,600 … and exceeded it yesterday.

It’s very interesting that price closed firmly – for the first time since January 2009 – under the rising 200d SMA (that’s another story).

In the meantime, let’s keep focused on the $1,600 pivot and the 200d SMA which was also the swing low from the recent October sell-off.

It’s not going to look good for gold if it continues closing under $1,600, so let’s watch price structure day-by-day relative to that reference level and these recent bearish breakdowns.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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How have market internals given us clues about the last two short-term stock market reversals, and what are they saying currently?

Let’s check out the 30-min intraday S&P 500 Chart of Breadth-based Market Internals:

What we’re seeing above (click for full image) is the S&P 500 with the NYSE Breadth and NYSE Volume Difference of Breadth (two of the “Big Three” Market Internals – the other is the NYSE TICK).

Breadth measures the number of advancing issues minus declining issues at a specific moment in time, while Volume Difference (VOLD) takes into account the difference in Volume Flow of Advancing and Declining issues.

The key is to look for internal confirmation with price or non-confirmation (in the form of visual divergences).

Let’s focus mainly on the non-confirming divergence of November 25th (a positive divergence at the lows) and the recent December negative divergences at the highs ahead of the current ‘retracement/sell’ phase.

Reference my November 29 Update on Market Internals to see how the picture looked in real-time then, and of course how the signals from internals successfully played out positively (as expected) for the market.

Use that as a clear educational example of how the concept is ’supposed’ to work (nothing is perfect though).

That brings us to our current decline in Market Internals (inner strength) while price rallied on “fumes” ahead of the recent ‘turn-around’ into the 1,260/1,270 target level.

Let’s take a closer look at the current picture:

A 5-min multi-day (intraday) chart allows us to see more detail that may be missed from the higher timeframes.

First, we see the November 25th positive divergence and resolution with two big “Confirmations” from Internals – November 28th and November 30th (when Central Banks intervened).

Strength in internals tends to PRECEDE strength (or follow-through/continuation) in price, as you can see from 1,230 (Nov. 30th) to 1,270 (Dec. 5).

Short-term price swings never last forever, and we often see deteriorating Internals (along with raw Volume and Momentum) ahead of short-term reversals (or retracements).

That’s what we saw last week and we’re seeing price follow-through in the retracement/downward direction after locking in negative Internal divergences.

We’re also seeing a type of “Rounded Reversal” or “Arc” Price Pattern, but that’s another story.

The key NOW is to watch for any sudden surge of bullish buy-ins or profit taking from short-sellers off the 1,220 important confluence support.

If buyers do not step in to stop the tide of selling at 1,220, we’re likely to see a continuation back to 1,200 as the next target and then if the market trades at 1,200, we’ll see if divergences exist at 1,200 in real-time.

Today’s sell-off puts the market focus on the 1,220 confluence, so keep your attention there as a short-term “make or break” level in the context of signals from Market Internals.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Not to be outdone by the recent S&P 500 triangle pattern, Gold is forming a broader Symmetrical Triangle Consolidation Pattern that we’re following closely for any sign of a breakout from the converging trendlines.

Let’s look at this situation from two perspectives, starting with the “pure price” intraday level:

When discussing a Symmetrical Triangle, it’s best to start with three definitions in the structure:

The Declining Upper Trendline, the Rising Lower Trendline, and the Midpoint or Central Value Area.

While the Trendlines should be self-explanatory, the Midpoint/Central Value Area is the center of the consolidation – or the price at which the Trendlines will eventually meet (also called the “Apex”).

I highlighted the current Midpoint at the $1,730 level.

Historically, symmetrical triangles have tended to break out 66% to 75% of the way from the start of the triangle to the apex (convergence point) which places us roughly in that area currently in gold.

This was the case with the smaller Triangle pattern in the S&P 500 I highlighted as it was developing (we had the successful breakout and resolution to the downside target).

No, that’s not to say Gold will follow-suit perfectly, but it is the dominant price pattern at work.

Triangles are Consolidation Patterns that often forecast a future breakout or range expansion/trending move (though you can’t absolutely predict in which direction price will expand… only that it will likely expand in an impulsive breakaway move).

That’s why we’ll be watching these trendlines carefully this week and into next – the current boundaries are roughly $1,750 on the upside and $1,710 on the downside – both converging towards the $1,730 apex.

Let’s step up the perspective and add a few indicators on the Daily Chart:

In a range compression (consolidation) pattern, moving averages tend to lose their effectiveness (when compared to serving as support/resistance for trade entry during trending phases), and it just so happens that the averages themselves converge towards the Midpoint at $1,730.

You can see the broader pattern stretches back to the September highs to lows which builds an estimated height of $350 ($1,900 minus $1,550).

Using classical price pattern projections, this suggests a breakout above $1,750 could lead to a continuation move that targets $2,100… while a downside breakout under $1,700 eventually targets $1,350.

Given the long-term (primary) trend, one would suspect the resolution (breakout) would be to the upside for a primary trend continuation, but as traders, we must be quick to adapt when things don’t work out exactly as expected.

If there happens to be a downside break, we’ll all be watching the $1,600 confluence for any sign of support.

However, an upside break would immediately target $1,800 and any firm movement above $1,800 enters the “Open Air” territory between $1,800 and $1,900 (one could see a ’slice-through’ effect impulse in the “open air” territory).

Stay unbiased and keep watching these levels for any sign of breakout and of course continuation (instead of a frustrating trap) with respect to these price levels.

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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When you’re studying a price chart to assess trading opportunities, what is your eye drawn to first?

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!

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