Pleasure or Pain? Index at Key Zone

Jan 13, 2008: 12:20 PM CST

The NASDAQ index sits exactly at a key price support zone, the break of which will increase the odds for significant downside, but should the index support at this level, can an “all clear” signal be given?

I’m sure you’ve seen prettier charts, but the fact remains that the NASDAQ sits at a key level that bulls have a second chance to defend.

The index is in a confirmed daily downtrend, but this level served as key support in the past in the form of a Key Reversal day on significant volume.

Should the bulls (buyers) fail greatly at this level, it would be difficult to conceive of a scenario where the odds would favor continued price advancements.

Let’s look at the weekly chart to see if we can gain any additional insights:

Actually, the weekly chart looks much more bearish than the daily chart, in terms of the dual trendline break combined with a significant “two close beneath” the 50 period (roughly one year) moving average.

This means that price is beneath the average price gathered over a one-year period, and the 50 period MA has served as key support for any major price corrections.

As you can see from the May/June market correction of 2006, the 50 period average was shattered yet price failed to make significant new lows and then shortly meandered its way back above the 20 and 50 period averages, setting the stage for a new rally.

The same could absolutely happen this time, but as always, we take what signals are given from price, volume, time, and key indicators, and at the moment, it seems the momentum is clearly on the side of the bears (sellers).

In terms of the price/trend structure, weekly price has formed a lower high AND a lower low AND broken support from key moving averages.

I must note that the orientation of the moving averages is still currently “very bullish,” but recall that virtually all indicators lag price and give late signals.

A “Very Bullish” orientation of the moving averages means that the 20 period is above the 50 period, and that both are steadily above the 200 period average.

Gosh, we live in fun times, don’t we?

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Another Trend Day Down

Jan 12, 2008: 12:08 PM CST

Friday was yet another major trend day down for the major US Indexes. Let’s look at some of the simplest trades you could have made within that intraday structure:

The first clue that Friday would be a trend day (down) was the opening gap. Opening gaps do not always precede trend days, but the initial imbalance in supply & demand increases the odds.

While the first play of a gap open is to “fade” the gap, if the gap fails to close within the first hour or two, odds also increase for a trend day. By this time, you should be using other indicators such as volume and moving averages, as well as perhaps the TICK, TRIN, Breadth, and VIX for confirmation/non-confirmation.

Once you identify with greater probability that the day’s structure will indeed be a trend day, it is then time to establish a core position to hold into the close and then swing trade around that core.

In this case, any pullback to the 20 or 50 period declining moving averages on the 5-minute chart set up a nice, risk-controlled, high probability trade. I have circled such instances in the above chart.

As a bonus, a beautiful bear flag pattern (or lightning bolt) sets up which achieves its target perfectly. It’s ok to use leverage or a larger position when these patterns set up which clarify entries and exits, especially for traders who love visual pattern recognition.

Often, on trend days, it’s best to throw most oscillators off your chart as they will usually degrade any edge from the underlying trend/price/volume structure. Recall that virtually all ‘popular’ indicators lag price/volume action.

Early recognition of a trend day can lead to significant profits when you trade them aggressively, and significant losses when you attempt to “call a bottom” or trade counter the establishing trend.

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Bull and Bear Flag Examples

Jan 11, 2008: 8:06 PM CST

Although the next chart may seem garbled, it is actually detailing recent simple bull and bear retracement patterns on the 15-minute chart. This serves as a great educational example:

I also call bull and bear flags “lightning bolts,” though technically I should only call bear flags lightning bolt patterns because of the equivalent downwards thrusts.

Recap: Bull and Bear Flags call for a “measured move” which sets up a key trade based on the price action alone. They are some of my favorite patterns in technical analysis due to their simplicity, ease of stop placement, and exact target location.

Notice the first bear flag which is a sharp retracement against the momentum/price downthrust.

An ascending triangle (which has slightly better odds of resolving/breaking out to the upside) formed which indeed did get a price/momentum up-thrust, which was corrected by a near perfect bull flag (around 2:00 Jan 10).

Price then impulsed down with today’s opening gap and then continued to trend lower all day. A nice and near perfect bear flag formed into the close.

Here’s an isolated example of today’s 5-minute chart:

This example was a more 45 degree angle flag, but the measured move and ejection (breakout) from the retracement (especially from resistance at the declining 50 period moving average) was near ideal.

Once you begin to understand these patterns, they literally leap off the chart at you and call your attention to them when they’re forming.

Besides that, I think they’re fun!

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Oil Falls off Record Prices… but for How Long?

Jan 11, 2008: 12:18 PM CST

Crude Oil prices slipped off the recent $100 per barrel record, and are now completing a sell swing lower. But how long will the recent sell swing last?

  • New price highs NOT confirmed by new momentum highs
  • Resistance is clearly at $100 per barrel
  • Rising trendline has been broken (beneath $96)
  • Rising 20 period moving average has been breached (at $95)
  • Price may find potential support at $92 with the 50 period moving average
  • Price is in a confirmed uptrend – odds favor higher prices

For educational purposes, I have also highlighted a “Bollinger Band Squeeze Play” in early October.

Due to the Range Expansion/Contraction principle, prices often eject out of consolidation zones (highlighted by narrowing of Bollinger Bands) and trend in a sustained ‘breakout momentum’ mode. New momentum highs confirmed this break.

It would appear that prices should support in the $90 to $92 range before making an attempt to retest or exceed new price highs at $100.

Due to the potentially weakening economic conditions in the United States, oil may fall on expectations of reduced demand… but we make money off price movements, not expectations.

Nevertheless, higher oil prices are a further drag on the economy. I’m sure a lot of investors (not in crude oil) would love to see a break of the $90 zone. For technical traders, that would signal a potential price move lower.

Until it happens, price is still in a confirmed uptrend and as such, odds seem tipped in favor of higher oil prices in the short term.

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Quote on Certainty

Jan 11, 2008: 9:27 AM CST

I was reading Mark Douglas’ book Trading in the Zone and came across a most perplexing yet interesting quote I thought I should share.

In chapter 7, Douglas is discussing “The Trader’s Edge” and about certainty and writes the following:

“[Traders often] crave the sense of certainty that market analysis appears to give them.  The typical trader wants to be right on every trade.

The irony is that if [traders] completely accepted the fact that certainty doesn’t exist, he would create the certainty he craves -they would be absolutely certain that certainty doesn’t exist.

The point is that the market is not about certainty, and analysis is not about making you right.  The market and trading is about probabilities with uncertain outcomes.  Analysis cannot make you right, but it can provide you awareness to other opportunities or potential opportunities where the odds of one thing happening are greater than the opposite thing happening – this creates a temporary imbalance or opportunity which is defined as a “trade.”

That’s what this game is all about!

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