The Market is Toying with Us

Jan 16, 2008: 6:21 PM CST

Seriously, I was surprised at the rampant volatility in the market today, with large upswings and downswings, a gap impulse that was faded, and a very weak close.

All you can do is learn from it and that’s exactly what I intend to do – I am posting what I considered “idealized trades” according to my trading plan and interpretation of market action. Through categorizing as many days as possible, I will increase my recognition skills and thus improve my intraday trading.

  1. Classic “Fade the Gap Trade” which worked with amazing simplicity. Simply enter long and target yesterday’s close (purple horizontal line)
  2. Exit “Gap Fade” and then trade the impulse gap in the original direction of the gap, which would have us going short and targeting the intraday price low. This is analogous to my “Impulse Sell.
  3. Ahh, my favorite! Classic bear flag or measured move (lightning bolt down) trade. Entry as close to the 20 period MA as possible with target being the prior measured move. Perfect.
  4. Classic 10-bar divergence trade. Notice the clear momentum divergence in the price and oscillator. Initial target: 20 or 50 period MA. Divergences are only good for small targets.
  5. Ascending Triangle consolidation break. This is a more suspect trade, but it led to a large momentum impulse up, which gave the day’s highest momentum and price reading. The break also occurred at the resistance from yesterday’s close. Target: Undefined or initially the 200 period MA (which acted as resistance)
  6. Second triangle break and moving average break down, which led to a trend move down into the negative price close. Target: Undefined.

Those were the ideal trades one could have taken with 100% hindsight based on my interpretation of market action and the distinctions I make that form trades and opportunities. I’m sure you saw things differently which led to other opportunities for profit.

I hope the market was kinder to you today than it was to me. Intraday traders either love or hate rampant volatility and large price swings. Either way, they provide plenty of opportunities if you’re able to perceive and act upon them.

I offer mentorship and consulting opportunities to those who are interested in learning more. See my “About Me” page for more information.

Best of luck!


Market Breaches Monthly Support Levels on All Indexes

Jan 16, 2008: 10:07 AM CST

An incredibly bearish omen is setting up currently in the monthly charts of the US Stock Market Indexes.

Each index has now carved an intra-month breach of its rising 20 period (month) moving average, which has served as key support and key resistance many times prior.

Until a close is registered beneath this average, meaning until the month of January ends, a true signal cannot be given, but it would appear that odds are increasing for a true close beneath this key zone soon.

The white dots represent areas where the 20 period monthly average has been tested and held as support or resistance.

The Red dots (two of them) indicate areas where the 20 period MA was breached on a close, representing a potential trend reversal zone.

Should the S&P 500 close beneath its 20 month moving average, along with the other indexes which show similar patterns (except for the NASDAQ, which shows a massive decline from 2000, but is still breaking beneath its 20 month moving average), odds would then significantly increase for a new downtrend to develop potentially which would spell trouble for most long-term investors.

On a different note, notice the momentum divergence that the S&P formed, in terms of momentum oscillator peaks and price peaks.

In 1999, the black line momentum oscillator showed readings close to 100, while the new price highs of 2007 show the oscillator reading near 75. Momentum divergences can also appear on longer-term charts as well, and have similar forecasting potential.

The most recent all-time price highs were made on lower momentum readings (shallower price swings) than in 2000.

Anyway, the last break of the 20 period average gave us a test of the rising 50 period average, and in this case that would project the price of the S&P 500 index to about 1,300.

On the Dow Jones Index, we see similar patterns and a similar momentum divergence, though the recent all-time price highs were more significant than that of the S&P, but the breach is just the same:

Please be careful as we potentially shift from a bull market into a bear market of unknown duration.


Market Resembles a Roller Coaster

Jan 16, 2008: 1:03 AM CST

The US Stock Market has been whipsawing traders up and down over the last week, with the market moving 1% to 2% up and down per day. That translates into swings of 200 Dow Points up and down on back-to-back days.

It seems like when traders get a signal to go long, the market reverses 200 points against them, which triggers a short trade, and when they enter short, the market rallies 200 points against them.

I honestly don’t know of any major or popular ’system’ or style of trading beyond intra-day that is able to capitalize on the violent reversals in price from one day to the next.

Swing traders often require a bit of movement in one direction before entering a position, but when they get their signal, the market gives them a small gain then erases it all and so much more the next day.

I suspect even position traders are becoming frustrated with market conditions, because the market doesn’t seem to be generating any long term buy or sell signals.

It “feels” like the market should be heading lower in the near to intermediate term, but buyers don’t seem willing to give up the ghost.

Reference this pure price example of the 15-minute price action over the last few trading sessions:

From late in the day on January 9th, the Dow bottomed at 12,500, breaking intraday support and likely triggering many shorts, but then the market rallied 400 Dow points by the same time the next trading day on the 10th.

Traders who took this opportunity to “get long” into the close or before, believing that the market had supported at a key support level, were treated with a 200 point vicious downside gap and a “trend day down” which brought the index down from 12,850 to 12,550 – a decline of 300 points in a day.

Traders who decided it was a great time to get short did so, and were subsequently treated on Monday (January 14th) to another upside gap and trend day up. Frustrated, they probably covered their short positions and some of them even decided to get long again.

Today, those same traders were foiled again with almost a 100 point gap and subsequent “trend day down” that took price to an intraday low of 12,500.

What’s a trader to do if he or she can’t stand aside and let the market develop a direction?

Realize that anything can happen in the market and place protective stops accordingly.

Refuse to give the market or your trade the benefit of the doubt. If your trade doesn’t work out immediately in these conditions, it may be best to cut your losses earlier than you usually do and move on to your next signal. You can’t afford too many losses of 200 or more Dow Points for most intraday or swing traders.

Take this opportunity as a learning experience and document as much information through your charts as you possibly can. Hopefully, these conditions will be rare, but you’ll be better prepared to exist in them profitably the next time they arise.

If you are a new trader and just getting your feet wet in this market, please be careful and trade with extremely small position sizes until the market returns to some sort of balance, or exhibits a clear trend in one direction or another. Choppy environments are extremely difficult for even the most experienced traders. Not only are current market conditions choppy, they are extremely volatile, with violent price swings in both directions.

Learn from it and try to have fun. Don’t traumatize yourself. The market will exist next week and next month if you don’t thrive in the current conditions. Take some time off if need be. Protect yourself as best you can.


Goldman Sachs Triangle Throwback Trade

Jan 15, 2008: 7:55 PM CST

Goldman Sachs (GS) recently formed a consolidation coil or triangle, and recently set up a classic “throw-back” or second chance high probability entry.

Notice the absolutely clear triangle consolidation from November until early January, and the subsequent break in mid-December.

I posted previously about the triangle break as a potential opportunity to trade GS short (or sell any long position you were holding).

Triangle breaks are often susceptible to what’s known as “throw-backs” which mean that, instead of trending sharply downward at the direct break, price meanders back in a retracement swing to retest the breakout point or, more commonly, the apex or peak of the triangle that formed.

Breakouts are actually lower probability trades than throw-back trades. Throw-back trades often offer higher probability opportunities to enter a position.

Throw-backs also tell us why it’s generally unsafe to trade with ultra-conservative stops (those that are far too close to your trade entry price). A stop for the consolidation break should actually be on the opposite side of the triangle, which may be too much risk for some traders to handle.

A break at $210 should have been accompanied by a stop around $225 that decreased either as the trade moved in your favor, or with the upper declining line of the triangle pattern.

Notice how the stop is much tighter and more logical (and more conservative) than the initial break-out.

The “Throw-back” trade called for entry near $215 with a stop above $220. Initial targeting would have been the distance from the height of the triangle, or about $45 (the distance between approximately $200 to $245 or $250).

See for yourself if you would like to learn more about this trade, and potentially incorporate it into your growing trading arsenal.


Bearish Indications from Sector Rotation. Recession?

Jan 15, 2008: 10:32 AM CST

The Sector Rotation Theory is again showing majorly bearish money flow patterns into the most defensive sectors possible.

The Utilities, which offer attractive dividends and who also perform well in conditions of falling interest rates, have increased 15% in the last 65 days as the market has turned bearish. Utilities greatly outperforms all other of the nine major US Stock Market sectors.

There is a three-way tie (which sounds similar to the US Presidential Primaries) for second in the Energy, Consumer Staples, and Healthcare sectors.

Rising Energy (oil, gas, etc) prices are bearish because they serve as a virtual tax on businesses and consumers.

Rising Consumer Staples stocks are bearish because large funds and traders are moving their money into the security that these stocks provide. Even in recessions, we must still buy toothpaste, food, tobacco (for those who do), home cleaning supplies, etc. When Consumer Staples (up 9.58%) significantly outperform Consumer Discretionary (down 9.35%), this is an extremely bearish omen. Consumer Discretionary stocks include gaming, hotels, luxury goods, travel, automobiles, etc. The idea is that, in bad times, we can reduce spending on these items while we cannot do so on necessities.

According to one view of the Sector Rotation Model, where are we in the current rotation of funds?

We are likely somewhere in the teal (light blue) box, and I have drawn the solid vertical blue line to indicate where I think we might be as well. Utilities are starting to outperform, while Energy, Consumer Staples, and Healthcare Services have been doing well for some time now.

This would indicate that the Stock Market is in a bear market, and the US Economy (green arch) is beginning Early Recession. This would match well with the TV pundits that are pondering whether or not we’re already in a Recession.

These charts are courtesy founded by John Murphy. Murphy frequently discusses Sector Rotation insights as well as education on Inter-market analysis, and I am providing an example of a video presentation from TV (discussed briefly in my earlier post):

This presentation, and many other videos are available to you there (membership page). It’s actually $12 per month for unlimited access, or $8 per month with a full-year membership. I am very much enjoying my membership so far and the vast number of presentations available to me there. I only wish I had more time to watch additional videos!

I strongly encourage you learn more about the potential forecasting value of Sector Rotation Theory, as it served to me as one of those “lightbulb” educational moments when was first introduced to the concept of money flow and institutional movements into and out of key sectors at definitive points in the business cycle and economy.

Sector Rotation Theory can be of benefit primarily to the longer-term investor, but also is is extremely applicable to swing traders and even day traders who hone in on key stocks in key sectors that they expect to move in the next few days.

Whatever the resolution, we’re in for some interesting times ahead!

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