Daily View from the Top

Mar 6, 2008: 5:33 PM CST

Let’s take a quick look at where we stand and were we may be heading on the US Stock Market chart, using the Dow Jones Index as our proxy.

I don’t normally draw so many lines on the chart, but there are a variety of support and resistance levels, many of which I have not drawn.

Notice the major confluence of resistance that took place at the 12,300 level in terms of the overlap of the recent triangle, which was just beneath the falling 20 period moving average. In addition, the market had just ‘busted’ an upside break of the triangle, and failed moves (or unexpected moves – if everyone thought the market was going to break higher) often can be stronger than expected moves.

As it stands, the market has significant resistance above, and little resistance beneath, combined with the fact that the market has been in a sort of holding pattern (consolidation) since late January.

A retest of January lows seems likely, but do note the non-confirmation coming from the reduced volume of today’s trading. With such a large volatility price move down (-1.75%), shouldn’t volume be surging? The fact that it is not is not confirming lower prices currently.

While this fact is not inherently bullish, it does create a small bit of doubt for the bears until proven otherwise.

It will be interesting to take a new look at the weekly charts, as well as the daily charts of different markets this weekend.

Until then, trade cautiously in this environment.


Intraday Channel Action

Mar 6, 2008: 5:27 PM CST

Today’s action in the stock market was marked by a lengthy consolidation channel, with a mini-breakout into the close, leading to lower prices.

Let’s take a quick look not only what happened from a technical picture on the intraday chart, but let’s learn a lesson about channels.

This is a textbook example of a consolidation channel, marked by two virtually parallel trendlines. Don’t be surprised if you see a picture of today’s action in a technical analysis textbook soon.

Seriously, trendlines are formed by a minimum of two touches, but three touches or more are ideal. The more time price ‘tests’ (or touches) a trendline and reverses, the more valid the trendline becomes.

Eventually, all channels will break, but until then, odds favor trading with the trendline – in both directions if it is a channel trendline. Trading bi-directionally is more of an aggressive style, but would have worked well today. Generally, one tries to take trades in the direction of the prevailing trend, which in this case was down (as determined by lower highs, lower lows, and the most bearish moving average orientation possible).

It is often best to ignore momentum oscillators in range-bound markets, as well as ignoring most moving averages (though notice how the 50 period average served as resistance today).

Rangebound markets favor using bound oscillators such as the RSI or Stochastic.

In the next post, let’s look at the daily chart of where we stand in the market.


Trader’s Educational Whiteboard

Mar 6, 2008: 12:28 AM CST

Today’s educational video lesson from Adam Hewison at INO is entitled “How to Avoid the Most Common Mistake Traders Make Everyday” which deals with determining and placing stops.

How many times have you – like me – placed a well-devised stop-loss on a trade and then had the market nip that price and hit your stop, only to rally?

In the lesson, Adam discusses:

1. Dollar Stops

2. Percentage Stops

3. Chart Stops

While you may be familiar with some of these strategies, it is helpful to learn a bit more on these topics and see how you might learn a new strategy.

Adam also explains why getting stopped out on a proper strategy must not be seen as a negative. Furthermore, he concisely explains a couple of ‘pros and cons’ of each strategy.

The video is free and lasts just under 8 minutes in duration.


Do You Know Where Your Commodity Has Been?

Mar 5, 2008: 11:01 AM CST

You’ve probably heard that commodity prices are rising, but have you looked at individual commodities and what that might mean for you or the market?

Let’s peek at a few selected commodities and see exactly what magnitude these commodities have been making new lifetime highs.

Soybean prices (above) have virtually doubled since October 2007 and almost tripled since mid-2006.

Wheat prices have almost quadrupled since 2006, before pulling back recently.

Higher wheat prices affect consumers in a variety of ways, the most obvious being that the cost of bread and other food products will likely increase, as has the price of milk and eggs over the last year.

Finally, let’s view corn prices:

Thanks to the ethanol possibilities and other pressures, corn prices have almost tripled since 2006.

I highlighted a perverse bull flag on the weekly chart, which has actually exceeded its ‘measured move’ component recently, as price is making all-time contract highs.

Oil and Gold (not shown) are also making new highs and showing similar major uptrend patterns.

Will these prices affect the economy in terms of higher inflation for everyday goods?

It’s probable, but let’s see how long it takes for these realities to sink into the financial media and general public.


Fun Intraday Trades

Mar 5, 2008: 12:54 AM CST

Tuesday’s action provided a plethora of key set-ups and high probability trades on the short time frame intraday charts on the US Indexes.

Let’s check out the Dow Jones “Diamonds” ETF (DIA):

The first trade when there’s an overnight gap is to fade the gap for at least a 50% retracement and a potential full gap fade. Today only gave us a 50% fade trade early on.

At the failure to close the gap, the market offered up a clear bear flag trade which targeted a ‘measured move’ of the initial flagpole (which included the invisible overnight gap price).

Any pullback to the key 20 period moving average set up a trade with a small target of the previous swing’s price low. These trades worked, but the momentum divergence that was building (purple line) gave clues that the bears were losing steam.

Aggressive traders could have played both sides of the channel that developed, but ‘counter-trend trading’ by buying down-swings in a clear trend day down can be a low probability strategy.

Fortunately, the lengthy momentum divergence led to an upside break of the strong downtrending channel of the day, leading to a miniature bull flag entry and “three push” pattern.

A key breakout trade came NOT at the breakout zone, but at the purple oval I’ve drawn, which represented the pullback to retest the channel and key moving averages.

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