Recent Gaps Can’t Fill

Mar 3, 2008: 6:03 PM CST

Last week was a difficult time for classic gap faders, as the market never seemed to fill a gap.

The mantra of January was “Almost all gaps fill,” but February is the near opposite of that sentiment, in that “Few Gaps Fill.”

Last week (and today) was particularly rough, as the market turned downwards after hitting significant resistance. Let’s peek:

The last few trading days have resulted in overnight gaps to the downside, none of which have filled (yet), or played out according to classic gap fade tactics.

We do see a giant momentum divergence forming, which hints (but not guarantees) higher prices are yet to come, as the market has found potential short-term support.

It’s very interesting to see how the market shifts and brings certain strategies in favor and out of favor.

Trader Bo Yoder calls this part of the “Payback/Pay-out Cycle” that plagues all traders, whether they’re aware of it or not.

While the gap-fade strategy ‘cleaned up’ and provided profits in January, traders caught on to the benefits of this strategy and the strategy failed to provide satisfaction through February as the market sought to foil late-comers to the party, unaware of the cycle.

It will be interesting to see if the market can make a swing higher in the next few days, as the 15-minute chart hints. If so, then that resolution will confirm the ascending triangle that’s developing on the daily charts.

If anything, there’s a clear level to place your stops on this chart if price does continue its downtrend lower. Let’s see!

 

 

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Index Overview

Mar 3, 2008: 11:57 AM CST

Let’s take a brief look at where we are as we start the new week, which may see a break of the recent consolidation pattern we’ve been experiencing.

In the Dow Jones, an ascending triangle is forming, which could hint at a larger breakout volatility move is ahead. Consolidation patterns imply balance and relative indecision in the struggle between the bulls and the bears.

The momentum oscillator has broken out to the downside from its consolidation pattern (trendlines), but price has yet to confirm this break, dipping beneath the line this morning but coming back in. Let’s see how price closes this afternoon.

The NASDAQ Index shows a potentially grim outlook:

The NASDAQ appears to have broken out of its symmetrical triangle. Notice the five-wave correction that has taken place. Corrections can take place either by retracing the previous swing, or by traversing in a ‘line,’ or a ‘correction by time’ instead of price.

While I’m not an Elliott Wave Theorist, one has to ask if we are about to start an Impulse Wave Five Down at the break of this sideways line (or symmetrical triangle):

I’d like to hear the insights of any Elliottician if you’re willing to share your thoughts.

Either way, it’s probably best to be on guard this week and next week, and plan to hedge against, or profit from, a large volatility move down (or up!).

Become a member to INO.com to learn more from unlimited access from over 100 educators in more than 500 video lessons, including Elliott Wave Theory, for only $99 per year!

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Cool Economic Data from St Louis Fed

Mar 2, 2008: 3:49 PM CST

If you’ve never checked out the amount of data you can find and customize from the Federal Reserve of St. Louis website, I strongly suggest you do so.

While you can find a plethora of information there, I strongly recommend the “FRED Graphs,” which allows customized views of virtually any Fed data you can reasonably imagine.

Here are a couple of examples – without significant analysis on my part – that you can create for yourself on this website:

Personal Savings. The personal savings rate in the United States has now dropped beneath $0, meaning that consumers are strapped and unlikely to be making major economic purchases, especially if they’re unable to find credit to finance these purchases.

Producer Price Index (all commodities): A Look at how the PPI has increased since 2003.

While I could spend all day on this website, I did want to point out its existence and how much data you can receive. You can plot all of the major economic reports the Federal Reserve follows (up to four series per graph) and also compare what changes take place before recessions to see if there are any clues we can gather about conditions right now.

I may be posting more of these graphs on the site as I find new insights and interesting findings.

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Afraid to Trade Blog Anniversary!

Mar 1, 2008: 11:38 AM CST

Thank you so much to readers of the Afraid to Trade blog! I owe so much to you for reading, linking to, and sharing the blog and the analysis/commentary/education I share with you.

I wanted to provide the traffic statistics provided by my webhosting service to show you how rapidly the blog has grown, and also share a few ideas of new changes that will be coming to the blog in the next few months:

First, here is a graphic that shows how the blog has grown over the past year:

Second, here is the actual table of traffic statistics:

In summary, in the one year first anniversary period beginning March 1st 2007 to March 1st 2008, Afraid to Trade has experienced 3,717,337 hits (which includes search engines and feeds), and 517,695 visits (which includes visitors). Readers have viewed 1,183,013 pages at Afraid to Trade!

I cannot express how thankful I am to all of you who have taken part in the blog in any way, whether through giving me ideas, linking to posts, adding me into your favorite feed reader program, commenting, emailing me, or just reading.

As promised, I want to provide some ideas I’m working on currently for the expansion of the blog into a full website that will provide a resource to traders to further their education and provide a source of interactive knowledge for you all.

I just started working with a website design company to see if they can put some of my ideas into a comprehensive webpage, and I will keep you up to date on the status of that process/project.

Please let me know if you have ideas or suggestions as to what you would like to see on the site, or what resource/information would help you as a trader. Please email me at corey AT afraidtotrade DOT com for submissions and I will appreciate all ideas and suggestions.

I am humbled by all you readers and you continue to motivate me to provide more and better quality information to help you in your journey as a trader. I look forward to the next year and from hearing from you! I am indebted to you all.

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Bears Take a Swipe at the Market

Mar 1, 2008: 10:54 AM CST

Friday saw the market make a large volatility move down, and the impetus has now shifted to the bears it seems.

Let’s look at the daily Dow Jones chart:

Notice that the market faced major resistance at the 12,800 level, and despite the potential triangle break, the bears could not push the market higher.

I zoomed in on the most recent action to introduce two points:

  1. The recent triangle that everyone saw (red) has FAILED as expected by many professionals. When everyone sees the same pattern, odds increase that the pattern will fail.
  2. A new consolidation pattern, perhaps a rising ascending triangle, is forming. The range of this pattern is currently 600 Dow points. Watch for a break of this larger consolidation pattern.

The most recent downswing should not have been a surprise, because (as I have highlighted previously):

  • the triangle price break was not confirmed by volume,
  • the market formed a doji (potential reversal candle pattern)
  • The 12,800 level served as critical resistance
  • The weekly chart also shows significant resistance at this level

Let’s peek at the weekly chart:

Notice how the Wednesday price high found significant resistance at the dual resistance zone from the 20 and 50 period moving averages. The bulls could not push price beyond this key zone.

Also, notice the non-confirmation from volume. Volume was declining each successive week as the market reached an equilibrium consolidation zone.

Let’s briefly see the monthly chart:

The last four months have seen price declines, with some of them being rather significant. February closed almost 400 Dow points lower (3% decline).

In October, the market formed a major monthly doji (which is a signal of indecision, and can act as a reversal signal after a large rise or fall), which provided a potential clue of the upcoming change of trend.

The market (on the monthly chart) is trapped beneath its falling 20 period average and the rising 50 (which served directly as support in January).

The main theme at the moment is consolidation and indecision. Eventually the market will break in one direction or the other, and it will be wise to heed this break.

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