I couldn’t pass up posting on the almost perfect short-term rising parallel trendline channel that has formed on the intraday chart of Crude Oil futures.

It allows us to observe a key channeling formation and learn an important lesson - that divergences can persist and give false signals while price remains in a powerful trend, and that it is more important to watch what price is doing in order to generate trading signals - an important lesson on all timeframes.

Let’s take a look:

Using TradeStation, we see the pure price of @CL Crude Oil (continuous) futures on the 5-min chart.

What’s important is to note the symmetrical, almost perfect parallel price trend channels that began mid-day yesterday (March 1st).  They continue to this day.

Price has respected these boundaries, allowing for simple trading entries, targets, stops, and exits all the way up.

A break beneath the lower trendline would be a good short-selling (intraday) or profit taking opportunity - that boundary rests currently near $80.50.

At times like this, it’s best to pare down your indicators and focus on price.

I wanted to show the example of how strong, consolidating ranges - even rising ranges - lead to false or misleading momentum (and other oscillator) signals, such as negative momentum divergences that fail to result in downward price action.

Even with a divergence, you still need to wait for a confirmation or an execution signal, which often comes in the form of a clean price trendline break.  Knowing this will save you lots of money in the long-run.

Keep watching for signs of continuation in the trend channel, or be ready to act with any confirmed break of the established boundary lines as seen above.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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It’s common to ask the question when price breaks a key resistance level, “Is this a real breakout that will last, or is this just a short-squeeze situation that won’t?”

That’s the operative question now - let’s take a look at the price breakout in the S&P 500 and try to make a determination with the information we have so far.

The 1,111 area was key resistance (a key inflection point), being the 61.8% Retracement, a descending trendline, and prior price resistance (late February high of 1,111).

As traders, it’s best not to get biased in either opinion (”Resistance will hold.”  or “Resistance will break.”) and take the Mark Douglas approach of “Price has entered a key inflection point that has to break one way or the other, and enter once we start to see a movement and place a stop on the other side” (Trading in the Zone) and especially take advantage of any unexpected breaks by playing intraday.

I describe this in a few prior posts:

“1,100 Resistance Level to Hold or Break,” and also:

“Lessons From Failed Signals and Popped Stops”

“What Happens when Resistance is Broken?”

“Opportunities from Popped Stops Intraday”

Once 1,100 did break Monday (with a gap), we had the classic “Popped Stops” buy play which was a benefit to intraday traders looking to play long off the short-squeeze that came from resistance being broken.

Now that the resistance is broken, we want to know if this is just a “quick blip” (a one or two day ’short-squeeze’ rally, where the buying is mostly fueled by short-sellers covering) or something else, where buyers are stepping up and driving price higher, creating a true breakout.

Right now, with the information given, it “feels like” a popped-stops rally,” and that’s evidenced by the choppy intraday action yesterday, divergences in market internals (see yesterday’s post “A Mid-Day Check on Divergent Market Internals“), declining volume (usually you want to see increased volume on a key break such as this), etc.

However, take a look at the highlighted regions I’ve drawn on the chart, which represent similar “Popped Stops” rallies that continued to drive price higher on lower volume all the way up (particularly October, November, and early January).

What’s a trader to do?

Stick to your intraday trading in such situations where price has been known to rally without stopping while forming all sorts of bearish non-confirmations.

Look to short weakness on any confirmed trendline or moving average break (a divergence is not enough evidence to get short - confirm entry with some sort of price breakdown).

Be on the lookout for any bullish signs such as a rise in volume, strengthening in internals, etc.

Until then, trade cautiously with the conflicting information out there.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Let’s take an afternoon look at the ‘popped stops’ rally of March 1st, which shows divergences in Breadth and TICK - both important non-confirmations going forward.

SPY 5-min Mar 1:

First, let me state that divergences in internals do not guarantee reversals, but they signal non-confirmations of price highs which serve as ‘caution lights’ or warning signals to take bullish profits and be on the alert for any weakness.

That being said, we’re looking at the SPY (could be the SP 500 Index or @ES Futures - the picture would be identical) on the intraday frame.

We’re seeing Breadth - Advancing Stocks minus Declining Stocks - then the TICK, and then $VOLD - Volume Difference between Advancing and Declining Stocks as our internals.

As price sneaked its way to the three most recent swing highs (notice the green dots - an indicator in TradeStation to highlight “New High for the Day”), we’ve not seen those highs confirmed with the TICK or Breadth.

The rising action in the VOLD is not surprising, given that 1,700 more stocks are advancing than declining right now (net), so thus volume readings - as measured by VOLD - would be increasing, so we’ll discount that.

What is surprising - and does serve as a deep non-confirmation of the index/price highs - is the Breadth Divergence.  Fewer stocks are positive on the day on each subsequent push to new highs than were at prior highs.

With TICK, the story is the same - fewer stocks are ‘ticking up’ at new price highs than prior price highs.

It’s worth noting that it’s unusual for price to continue rising in the face of such divergences, so be very careful in any long/buy positions, and be ever vigilant for any opportunities to short weakness under $111.60.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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It’s already March 1st and the market is off to an early rally!

With a new week and a new month upon us, let’s take a quick look at some of the key indicators/charts that the Disciplined Investor - Andrew Horowitz - is watching on March 1st.

Today’s update is entitled, “An Apathetic Condition” (interesting title):

This week, Andrew writes:

“Volume is one of those indicators that cannot be ignored. It does not show an overbought or oversold signal and it does not oscillate. What it does do is provide a measure of conviction for a market and a better reading on investor sentiment.

Most recently, it almost seems that there is an apathetic mood as investors are awaiting for equity markets to break one way or another.

During that time (since December 2009), volume has been tapering off, unless it is a down day and sellers appear all too ready to dump shares.”

I concur - the boundaries are set and this morning’s bullish spike could continue the short-squeeze higher, but volume is key in assessing whether this is just a short-squeeze on low-volume (bearish) or if volume surges during the rally (not happening so far) which would be a bullish sign.

This week Andrew takes a special look at the volume and ‘internals’ underlying the rally, along with levels to watch.

Corey Rosenbloom, CMT Continue Reading…

While doing some weekend research, I came across an interesting development.

At first glance, I saw that the Consumer Staples Sector SPDR - XLP - was making new recovery highs (new 2010 highs).  My first thought was that this was a very bearish development that could be underscoring risk-aversion in that money is flowing into ’safer’ stocks according to the Sector Rotation Model.

My next thought was to compare that development with its sister sector, the Consumer Discretionary/Retail Sector - XLY - to see if we were seeing weakness there.  To my surprise, I found that we were seeing new 2010 and recovery highs in the ‘risk seeking’ or offensive Retail Sector as well.

In fact, the only two sector SPDRs making new recovery highs were the ‘aggressive’ Retail Sector (XLY) and the ‘conservative/defensive’ Staples Sector.

Let’s take a look at these conflicting and strange signals from the sector rotation model, and view their respective ‘bullish’ daily charts.

First, a Line Comparison of AMEX Sector SPDRs (focusing on XLY and XLP):

StockCharts has a neat Sector Performance Tool you can use to track sector performance.

Instead of getting lost in the lines, focus on the “Staples” line (teal) and the “Discretionary” line (blue).  They are the only Sector SPDRs that are above the January 11th SP 500 peak for 2010 at 1,150.

Thus, these two ETFs are showing clear ‘relative strength’ not just to the S&P 500, but to the other sectors as well.

The reason that’s strange is because these are seen as competing sectors in the Sector Rotation Model, which asserts that in a rising/bullish environment, money is flowing into the ‘offensive’ or ‘aggressive’ sectors such as Technology, Finance, Industrials, and especially Consumer Discretionary (Retail).

The theory is that in a good economy, people will spend more, sending retail companies higher.

In a bad economy, or in anticipation of bad times ahead, consumers spend less, save money, and buy only what they need, which are listed as “Consumer Staples.”  By comparing these two sectors, you can effectively get a glimpse of fund and investor sentiment and expectations.

So what happens when they’re both sending the same signal?

Let me first state that it would be generally deemed as a bearish sign if Staples were outperforming all other sectors.

It would be seen as a bullish sign if Consumer Discretionary (along with Technology and Finance perhaps) were outperforming all other sectors.

However, what we have now is not just outperformance, by one or the other, but outperformance by both above all other sectors!

It’s an interesting yet conflicting development, and we can see how it happened on each sector’s respective daily chart.

First, let’s start with the “defensive” Consumer Staples (XLP) Chart:

Without doing technical analysis on these charts, we see that price appeared to be in a “Rounded Reversal” formation with a bearish breakdown of the moving averages… and then a sudden, stunning rally from nowhere in late February took the XLP to new recovery (2010) highs.

Normally, this would be viewed as investors taking the “safe route” and steering capital to the safer, defensive sectors.  This would be bearish for the broader market.

But wait right there!  We see almost the exact same thing in the Consumer Discretionary chart, which is where investors go when they feel an “all clear” on the economic horizon.

Next, we’ll end with the “offensive” Consumer Discretionary (XLY) Chart:

It’s the same thing!

What message are investors sending?

It’s very hard if not impossible to tell right now just by looking at the Sector Rotation model, specifically in the insights analysts normally glean from comparing Staples to Discretionary.

That’s why we should be watching each day cautiously for any signs of bullishness or bearishness, and not get caught up in bias traps such as saying “The market has to go higher because of …” or “The market has to go lower because of…”

Take it day bay day, swing by swing and navigate any ‘tricky’ or conflicting signals as they resolve one by one.

Corey Rosenbloom, CMT
Afraid to Trade.com

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