Rough Intraday Selloff

May 21, 2008: 1:34 PM CST

I figured we might get some continued downside in the broader market today, but I’m always surprised at how swift and rapid these sell-offs actually are.  Let’s take a quick look at the action so far as we near 2:30 EST in the trading day.

I’ll be using one chart created ‘on the fly’ from Tradestation, showing the DIA’s 5-minute chart with the Breadth window overlayed on the chart:


(Click for full-size image)

I’ll try to analyze the action later this evening, but the day began with a near perfect bear flag into resistance (via the combined 20 and 50 period moving averages) which set up a nice trade (which was confirmed by a new momentum low – this is my “impulse sell” trade).  The target was the intraday S1 pivot (pink line) which was exceeded.

I still expected lower prices and held a core position with a stop just above the falling 50 period MA which came ever so close to being executed, but I’ve found to play core positions with a looser stop because large moves in the intraday market are often preceded by a ‘false’ swing which often take out close stops.

Nevertheless, price fell back down into a new impulse down to the bottom of the Bollinger Bands before swinging back up to form yet another classic “doji at resistance” trade set-up which surprised those who took the trade with a large intraday windfall profit (with the target above the S2 Pivot, which was quickly exceeded).

We’ve formed a new momentum low and a large impulse down.  The 15-minute chart (and somewhat on the 30-minute chart) showed a classic bear flag for the intraday action so far (check it out).

I’m also including a ‘real time’ (intraday) image from StockCharts.com which shows that the DIA rests at the rising 50 period moving average (while the Dow Jones – not pictured – actually went beneath this level today).

Let’s see how this wild day (but welcome because of its increase in volatility) resolves into the close.

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Crude, Crude, Crude

May 21, 2008: 9:40 AM CST

This morning while scanning the Newsflashr Business Feeds section, I noticed that virtually every major news organization was reporting on Crude Oil prices breaching $130 per barrel for the first time. Most of the headlines were of this variety:

Crude Surges Above $130 on Supply Concern” – Fox Business
Oil Tops $130 for First Time” – BBC
“Oil passes $130 for the first time“- CNN
“Oil tops $130 Haunted by Future Supply Worry” – Reuters
Oil rises above $130 for the first time” – USA Today

And my personal favorite…

Oil Soars to $130, What Will Congress Do?” – ABC News

There are other headlines on the Newsflashr site, which allows you to view headlines at a glance from top news sources, then allows you to click to read the stories that interest you. It’s a whole new way of reading the news.

With all these stories, I thought it would be helpful to show you the recent charts in Crude Oil and make a few quick observations:

If you ever wanted a classical technical analysis definition of an uptrend (series of higher highs and higher lows) then this chart is it. While prices do not rise in a straight line, they do experience temporary consolidations or pullbacks in the upwards price drift, which actually creates trade set-ups and low-risk ideas.

The rising 20 or 50 period moving averages often halt any retracement in price, as does certain Fibonacci retracement values (38%, 50%, or 62%) which can create powerful trade set-ups when combined with another support zone.

Crude Oil indeed made yet another new price high which was confirmed by a new momentum high. We are seeing the higher prices that were forecast (as a probability) from that recent May 12th NMH. Barring some major fundamental (supply/demand) change, odds still favor continuation of the prevailing trend.

Let’s see how strong this trend is on the weekly chart:

Price has more than doubled since the beginning of 2007, with the momentum oscillator continuing to make new momentum highs right along side with price (suggesting further continuation).

Adam Hewison of the Market Club just released a new video entitled “10 Trades and $32,000 Later….” how the service has fared (exceptionally well) using trading signals via their ‘trade triangle technology’ for the year to date.  Seriously consider joining if the service would be of assistance to you.

The price swing from $90 per barrel to $130 was a sustained advance with only two weeks during that time being negative.

If you count the weeks, in 2008, Crude has gained 14 weeks, declined 5 weeks, and ‘tied’ 1 week. Those are amazing statistics for any commodity or market! Unfortunately, higher prices in this market affect the broader economy, and higher crude cuts consumer and business cash flow, which reduces relative buying power across the board.

The contrarians exist, and with so much headline exposure, it would be hard not to be at least slightly contrarian, but fighting such a strong trend can be damaging to your account.  Continue to check back and keep your eye on this market and what it could mean not only for the overall market, but for yourself or your business.

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Bears Take Their Intraday Swipe

May 20, 2008: 6:48 PM CST

The US Stock Market Indexes fell 1% today, after selling off into the close on Monday’s trading, causing price to trade at lower levels far quicker than it rose to these levels. Let’s look at the Dow for clues regarding potential structural trades you could have taken.

The price began the morning with a sharp overnight gap which was little surprise given the rapid sell-off into yesterday’s close. Price also formed a near perfect bear flag into the close, yet the ‘elegant entry’ wasn’t signaled due to price gapping through the lower trendline of the pattern.

After surging lower in alternating, narrowed price swings, the action leveled off before making a final ‘flush’ to new lows around 2:00 when the growing positive momentum divergences ‘kicked in.’

During a trend-day style environment, it’s important to recognize the conditions early, get the trade on, and scalp around a core position, while playing any retracement to the 20 period moving average as a new entry.

In fact, there were some classic doji candle patterns that formed at or near the falling 20 period average that allowed for some very high probability (small target) trades with very little risk.

I have magnified many of the doji style patterns during the day, including the rare “tri-star” doji pattern that formed around 11:30.

The 12:30 doji at resistance via the 20 period moving average formed yet another golden trade and the final doji-style pattern came after 3:00 as price retraced up to the falling 50 period moving average.

Also, let’s look at the larger intraday structure via the 15-minute chart to see how much ground price lost over the recent down-swing:

Price declined to levels not seen since the 13th of May.

As mentioned earlier, the price rests at potential support via the 20 or 50 period moving average (depending on the index) so it will be interesting to see the development from here.

(The Dow was the weakest index of the day, falling 1.5% to the S&P 500 and NASDAQ’s just under 1%.  Oil prices reached new lifetime highs again today, gaining over $2 per barrel).

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Market Finally Tests Lower Prices

May 20, 2008: 12:51 PM CST

After failing twice at its 200 day moving average, the US Stock Market indexes tested lower levels, and do so with a sharp sell-off.

Let’s view the larger picture of where price is on the Dow Jones Index:

The most recent action is not the end of the world by far.  Price appears to be rolling comfortably as the demand/supply relationship is quietly shifting in a rounded formation.

Price is failing to surmount the falling 200 day moving average, but at the same time, the 20 and 50 period moving average appear ready to meet the decline with potential support.  Combine that with the potential support of the February ‘double top’ highs (near 12,700) and that area (or at least into the consolidation area just beneath it) could be yet another support zone.

A negative momentum divergence has formed as price has carved its way slowly higher.

The weekly chart shows further support at these levels, which may halt significant further downside action:

Dow Jones

I can’t remember the last time I’ve seen so many lines converge both above and below the price as we’re experiencing now.

The red down trendline connects price highs which was recently broken, and could serve as support.

The rising black line connects price lows which is still (currently) in-tact and could serve as support (though I feel it’s more likely to get broken soon because of its steepness).

The flat black line connects prior price lows (and current price highs) and also corresponds with the important ‘psychological’ level of 13,000.

Also, the 50 and 20 period weekly moving average are converging near 12,750, which could further serve as support.

It’s such an interesting time as an analyst right now, but as a trader, it’s so hard to anticipate what’s about to happen next.

The good news is that no matter which position you take (whether prices will continue higher or reverse and go lower), the places to position your stops (in case you are wrong) are so close to your entry either way that the risk is low and the reward is high, provided one of those levels gets battered and price makes a trend move higher or lower from here.

Let’s keep our eye on these developments until price (traders) can figure out which direction it will resolve.

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Link: Closer Look at Profit Targets

May 20, 2008: 10:27 AM CST

The IBD Index blog recently posted a wealth of data on system testing and permutations of percentage stop and percentage profit target in relation to the IBD 100 list, S&P 500, NASDAQ, in a recent post entitled “A Closer Look at Profit Targets.”

The blog also has a large collection of posts on other aspects of system testing and design and – as the title suggests – focuses most of the analysis on the Internet Business Daily top 100 stocks list.

Before you get excited and think you can view the IBD 100 for free, the author is not allowed to post the contents of the stock list to the blog, but he keeps track of the performance of the index and how investors might use the strategy for better profit.

In this post, he tests a variety of combinations on fixed stop-loss percentages (from 2% to 10%) and fixed percentage profit targets (from 4% to 40%).  This is a concept I have been examining as well, but have been focusing on fixed dollar and Average True Range functions for stops and targets.

He sorts results by:

Expectancy by Dollar Risked
Profit Factor
Efficient Expectancy Ratio

There are a few surprises in the data that you might not have otherwise been aware.

The author writes:

“…stops have a larger impact on a system than do entries and the manipulation of stop combinations is one of the most effective methods of tailoring a system to one’s needs.”

and…

There is no magical combination of numbers, no “Holy Grail”.

Check out the entire post for full charts and detail.

(Credit to Rob Hanna’s post “System Discussion from Other Blogs” at Quantifiable Edges for providing the initial link to this post and others – and appreciation for linking to my post as well)

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