Last week we had a neutral outlook while we waited for more signs from the market. This week we continued seeing bearish divergences and several indicators turned down. 6 indicators are down and 2 are up, with the 2 up having recently formed bearish divergences and could be continuing to do so. The biggest signs this week are the bearish momentum and HVC right at the broadening top line which happens to fall at 1000, and the swing system remaining short. Thus the daily chart is extremely bearish and this is a good low risk short entry point with a stop on a close above the broadening top line (around 1000) or above the 1016 Fibonacci level.
Longer term the outlook is very bullish, mostly due to the large commercial traders buying. Normally I don't go against the long-term outlook but having missed the current move up is making me re-think this. So we have a short-term bearish signal and a long term bullish signal. Let’s see what the choices are:
1. The market corrects down to the middle of the broadening top around 930 and then continues upward for an upside breakout of the broadening top with a target of 1126 which is a 50% retraction of the bear market. This scenario is consistent with a bearish short-term view and a bullish long-term view.
2. The market continues upward. This is unlikely but the entire move up has been unlikely proving once again that anything can happen. The commercials have enough buying power to continue the rally to the 1126 target.
3. Commercials start selling and push the market down to the bottom of the broadening top formation at 860.
This week should tell us which of the 3 will happen.
I added to my short position on Friday and if this week starts out bearish I'll be looking to add a bit more. If we move up with higher volume I'll cover. Currently short with 1/2 position.
Finally, I have combined some of my indicators into a strategy which gives buy/sell signals. It still needs some work but I plan on sharing some charts and signals when I get back (if there is interest). The long-term systems are currently long and the short-term systems are currently short.
I didn't write about this in my last update but one thing I'm watching is the intermarket movements. Specifically the dollar. The dollar has been inversely correlated to the indexes, oil, gold, euro, etc. The dollar is currently in a retractment and many including myself expected it to resume its move up. This week it broke through support but from what I see this has the makings of a fake out. I was expecting the dollar to move up and the indexes, oil, gold, and euro to all move down. When the dollar broke through support many expected it to continue down and the others to continue up. In any case this presents a major market turning point and one way or another we should get some clarification really soon. The past couple of days the dollar has stopped going down. It's working on completing a 5th wave down which is usually the final wave. If my theory is correct, the dollar could be finishing the move down, going below support as a fake out. Traders are going short on the dollar and their covering could fuel a rally. It's really interesting that the dollar is just under support right as the indexes are just above resistance. And in both cases momentum is decreasing.
I read in another thread a criticism of a well-known trader's newsletter where the guy called the top (or bottom) several times but was wrong. The critique was that the guy didn't know what he was doing. I thought it was funny because with a $1k stop one could call the top wrong many times and eventually be right and make a fortune.
Finally, it seems everyone here is more into scalping than swing trading so I'm not sure I'm going to continue posting to myself. I was hoping for some participation and exchanging ideas.
My theory is this:
- scalping - provides income while waiting for day trade setups ( I only get a few setups a day and sometimes they're open to close so lots of time for scalping)
- day trading - main source of income
- swing trading - a way to invest the income from day trading
To me they all fit together and work to spread out the risk. Obviously if you have a small account then it's best to focus on scalping and/or day trading to start building up the account.
I read your post each and every time, but sincerely, dont have much time right now to sit down and give something in return, but I hope soon I can.
I wish I could do some swing trading but my trading account and my confident in my skills are a little reduce at the moment, so need to limit myself to daytrading :-) . Your outcome is always appreciated.
Think we are in the same camp regarding the dollar.
IMO the dollar will be key in the start of the decline. The dollar is due for a (last?) bounce, and then stocks and commodities should start to go down.
Also we are getting close to a time fib window (mid Aug- mid Sep) for the decline to start.
But I would not exclude the chance for first only a small correction and a last push to 1050-1100 in the next month.
BTW A good point about the various forms of trading. Makes a lot of sense.
Why not another count ? A big ABC correction of the previous bull markets?
The whole downturn up to March being Wave A down.
March - Oktober? wave B correcting part of the decline with potential target 1020 (38% retracement or even 1150 (50% retracement).
This would place us now in the last part of the subwave c up (after a up (March-July), b down (June), c up (July - ?) .
Then end this fall - mid next year a big drop in Wave C to below the March lows.
I thought this was interesting to share. Paul Tudor Jones is one of the few "wizards" who is still active. He just sent out a letter to his shareholders. His assessment sums it up well for what I believe.
If this is a bear market rally why is he looking for a better opportunity into year-end for going long? That doesn't make sense to me. My guess is he says that to calm down his investors who feel they're missing out, that or he may see a low-risk opportunity to trade the bear market rally after a pullback.
Here's what I'm watching: The COT report. Commercial traders have been buying for many weeks until last week when they were net sellers for the first week. However the commercial SPX traders were still buying. We're at resistance from the broadening top and the 38% retractment level of the bear market (1016 on ES). If commercials continue buying we will head higher possibly to the 50% retractment and the 62% level. However if the commercial traders start selling that will cap the rally and we'll head down. This is all long term of course. Tomorrow's COT report will be very interesting. Was last week's selling just a pause? or are the commercials switching sides?
For the wave count: I've been lost and confused trying to apply it to the S&P. I don't really use this in my trading except to predict the end of a wave 5 or a C correction to try an anticipate turning points. My trading style is countertrend so I look for reversals. I'll have more time to study this on the weekend.
Last edited by cunparis; August 7th, 2009 at 02:59 AM.
I haven't completed my analysis for this week but there are some interesting developments. Today gapped up but closed in the middle on higher volume, this indicates supply. The high of today on ES was.. 1016! Exactly the 38.2% retractment level of the bear market. A couple more interesting developments: Commercial SPX traders were net sellers for the 2nd straight week (after being net buyers for the previous 6 weeks). And the Dollar seemed to find support and went up on higher volume.
All this points to a major turning point across all markets. The dollar could be resuming the uptrend, the indexes could resume their downtrend, commodities especially oil & gold could head down (partly due to a rise in the dollar but also due to market factors).
I've been waiting for this moment for a while now so I'd like to see some more confirmation but I see very good low risk setups across several markets. As an example, a short on ES with a stop on a close above 1016 on higher volume or around 10 pts with a target of 940 (50% retractment of the current leg up and a possible target of 860 which is the bottom of the broadening top formation). That's 10 pts risk for a potential 76-156 pt gain. I don't think they get much better than that.
I added to my short today and will be ready to add more if the next few trading days look bearish.
Sorry but I didn't have time to do my usual weekly analysis. Not that I didn't have time to post it, I didn't do it at all. Been too busy working on a swing trading strategy. However my previous comments are still in tact. Just about every indicator/breadth/data/analysis shows we're overbought with bearish divergence. It's just a matter of time before the indexes come down hard.
here's the S&P 500 McClellan oscillator & summation index. I can't put the S&P on the chart due to a stupid tradestation limitation. But you can imagine. Major bearish divergence here. so we just need a good confirmation. I'll be looking for a low below 990 and then a high below 1016. This will be a sort of H&S pattern. Of course the drop could be real sudden so we can't count on having a bearish price pattern..