We hit 990 which acted as support. Bears would like to see this small support taken out and the bulls would like to see it hold. The market is oversold and due for a bounce but may go a bit lower first. The bounce could stop below the 1016 setting up a reversal pattern with an lower low and then lower high. Or it could be setting up an ABC correction pattern. In my chart I have a few possibilities both stemming from the same correction, a bullish option and a bearish option. I'm trying to predict less and go strictly on what the charts are saying. That's not easy to do. It's easy to have a bias and let them affect the interpretation of the charts. If the bias comes from a higher timeframe then it's ok, but if the bias is misinterpreted?
This is a an indicator I use to interpret the COT data. There is a stochastic of the large commercial traders' net position. You can see the larger trend is up but over the past 2 weeks it has went down. They are powerful enough to move the market. They could be selling to stall the rally and push it down where they could then start buying again at a better price. The new buying could been sooner or later. If later this could be the start of a selling campaign that would drive the index towards the bottom of the current chart pattern (broadening top). Or they could just be taking a pause before the summer vacation period and before resuming the uptrend. This week will give some more clues.
So how do I use this? The COT gives me the most likely direction and I don't like trading against the commercial traders. However interpreting it is not easy. You can see in June the commercial traders were selling and then suddenly started buying. That buying was one criteria that told me to cover my shorts (see previous posts). However after that the daily chart was bearish and I went short against the commercial traders which was not a good idea.
If I get the direction right then that helps me to interpret the daily charts. Here we have a long term bullish on the COT but short term bearish. On the daily chart above we're in a broadening top pattern and just came down from a key 38% retracement level of the bear market. Add in a bunch of overbought indicators showing bearish divergence and the short term seems bearish. An increase in commercial buying would change that.
Arthur Hill gave two possible wave counts in his last update so I thought I'd share them here. I'm not that big on Elliot Wave cause it's very subjective and difficult to do in real time. For example, compare his A-B-C of the 2nd chart to my second chart in the previous post. The two are compatible because they're on different timeframes. But therein lies the challenge!
He presents two possibilities, one bullish and one bearish. As of right now I have more confidence in the bearish version but that could change depending on the commercial traders and the price/volume action when everyone is back from vacation.
A coworker asked me if in the first chart I used fibonacci for the levels in the lines I draw on the chart. One could use fibonacci extensions & retractments for that and an excellent book on the subject is Rober Miner's book
However it's quite complicated and time-consuming without his special software ($$$) so I didn't do it, I just draw them on to indicator the general idea. Miner's approach is good for anticipating these levels. I recommend the book even though I don't use this in my trading.
Also, on Tuesday's close my mechanical swing trading strategy went long. I consider it to be pretty reliable in general but the last 2 trades were stopped out so the current market is quite uncharacteristic so it might be as reliable as it has in the past. I decided to override the signal and I'm staying short as long as we stay under 1016 on ES with bearish momentum. I will write more on all that in the future if there is interest. By interest I mean people participating in the thread!!!!
I don't trade on EW counts as I try to follow the intermediate trend. I did follow EW years ago and had Prechter's newsletter, but that cost me lot of money .... the letter and even more the trading results.
But EW is interesting to try to anticipate the broader picture and gets me mentally prepared for trades along the intermediate trend.
Re the Hill charts my preferred count is the ABC scenario. An ABC reaction on the impulsive drop from October makes more sense to me. For me we are now in the last part of the C leg which subdivided in a smaller a,b,c. With 'a small' finished, now in small pullback 'b small' and one last final push to come in 'c small' to 1050ies.
But we might truncate here and start a real decline.
Counting the rally as 1,2,3,4,5 looks less likely to me. It would make it a real huge rally as the 3 leg should be the longest.
But who knows what will happen, there is so much interference in the markets now with the primary FED dealers getting billions over the last weeks (becoming even lot more billions after they to their reserve multiplier trick) of freshly created dollars from outright treasury monetization to play with. They can move anything with this and by controlling most of the brokerage and 'legally enabled frontrunning' via their High Frequency Trading computer parks they will use every trick to take their customers to the cleaners.
Still some of these outright treasury purchases to come next week. So my best bet is ... with that ammunition it will be hard for the market to drop. Or maybe the big banks will buy shorts for that money ... then extra hard down.
I guess we just have to wait a play he trend. Picking tops can be deadly for your account. I learned that lesson in the past
The S&P is right in line with the possibilities I posted previously.
I previously said I was looking for a lower low (below 990) and then a lower high. It looks like we might have had the lower high but I'd like to see a 2nd lower close to confirm that.
I'm attaching an updated chart (I haven't moved my drawn-in lines). It happened quicker than I expected which always makes me stop to see if I missed something. I'm also posting a zoom in of the last few days. I've indicated selling volume with a red arrow. What is selling volume? First the white volume bars are down climax bars which is basically a move down on higher volume. Then there is a high volume bar that I marked on the chart with the text "selling volume". When the market makes a new high (or retests a recent high) and closes in the lower half, it's most likely due to supply which we call selling volume. You can see this happened on both highs (8/7 & 8/12). On 8/13 price closed towards the high, that's showing demand which is buying volume. However the volume was much lower that day which means there was more of a lack of sellers than an abundance of buyers. The next day the sellers returned.
So now that we have an idea of what's going on, time to ask who's buying and who's selling, and then decide which side we want to play.
Friday's COT report was interesting. The net position of all commercial index traders went down, which has happened for several weeks now. I particularly follow the SPX commercials who actually bought a bit this week but that is offset by the emini commercials who sold as well as the other index traders. If the SPX commercials had sold as well I'd be much more bearish. But as it is the commercials are selling for several weeks straight and this a strong indication that the rally is over.
So now we know who's selling, who's buying? Every week I do an analysis on the dumb money. If the commercials are the smart money, the small options traders are the dumbest of the dumb money. Right up there with the Rydex leveraged fund traders. These guys are buying the rally like crazy. We can see that in the COT report as well, the small trader category is buying it up.
So we have a multimonth high and the smart money is unloading their shares to the dumb money, at the top of a broadening top formation, at exactly 38% retractment of the bear market.. could it get any more bearish?
Well yes it could. I'm also watching the dollar, crude, and oil. The dollar broke through a critical support level but it appears to be a false breakout and now the dollar is in a small bounce. If the dollar breaks the last swing high at 79.81 then this is bullish for the dollar. And since the dollar and the indexes are inversely correlated, that's bearish for the stock market. The COT report shows the commercials are supporting the dollar and selling gold & oil. Everything points to a major turning point across all markets.
Finally, I've been working on combining my favorite indicators into a mechanical system to make it faster & easier to interpret. When I say indicators, I mean breadth indicators and not price indicators. So far I have 3 individual systems, one flat, one short, and one long. This weekend I managed to combine them into a single system so that I can trade it. It is short. I'm still working out the details but so far the results are pretty good.
As for a target, the first one would be a 50% retractment of the rally which is 940. Second targets would be 928, 900, and 860 (bottom of the broadening top).
I hope you found this useful, let me know if you have questions or comments and most important let me know what you think. I wish I could post more charts but I don't have much time so if anyone has any comments if you can post a chart with your comment that would help everyone.
Last edited by cunparis; August 17th, 2009 at 01:41 AM.
The following user says Thank You to cunparis for this post:
The combined COT report for all indexes showed the commercials were pretty much unchanged from the prior week. The prior weeks before that the commercials were selling. The explosive rally on Friday suggests that the commercials may have started buying and the smallest traders selling gives the idea credibility.
I was trading ES and CL at the time of the breakout. I was short ES with a stop at 1017, thinking a stop 1 point above resistance at 1016 should hold. The breakout was so fast price shot up to 1020 in just seconds. Took me a while to figure out what happened. Good thing I had my stop. The resistance had held for a while and you could see price chopping away at it. When resistance finally broke there was a vacuum of sell orders and that's how price just blew through it. Amazing really. And totally unexpected. The volume was average so there is still a possibility that it will fade out. Most gaps are filled so the gap at 1007.75 would be the first target if price pulls back. If the rally holds then I don't see much resistance until 1200.
In my chart you'll see the price roughly followed my outline with the exception that I underestimated support at 980. I thought price would drop to 953 before bouncing up. Looking closer at the chart, in hindsight, I see that the high volume on support at 980 was buying volume and I think one could have determined that at least a little bounce was due.
I'm going to be looking for a confirmation on Monday, meaning increased buying on increasing volume. Or a pullback to fill the gap.
For my mechanical systems, my main trading system stopped on Friday and then went short again at the close. The three individual systems that make up the main system are long, short, & short.
Have a good week.
PS: The dollar is still in a trading range and have still shown commercial support. In my opinion the fate of the dollar is critical for the indexes. A breakout of the dollar will likely stop the index rally and a breakdown will likely signal a continuation of the rally. So while the indexes have broken out, the dollar hasn't broken down. This discrepancy must be resolved as the two are very negatively correlated. Of course this correlation could stop at any time without notice. Otherwise it'd be too easy.
Last edited by cunparis; August 23rd, 2009 at 04:10 PM.
Reason: added opinion on the dollar
Due to lack of activity and me being busy on other things, this week's outlook is going to be very short. Basically I don't have any idea what's going to happen!
The commercial traders started buying again. Small traders are buying. Speculators are selling. I like to see the commercials and small traders going in opposite directions and so far that's not happening.
As far as price action, it seems we're in a minor pullback here which has mostly been a pause and moving sideways. This is most likely due to the low volume of the late summer. Next week should pick up a little but we probably won't get any big move until after labor day.
I'm watching the dollar. Commercial traders resumed their buying spree on the dollar, which is holding it just above support. The commercials are very much engaged in supporting the dollar and I'm betting on an upside breakout, which will probably signal a top in the indexes if the current negative correlation holds. Gold & oil commercials are very bearish positioned so it all makes sense. We just have to be patient and wait for it to play out. Which could be after labor day. September is also a rollover month and is sometimes when the market will turn. I've read that some long term cycles are due in October but I haven't investigated that so I really don't know much about it. But I do know that October is typically not a bullish month. So again, everything makes sense for a top between now and october.
So if that's the case then why are commercials buying? It could be one last bull trap, who knows. This is the part that's puzzling me.