BestOnlineTrades

The Relentless Pursuit of the Perfect Trade

So far the market correction is behaving similar to the 1975 correction and has been relatively ‘orderly’ and persistent but not of the nature of a ‘mini crash’.  That could still change, but at least up to this point it is on the track of being garden variety normal corrective action that was clearly over due since the July 2009 and March 2009 swing lows.

Friday’s reversal candle was significant in that it was a reversal hammer that typically should result in strong follow through to the upside.  That did not happen today and leaves the rebound rally in doubt.

Friday’s reversal candle was also a lower low on equally heavy volume as the previous day and leaves it wide open to be retested.  I suspect that could happen as early as this week.

Daily RSI (14), is signaling to me that it wants to bust below the key 30 level and do a little basing out under that level.  That is exactly what happened during the 1975 corrective leg and was the first signal that most of the damage was finished.

The behavior of this correction is very important because it will determine what probability exists for a solid base forming near the high 900’s level, or only a shorter term base that eventually fails and breaks down further towards the March 2009 lows area.

My preferred scenario is still that we form a solid base and do corrective basing action for several months which should eventually lead to a massive blast higher and resumption of the bull trend.

But of course that preferred scenario is subject to change at any time.  I need lots more data and price action to get a clearer picture.

The bear trend has characterized itself as being very persistent in terms of lower lows and lower highs and has not offered shorts many new chances to re load their short positions.

Incidentally the TYP triple bear Nasdaq ETF has a very bullish stance right now and I love the setup.  I went long the TYP today near the close after bailing out of the TZA after last Friday’s reversal hammer candle (because I thought it would lead to a big bounce).  But since the bounce never happened, we may have a ‘Hound of the Baskervilles’ signal which is a signal that Alexander Elder describes in his outstanding trading book Trading for a Living:

Elder says this signal occurs when a reliable pattern or an indicator does not lead to the expected action and the prices move in an opposite direction. Alexander Elder names this signal, as The Hound Of The Baskerville, based on a famous story written by Sir Arthur Conan Doyle. In the story detective Sherlock Holmes was called upon to solve a murder case in a country estate. He found the essential clue when he realized that the family dog did not bark while the murder was committed. This meant that the dog knew the murderer, and that this was an inside job. The signal was given by lack of expected action-by lack of barking.

So if the signal is valid then one of the next few days should be very hard down, not just down…

It sure does look like one and especially considering that the break of the trendline was down downward on very heavy volume and the retracement back into the underside pocket of the trendline was on significantly lighter volume.

My gut feeling tells me that it is valid and that we turn down tomorrow and into Friday.  But today was an inconclusive day, an inside day. 

If we bust higher in a big way on any of the last two days of this week it is going to put in some serious doubt any severe bearishness I have been thinking was going to happen.  So for now just wait and watch and look for confirmation tomorrow or Friday.

On the monthly chart you can clearly see that the typical retracement topside into the January monthly candle has occurred and only in 2 to 3 days!  If we turn down again and then lower into next week it should do a nice job of filling out the February candle and create the long awaited follow through monthly bar I have been hoping for.

But this scenario can be blown away in a couple days.  The market right now is at a teasing point and I really need to see weakness tomorrow and or Friday to get a good boost of confidence that leg 2 down has commenced.

The UUP (US Dollar Index ETF) still looks strong and based on my amateur elliottwave skills looks like it could be warming up for a 3 of 3 wave up ? Which are usually the most powerful waves.  I realize the market has been lagging in its inverse behavior with the UUP in recent month, but still a spiking dollar higher could be the added juice we need to get this market rolling over again.

So we have the dollar, the weekly trend change down, the bear volume to bull volume ratio and this bear kiss chart on our side.  That is the evidence… So having said that, with all this evidence, will the market be able to ONCE AGAIN evade all the bearish signs and blow away the bears with a 200 to 300 point up day?  I never want to say never in this business, but my odds now favor downside resumption into end of week.

Lets see how it shakes out !!!

The volume was again very weak on today’s rally in the sp500 relative to the previous swing highs 4 or 5 days ago.  But I have to say if we get another full bullish bar tomorrow in gap and go form then it is going to put into doubt the more accelerated bearish weekly forecast I was thinking was going to occur in previous posts.

If we do rally tomorrow, it would be ideal to rally but then close flat or negative by the end of the day to create a large topping tail.  But again, if we do not do that and instead get another full bullish price bar above the trading level defined by the red dotted line then something else is going on in my opinion.

The fibonacci 61.8 retracement level is near the 1120 level.  That level to me would be the last acceptable retrace level to still allow for more bearish trend development later this month.  I would rather be picky and select the 1105 level as the line in the sand.  Price stays under 1105 then I stay short, but above 1105 just wait and watch.

The SP500 20 and 50 day exponential moving averages are inches away from a crossing point.  This is noteworthy because this setup also occurred on July 14, 2009 and was the exact low point of that extended correction before a strong resumption of the bull trend.

The two things that are different this time around however are that we have the weekly trend in bearish stance (weekly MACD) and we have downside volumes that are very heavy relatively speaking that seems to be confirmed the weekly trend change.

However, as usual there is always an alternative scenario.  The alternative scenario is that the market will find a way to rally strong from here and move to new highs but in a sloppy upward sloping channel type manner.  This is what the market did in the 2004 to 2007 period and despite weekly sell signals the market just kept pushing them higher and never really had a major severe extended correction.

Right now I doubt that this scenario will come to fruition.  Instead I believe today’s low volume bounce may carry through another day or two and then we should see a resumption of the downtrend and further correction into mid February.

So far the market as represented by the SPY ETF is behaving in a somewhat similar manner to the decline that occurred in 1975 time frame.  I mentioned in a previous post about how I was curious to see the nature of the price decline this time around to see what kind of bear market animal we are dealing with (1929 style or 1975 style).

So far anyway my read of the tape action suggests that we are in a 1975 style market.  We are trading in a similar manner with persistent lower highs and lower lows.  If you look carefully at the 1975 decline you will see that almost the entire decline did not give shorts a good chance to re-short the market.  You really would have had to go short near the top and then stay short.

Looking at the chart above you really have to look into the nuances of tape reading and study the price reactions near support and the volume at those levels as well.

• First, the price REACTION on the SPY near channel support and near the yellow dotted supporting line has been lackluster.  Usually when you see price drift around a supporting channel or support line like that too long, it is not a good sign.  Best is to see a quick reaction off the supporting area to show new demand and reconfirmation of trend.
• Second, we are still trading in a range with lower highs and lower lows
• Third, the volume near the channel and support area has been extremely high (relatively speaking) and dealt some major hits to channel support and horizontal support.
• Not only was the volume high near this key channel support area but price also busted through it briefly. So the combined effect of the price damage and high volume weakens the channel line and suggests it could eventually break.
• The recent trading action of the last 5 days or so appears to be of the ‘rolling correction’ type which would be a sign of internal weakness.

Whether or not we continue to mirror the 1975 style remains to be seen but so far that is my read of the market.  Looking at the chart below you can see that there was barely a chance to get short a second time during that decline.  One could have made the decision to just ‘jump in short’ during that decline, but that is usually not the preferred type of ‘re-short’ setup that most traders would like.

Today’s GDP one day intra-day pop may be one of those ideal opportunities to get short again.  I think it is a mistake at this point for shorts to be expecting very significant extended upside rallies.  They may still come, but from much lower levels.

I find it very interesting that the market so far is not giving easy opportunities for people to get short again.  This type of behavior is the 180 degree exact opposite of what we saw during the entire rally period of March 2009 to January 2010.  Why should the market give the shorts another easy entry?  In typical fashion the market is not ‘giving us’ what we want.

The ‘China like GDP Growth’ news we got seems seems to be a ‘sell the news’ type of event and is definitely not leading.  The market wants to lead us somewhere else, namely down .

Initiating a new short position or added short position near this channel supporting area is not a bad idea in my opinion.  Key is to use tight stops near the channel area.  Perhaps the best thing to do is wait for Monday next week confirmation that the next leg down will begin right away.

Today is also the last day of the month of January and so we have the final closing monthly candle leading into February.  It looks bearish enough to me to suggest that the first couple weeks of February will be down.  So the weekly bearish trend remains in tact.

Trading the volatility of the last days and weeks can be really difficult.  I have traded in and out of the TZA because I, like many others have been expecting the much awaited bounce to get another good entry.  It has been a whipsawing experience.

I am long the TZA again going into the next couple of weeks and will look for confirmation early next week that the next down leg has begun.

If the first two weeks of February do not show significant downside price action in the broad market, I am going to be very surprised. 

I decided to bail out of the TZA triple bear ETF for now since I just does not seem worth it holding these during the ‘Fed Bounce’ during the next day.  I have seen the market plenty of times discount the Fed news a day or two ahead of time and then ‘sell the news’.

Either way I think it is prudent to sit on the sidelines for now.  There is another possible good entry coming in either tomorrow or later this week.

Plus, as far as the SP500 goes, I cannot deny that despite my intermediate term bearishness, the market right now is sitting on a general uptrend line for quite some time now and has already on at least 3 occasions, maybe 4 had sharp V bottom type reversals off of this trendline.

So I would still like to respect this bull a little bit given how many times it has recovered readily from some pretty sharp sell offs.

If the market for some reason quickly breaks below either the low of today or 2 days ago then I will have to go short again quickly on the premise that my bounce theory was wrong and the market wants to show continued persistent weakness.  So my finger is definitely on the trigger in to re short immediately if necessary.

The SPY which is shown in the chart above could bounce right to the down sloping resistance line and compress into a triangle before turning around.  That might actually take until the end of the week to occur.

So in summary it looks like the market may give us another outstanding shorting opportunity to those who are patient and willing to wait through the big dog and pony show (Fed Meeting, State of Union Speech, Bernanke vote) that occurs during this week.

The bounce on the SP500 was really lousy today both in terms of price advance and in terms of volume.  But that is exactly what you want to see if you are near term to intermediate term bearish on the broad market.

It is also good that we did not take out or test Friday’s low because it at least opens the door to more downside.  Had we tested Friday’s low swing point and then closed back inside the trading range it would be saying more concretely that we have reached a bottom and should get at least a modest bounce.

But still I think we could bounce more into Wednesday 2:30 Pm time frame.  In fact I don’t see the market doing much at all until that time frame is reached.  So expect dead money for the next day and a half or so.

The weaker the bounce looks, the more it is saying that the next leg down will be more severe than the first.  I have a hard time seeing the SP500 getting much above 1116 in the next day or two.  Even if we close near 1116 at the end of the week or slightly higher, it will still create a very bearish looking monthly January 2010 candlestick, setting up a huge potential decline for February.

We could very well hit that 1116 point on an intraday basis in late afternoon of Wednesday and then sell off into the close.

It ‘looks’ like Bernanke will be confirmed from what I have been reading and the traders over and INTRADE seem to agree, so far at least.

Really tough to call how the market will react to which piece of news this week.

But one thing I do know, that regardless of how the market reacts, the change intermediate trend from up to down still seems to be valid and I am expecting much lower prices into February.

Still holding TZA and may add to the position on a big enough dead cat bounce.  But holding core short position is the best way to play price action into February 2010 in my opinion.

I have begun to wildly speculate the last day or so about how events will play out next week.  Speculating on how events will play out and how they will affect the market or vice versa is one of the most entertaining aspects of trading to me.

The problem with wild speculation about how events will unfold is that it is a very imprecise science and looking back I have to say that most of the time I got excited about how a particular outside event would play out turned out to be wrong in hindsight.  What would happen instead is that the market would either completely ignore the news or do the exact opposite of what I thought.  Welcome to the world of trading the markets!

Anyway, I would like to say that I think there are two potentially pivotal events happening next week.  The obvious one is the Fed Meeting.  The not so obvious one is the Bernanke Senate vote on his confirmation for a renewed term.

So in a perfect world whatever the Fed does or says middle of this upcoming week will be predictable and ordinary with no major surprises.  And if that perfect world keeps turning, then there will also be no surprises on the Bernanke Senate vote.  The vote will be successful and he will be reappointed without any problems.

So that is the perfect world.

But what about the imperfect world scenario ?

The imperfect scenario goes something like this…

The market continues an accelerated decline to start the week of 1/25/2010 and becomes unstable enough to trigger a panic either right before the Fed talk/decision day or right after their talk/decision.  Then, with the public/media and Washington political crowd totally shocked at how such a severe decline (crash or mini crash) could happen, the scheduled senate vote takes place and Bernanke fails to get enough votes.

That type of scenario is extreme but to me it is a good example of how market action (ie. mass social mood) can potentially change public opinion and political opinion very quickly.  I believe that Bob Prechter in his discussion of the psychology of markets makes a similar point.  That the market or deep social mood is the one that decides outcomes before they happen, not ‘headline news events’ as the mainstream likes to think.

The election in 2009 and the market action around the same time was a superb example of how the social mood turned deeply negative which was reflected by the price action and it resulted in political outcomes that might not have otherwise occurred.

So who will decide Bernanke’s confirmation ?  The market or the senate?  I don’t know.  We will just have to wait and see.  One problem is that I do not know on what day this senate vote is.  I have been hearing end of the week, but it is unknown at this time.

If the market happens to be rallying higher in bounce form before the senate vote and then he is not confirmed, then I can easily see the Dow dropping 1000 points very quickly.  That scenario would contradict what I just said about the market deciding (on the daily time frame), but the fact is that we already have a weekly bearish trend change, so one could still argue that the ‘market decided’ the outcome many weeks ago.

Again, I am wildly speculating here, but it sure is fun .