A Look at the Strengthening Euro Index
December 15th, 2008 by Corey Rosenbloom
As the US Dollar has been weakening recently, foreign currencies have been strengthening, as have commodity prices.Let’s focus on the Euro Index to see what insights we can gain from the daily and weekly chart views.
Euro Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/121508-1620-charts1.png
Price has clearly broken the strong uptrend which has persisted since 2002, roughly in line with the US Stock Market bottom.The Euro actually peaked after the US Market peak in October 2007, putting the Euro more in line roughly with commodities such as crude oil (in terms of chart structure).
Any time price retested the rising 20 week EMA was a key buy point until price broke through the average in August ‘08.At this point, the uptrend was threatened, but not broken… until price then quickly broke the rising 50 week EMA and formed a counter-rally into the confluence zone ($148) where the moving averages crossed, confirming a new downtrend in price (red arrow).
Ultimately price plunged from this point, falling sharply as the US Dollar Index rose just as sharply.Not even the 200 week SMA was support for the Euro as the index made brief new lows not seen since 2006.
What’s happening now is a different story, and for that, let’s turn to the Daily chart.
Euro Daily:
http://blog.afraidtotrade.com/wp-content/uploads/121508-1620-charts2.png
Price formed a key sell signal in September as price came off a momentum divergence (not labeled) and found key resistance at the falling 50 day EMA, plunging price to new 2008 lows into October.
November saw an interesting technical juncture, as the momentum oscillator revealed bullish strength yet price was unable to overcome the resistance given by the 20 day EMA and almost formed some sort of a bearish descending triangle… that resolved to the upside, soon breaking both the 20 and 50 day EMAs.
I wanted to use this as an example to caution against reading too much bias into triangle patterns.Classical technical analysis would have us believe that descending triangles are bearish and ascending triangles are bullish, and while that might be a decent classification, clearly it is not an absolute fact.To me, triangles represent consolidation only, and represent areas of balance, wherein we can expect price to burst out in an impulse move at the breakout… though I argue we cannot know in which direction price will break.
Nevertheless, price did break above the 50 day EMA and the momentum oscillator has registered a new momentum high, indicating that the odds of higher prices are more likely than of lower prices… but not before some sort of pullback occurs, most likely to test the confluence support zone when (and if) the 20 day EMA crosses (bullishly) above the (now) rising 50 day EMA.
Continue to watch the Euro, US Dollar Index, and other key currency indexes for insights into how the commodities and ultimately equity markets might react to changes in price trends.
Throughout December, take advantage of the Market Club’s two-month trial membership if you’ve not joined already.From them you receive education, analysis, scans, signals, and insights from their team.They do a great job at showing FOREX charts and signals.
Corey Rosenbloom
Afraid to Trade.com
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Fibonacci Confluence Support Zones for the US Dollar Index
December 14th, 2008 by Corey Rosenbloom
In a previous post, I highlighted the Fibonacci retracement confluence clusters for the S&P 500 Index and now I wanted to show the same methodology of possible confluence support on the recent downswing in the US Dollar Index.
US Dollar Index with Fibonacci Clusters:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts110.png
Using Constance Brown’s method of drawing Fibonacci grids off significant points (of support, not necessarily spike highs or lows), we have the following Fibonacci grid.
I was only able to draw two major Fib grids, as price really has made a steady upwards advance with nary a pullback.As such, I took the grid off the April-July price lows (from price consolidation) and off the September lows, taken to the resistance price just above $88.00.
We see only one zone of Fibonacci confluence, which picks up about the $82.00 index level ($82.17 and $81.80 to be exact).It is likely that price will find at least temporary if not major support at that level, but should it fail there, we would have major support coming in at the $80.00 Index leel, which would represent three support confluences:
The 50% large scale retracement at $79.80
The 61.8% minor retracement at $80.73
The prior swing high in September at $80.38
Although I haven’t labeled it as such, the possible Elliott Wave count has us carving out a Wave 4 retracement, with the March to July area being a complex correction; the July lows to September highs being Wave 1; the September price correction being Wave 2; while the large momentum rise from $76.00 to $88.00 being the impressive 3rd Wave.
This count will be confirmed if price remains above the $80.00 swing high from Wave 1… and will be invalidated should price cleanly break that level.
For now, continue to watch the $82.00 price level in the US Dollar Index very closely.
Corey Rosenbloom
Afraid to Trade.com
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Weekend SP 500 Index Overview
December 13th, 2008 by Corey Rosenbloom
Let’s take a moment to view the daily and weekly charts of the S&P 500 Index to determine the structure and technical position entering next week.
S&P 500 Weekly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts25.png
We’re still in a lengthy confirmed downtrend with volume reaching very high proportions into the price lows of October and November, signaling potential capitulation selling into these lows - though increased volume at new lows is not a solitary reason to get bullish by any means.
November’s price lows - which actually broke the 2002 bear market lows on the S&P 500 - occurred on a positive momentum divergence, which actually is bullish to an extent - price has supported so far off these lows.Any break of the 750 level soon would be tremendously bearish.
The moving averages are in the ‘most bearish orientation possible’ and the falling 20 day EMA is set to reach the 1,000 level soon, which would be an initial target on any counter-trend rally which could take place (this is also similar to a 38.2% Fibonacci retracement of the large-scale move).
Let’s zoom in to the daily chart for a better perspective.
S&P 500 Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts19.png
The market is in an extremely choppy period, and notice how the range is currently contracting into a rough balance area which could be disturbed with a sustained price break-out this week or the next.An inspection into the shorter time frames (such as the 60 or 30 minute chart) reveals a complex consolidation, or triangle pattern formation.
We’re clearly in an Elliott Wave 4 corrective phase… but the debate is over *which* Wave 4 we are in.I’ll try to address that in a later post, but for now, let’s focus on the current price structure as it is playing out each day.
The moving averages remain in the ‘most bearish orientation possible’ while price continues to be in a confirmed downtrend (or series of lower highs and lower lows with no relief in sight in terms of price structure).
However, there is a positive momentum divergence which has built under price, so that warns us against becoming ultra-bearish until that divergence is ‘worked off’ which appears to be occurring.
Price has broken and closed above the falling 20 day EMA, and it would be very bullish should price hold the current level and breakout above the falling 50 day EMA around 940… and more remarkable if price could take out the 1,000 price level attained in early November… but let’s take price action one day at a time.
The fact that the market has rallied (or at least held its own) this week in the face of such overwhelmingly bearish economic news (after the November Jobs report and the possible failure of Congressional action on the “Big 3″ US Automakers, among other news of reduced retail spending).
Whatever the structure, the market is forming a corrective phase, though some stocks are showing remarkable strength in this environment.I caution from getting overly bearish or bullish at the moment, and let the market sort out some of the news and breakout one way or the other from the recent ‘choppy phase’ it seems to be trapped within.
Always guard your capital and manage your risk in this environment.
Corey Rosenbloom
Afraid to Trade.com
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Gold at Significant Turning Point
December 12th, 2008 by Corey Rosenbloom
Gold prices have reached an important technical confluence node - rising above this key level would be tremendously bullish, but there’s a good deal of bearish confluence resistance overhead… but gold might just make it above with just a little push.Let’s look at the daily and weekly charts to see these developments.
Gold Prices Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts24.png
The significant resistance takes place at the $830.35 level, which corresponds with the 38.2% Fibonacci retracement of the current down move, and is combined with the falling 50 week EMA at $827.30.If would be a major accomplishment for gold to close above the $831 per ounce level soon.
However, it has significant headwinds before doing so.The weekly chart is in a technical downtrend which has been confirmed, and the momentum oscillator just registered a new momentum low in November, confirming the price lows.We’re technically on (or ending) a counter-swing rally into resistance, but the recent bullish candle either will help shake the bearish technical picture… or fall victim to it.
The EMA structure is in a bearish orientation (the 20 is beneath the 50), and both serve as overhead resistance - which is occurring this week.
For Fibonacci purists (using absolute spike highs and lows), the 38.2% retracement registers at $818.92.I tend to side with Constance Brown and use significant or closing prices instead of spike prices, somewhat of a controversial technique.
Now, let’s drop to the daily chart and see another reason why a close above $831 per ounce would be mighty significant.
Gold Prices Daily:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts18.png
Like the weekly chart, the trend is still confirmed as officially ‘down,’ and the EMA orientation is actually in “the most bearish structure possible” - those are even stronger headwinds against which to fight.
There isn’t a positive momentum divergence, but rather a sense of positive momentum building along with the price.
The $830 zone is significant for one subtle reason.Should price breach the November highs, we would officially confirm a fresh uptrend in the daily chart on the price of gold - that would be the genesis of a new technical trend, and short-term timeframes precede long-term structure timeframes… but let’s not get too far ahead of ourselves.Doing so would lock in a pattern of higher highs and higher lows - failure at this level would lock in a double top and leave gold prices inches away from a true reversal.
Mini-Gold futures (as of this writing) are trading around the $721 level after reaching an intraday high of $829.60.
Continue to watch this closely to see what happens at this critical technical juncture.
Corey Rosenbloom
Afraid to Trade.com
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Daily Chart Positions of the US Dollar and Crude Oil
December 12th, 2008 by Corey Rosenbloom
From the looks of it, the US Dollar Index is breaking down while Crude Oil and other commodities appear to be building bases.Let’s take a quick comparison of the US Dollar Index and Crude Oil prices to see these developments in price structure.
US Dollar Index:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts17.png
The Dollar formed a wedge pattern in mid-November into new highs at $88, but it did so on a negative momentum divergence, and now we’ve completed a mini-bear flag pattern which has taken us to lows beneath $84 which broke both the rising 20 and 50 day EMA - a bearish omen.
Also, the momentum oscillator is forming a sort of head and shoulders pattern which also doesn’t bode well for dollar bulls, but I would consider a H&S pattern on the indicator as less important than the actual price development, but it’s still worth noting.
The current price structure flashes a relatively strong sell signal, in terms of a breakdown in momentum and price breakdown through key EMA support.
I would also suggest that we could be experiencing a 4th wave pullback in a larger 5-wave Elliott impulse, so now is probably not the time to short everything related to the dollar (by the way, if you do want to play a short in the Dollar Index without using futures or FOREX, the ETF inverse fund UDN might be a good option).
What is bad for the dollar is good for commodities - let’s take a look at Crude Oil.
Crude Oil ($WTIC):
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts23.png
The broader $CRB Commodity Index has a similar price structure, which has it challenging overhead resistance via the falling 20 day EMA on a positive momentum divergence.
Any buy-in to crude oil would be strictly a counter-trend reversal play, but that doesn’t mean you can’t try to profit from scalping counter-trend swings.I’ve mentioned in previous posts (Crude Oil Finds Long Term Support and Buy Signal at $40 and also Bullish Volume Surge in USO - US Oil Fund) because I felt strongly about the structure developing short-term which is playing out nicely, though we’re encountering resistance at the $50.00 per barrel level thanks to the falling 20 day EMA.
Though there are targets on Crude Oil that range from $30 to $80 in the near future, I try to take markets and trade one day at a time and try to look for the most probable, immediate price swing instead of getting caught up in “Where will crude oil be a year from now?”.Try to make your best guess of the next logical price swing and manage risk accordingly - it will reduce stress.
Continue to study these developments and how it might affect US Equity Markets and beyond.
Corey Rosenbloom
Afraid to Trade.com
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Idealized Trades for Thursday in the DIA
December 11th, 2008 by Corey Rosenbloom
Let’s step inside today’s trading action to see what points represented ‘idealized trades’ and gather as much information we can from the price structure that developed on this reversal day.
DIA 5-min:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts16.png
The day started with an overnight gap to the downsie of roughly $1.00 (or 100 Dow Points) which is just in the gray area of “Do I fade it or not?”.Price quickly began moving up which meant that only the nimble (aggressive) traders were able to get their ‘gap-fill’ biases moving through trades that targeted yesterday’s close (purple line).
Indeed the gap did fill and formed a new momentum high on the day, which hinted that a new price high might still be yet to come.Price formed sort of an “ABC” correction around 11:00am.
Notice the three dojis at confluence support via the 20 and 50 EMA along with yesterday’s close - that would have been an ideal opportunity to get long, but notice what happened quickly afterwards.Price began a move higher but was zapped down by two bars, taking us below the confluence moving averages where we generally place stops… only to have the tight stops taken out before price actually did move to new highs on the day as anticipated (or expected).
The price push to new highs at noon formed on a negative momentum divergence, combined with a doji at the top of the Bollinger Bands.It never ceases to surprise me how many intraday highs or lows are formed in momentum divergences - today was no exception.Take note of that.
Price then trailed down to make another attempt upwards, only to fail just short of the intraday high.Your bearish instincts should have kicked in as price broke the $87.60 support zone, which was significant because of the EMA confluence zone.
What I label the “Best short” or best trade of the day set-up just as price broke these lows and formed three bearish doji-style candles UNDER confluence EMA resistance right where the 20 crossed under the 50 EMA.You should have placed a stop just above the 200 moving average and tried to hold for a relatively large, trend-reversal style target which was achieved rather quickly.
The “second best” entry came after this zone when price rallied back into the falling 20 EMA, forming sort of a “bearish engulfing” candle.Price never looked back from this level, and formed almost an hour of solid down-bars (on the 5-minute chart) - merciless.
A mini-divergence preceded the late rally into the close (marking again an intraday price low on a momentum divergence).
Take time to study the price action from your own perspective and note your perception of idealized trades, so that you can recognize and react quicker in real time.
Corey Rosenbloom
Afraid to Trade.com
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Signal and Static Noise in XOM
December 11th, 2008 by Corey Rosenbloom
Wouldn’t it be nice if stocks followed a clean, swinging pattern from one point to another?Usually we can trace that pathway with little interference but recently in Exxon-Mobil (XOM), we’re seeing a high noise to signal ratio that’s worth a closer look.
Exxon-Mobil (XOM):
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts15.png
Coming into October, XOM behaved like it ’should,’ meaning that each day’s range was relatively contained and there was a clean pathway of movement undulating up and down on the chart… that is until October hit and daily range exploded, where the trading activity got erratic and random and it would have been the bast play to avoid this stock due to the low signal (trades) concurrence.
I drew a green mark where the change roughly began. You can also see the change take place in the momentum oscillator, comparing pre-October to post-October.Look at how erratic and sharply/wildly the swings (spikes) are in the 3/10 Oscillator - almost random.
Trace the price with your finger from the start of October.Down big, up big, down big, up big, down big, up big, then try to follow the thick choppiness price experienced through November.What does a trader do?
Luckily, you (most likely) are not required to trade XOM stock, or any stock that exhibits a high randomness factor (as you perceive it).Don’t try to read into the price chart more than you can see at a quick glance - if it doesn’t make sense, move on and don’t feel upset about it.Move on perhaps to an ETF or one of the other thousand or so stocks out there that you deem appropriate to trade.
Stay with stocks that match the way you interpret price behavior, indicators, and signals (trade set-ups).Go where your skills seem most in-line with the current price action.
And by all means avoid as best you can charts that don’t seem to make sense to you - your mind, and your trading account, will thank you.
Corey Rosenbloom
Afraid to Trade.com
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Oddities in the US Dollar ETF UUP
December 11th, 2008 by Corey Rosenbloom
There was a strange, large scale overnight gap in the UUP Bullish US Dollar ETF which wasn’t confirmed as strongly in its bearish counterpart, the UDN.Let’s take a look at these two ETFs on their daily chart to see if we can get a better picture.
Bullish Dollar ETF - UUP:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts13.png
Price gapped from $26.00 down to $24.00 overnight, a sudden and violent drop.The $24.00 level quickly caused a bounce in price and surge to the upside, so we’re currently trading higher than the open, but lower than yesterday’s close.The strange thing was I intended to write a post about the UUP noting the shaky foundation upon which it stood and was going to hint that I felt a break of the 50 EMA was likely yet to come.I didn’t expect such a gap, however.
Stepping back, we see price coming into highs at resistance at $27.00.A multi-swing negative momentum divergence formed and volume decreased, both of which served as non-confirmations of the higher price levels.Today’s size of the gap is surprising, but the bearish structure is not, given the multiple positive momentum divergences that have formed in oil and some other commodities (which trade inverse the US Dollar Index).
Let’s compare the large-scale morning gap in UUP to the bearish counterpart ETF the UDN.
Bearish Dollar ETF - UDN:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts14.png
Not surprisingly, we have the mirror image of the above, but without the sharp overnight gap.Price moved only from $25.50 to $26.00 as the gap is moving towards yesterday’s close at the moment.
Structurally, we see the multi-swing positive momentum divergence, pick-up in volume as price rises, and breaking of both the 20 and 50 day EMAs, and an official positive trend reversal (thanks to higher highs and higher swing lows).
Of course, this positive momentum is occurring on a bearish ETF which reflects weakness in the US Dollar Index (and strength for commodities).
Speaking of the US Dollar Index, let’s take a look at its weekly chart and note a possible Elliott Wave interpretation.
US Dollar Index:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts22.png
We did mark a new momentum high in October, hinting that higher prices may be yet to come after a pullback/retracement in price which could take us to the $82 to $83 level which would reflect confluence of the 20 and 200 period moving averages, as well as a decent Fibonacci retracement target (the 32.8% retracement of the move off the bottom stands at $81.93 while the 50% retracement off the move from Wave 2 at $76 stands at $82.20, reflecting Fibonacci confluence around the $82.00 zone).
According to this view, we would have a bit further to move to the downside before possibly making a run higher early in 2009 for a supposed terminal wave 5… but that’s another story as well.
Keep watching the US Dollar Index and how the movement might affect the broader market and key commodities.
Corey Rosenbloom
Afraid to Trade.com
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Bullish Volume Surge in USO US Oil Fund
December 10th, 2008 by Corey Rosenbloom
Don’t let this development pass your analysis by!Today, the US Oil Fund ETF experienced a volume surge of 37 million shares on a potential doji reversal candle at possible support.Let’s see this development both on the daily and the 30-minute chart.
USO - US Oil Fund Daily
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts12.png
The day closed on a doji candle at possible support coming off a multi-swing positive momentum divergence - all of which suggest a bullish short-term bias going forward.
Before getting too bullish - and I’m finding that hard to do - realize that the daily and weekly chart are still clearly in confirmed downtrends and the moving average orientation is absolutely in the most bearish position possible - that is the headwind into which you enter a possible bullish counter-trend trade if you desire.
That being said, it would appear structurally that price is ‘flattening out’ or ‘curving around’ as we either have hit, or are close to hitting a potential intermediate bottom in both the ETF (USO) and Crude Oil itself.Oh, just because Crude Oil is near $40.00 per barrel does NOT mean that it can’t go lower - because something is ‘cheap’ is absolutely no reason to get bullish.You’ll need to analyze deeper than that - I’m giving you hints here on how to do so - to get bullish.
The initial target - the conservative target - would be a retracement to the 20 day EMA at $41.00, or perhaps even as far (not in a single swing, of course) to $50.00 which is the falling 50 day EMA.If this zone truly does represent major support, then it’s possible we won’t see these prices again for quite some time - but I’m not in the business of calling bottoms - I work best calling the next high probability swing only… sort of like seeing through fog.It’s much easier to see what’s directly ahead of you rather than trying to see a mile down the road.
So the next probable swing is a counter-trend retracement rally up.It’s up to you to determine your stop (somewhere beneath $35 most likely) and your target (at least above $40) depending on your timeframe and risk-tolerance.
Oh, let’s see the developing structure on the 30-minute chart for additional clues.
USO - US Oil Fund 30-min chart
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts21.png
While we don’t necessarily have a momentum divergence, we do have positive momentum building (notice the trend and the new momentum highs) as price has formed a trend reversal to the upside (having formed higher highs and higher lows) and is fighting tenuously to hold on above EMA support.If these moving averages cross - which one more bullish day will cause - then that would be reason for renewed bullishness and perhaps even an entry for certain styles of traders.
I highlighted the volume surge for you.At two points in the day, more than 5 million shares transacted in a 30 minute period.That’s some serious movement.
Continue to study the US Oil Fund (USO) for yourself to see if you find an appropriate opportunity in it that matches your trading style.Whether or not we get an actual price reversal, the risk is low compared to the reward, so that potentially sets up an attractive trade from a risk/reward standpoint at least.
Corey Rosenbloom
Afraid to Trade.com
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Adam Hewison Introduces the Pullback Rule and Fibonacci
December 10th, 2008 by Corey Rosenbloom
Adam Hewison of Market Club made available a video entitled “The Pullback Rule” or the “Rule of 50″ that serves as an introductory lesson on trading concepts and Fibonacci retracements that you might find interesting.
He takes a chart from Gold at the beginning of 2008 and discusses how to apply basic Fibonacci principles to locate potential market turning points, a tactic that works across all markets.I use Fibonacci principles frequently on the blog and I thought you might like to see a different perspective, or have a video example of how to apply these principles as discussed by Adam.
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts11.png
Of particular note, at the end of the video, Hewison provides a link to learn more about Fibonacci through history as well as a link to learn more about more advanced Fibonacci concepts.That’s one reason I support the Market Club so strongly is because I feel they are genuinely dedicated to continued trader education.
Here is a portion of the text that introduces the video (reprinted with permission):
I can honestly say that 30 years ago I learned how to trade the markets in the pits of Chicago.This one trading secret - which is over 800 years old - is one of the most monumental mathematical discoveries of all time.
The publication in 1202 of the “The Book of Calculation” was never meant to be a road map to success in the markets. However, it turned out to be an extraordinary blueprint for how modern day markets work.
The number sequences contained in this amazing 800 year old book, is like having a virtual DNA for every stock, futures and foreign exchange market.
No one knows for sure why these number sequences work - some traders believe them to be mystical, others, like myself prefer to call them one of life’s little mysteries.
My new 8 minute educational trading video that remains true to core principals of the “The Book of Calculation.” Show you step by step, exactly how you can benefit from using this trading secret.
As always, my thanks to Adam and the crew for their commitment to trader education and interaction.
Corey Rosenbloom
Afraid to Trade.com
2 Comments | add comment
A Technical Take on Google GOOG
December 10th, 2008 by Corey Rosenbloom
I haven’t discussed the technical picture on Google (GOOG) in a while, so let’s take a moment to look at the weekly and daily price structures for Google and what might be in store for the near future.
Google (GOOG) Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts1.png
The dominant structure I’m seeing is a (potentially) completed “ABC” large scale corrective phase which took price sharply from $750 to $250 in a year - a devastating chop for investors.Remember that each Corrective Wave itself subdivides, and what we had here was a large-scale “Zig-Zag” pattern (where Wave A was 5 fractal waves; Wave B was 3 fractal waves; and Wave C was also 5 fractal waves).
With that structure behind us, what is the current technical picture?
Price has formed a large-scale positive momentum divergence into the $250 price lows on what appears to be a selling climax (similar to what we saw at the end of Corrective Wave A) and so barring anything majorly unexpected, we should expect to see a push at least to test the falling 20 week EMA around $370 per share.
Notice also that two bullish candlesticks have formed at the support zone of $250 (one a hammer-like pattern and the other a bullish reversal doji).The current week is confirming this pattern and could lead to higher prices in the short term - but keep in mind these are officially counter-trend rallies, and it would take a move over $600 to change the trend structure back to ‘up’ officially.
Google (GOOG) Daily:
http://blog.afraidtotrade.com/wp-content/uploads/121008-1520-charts2.png
It would appear that this chart leaves much to be desired for the bulls, but there are signs of hidden strength.First off, price has formed a ‘mini-reversal,’ having formed a higher low and then formed a higher swing high - that’s bullish alone.Also, price has broken officially (and closed) above the falling (now flattening) 20 day EMA.Before you get too bullish, I might suggest waiting for conservative traders to wait for a close above the 50 day EMA for further confirmation.
Just like the weekly chart above, we see a positive swing momentum divergence forming under price, and a key doji day (candle) when price nipped beneath the $250 support zone.All this Google ‘bullishness’ is contingent on price remaining above this $250 level, so that would be a logical place to insert a stop (or write bullish put credit spreads) underneath that zone.
Continue to study Google through your own analysis for further potential trading opportunities.
Also, take advantage of the Market Club’s two-month trial membership if you’ve not joined already.From them you receive education, analysis, scans, signals, and insights from their team.
Corey Rosenbloom
Afraid to Trade.com
3 Comments | add comment
Intraday Action for Tuesday
December 9th, 2008 by Corey Rosenbloom
Let’s take a look beneath the market to see what ‘idealized trades’ set-up within the intraday price structure of the DIA for Tuesday’s trading - then let’s view the day through the lens of a 5-minute Elliott Wave count that could have helped guide our trading day.
DIA 5-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes16.png
First, the day began with an overnight gap which was quickly filled - with the exception of the bearish bar around 9:30.That bar is an argument for wider stops in this volatile environment - and a little guts and patience.
With the gap fade complete just before 11:00am, we had four long-legged (upper shadow) bearish candles - which you could have called dojis or shooting stars - but you should have gotten the gist that those four candles (long wicks) were quite bearish, when coupled with the fact that price was testing and failing to rise above yesterday’s close.That signaled a high probability, low-risk short-sell trade, which worked out perfectly.
Price then rallied into EMA confluence resistance two times, setting up potential fresh short-sell entries 9though again, it would have taken a slightly loose stop slightly beyond the 50 period EMA).Keep in mind that price was supporting about the $88.00 per share level, which was broken just after the 1:00pm hour, triggering a potential support-break short sell.
Price then rallied sharply (one bar) into the falling 20 period EMA which set up yet another low-risk, high probability short-sell entry (given that the trend - and moving average orientation - was confirmed as bearish at this point).Price did indeed make new lows on the day before forming a quick rally into the 50 period EMA resistance, forming a shooting star which was immediately - and confusingly - followed by a ‘hanging man’ candle also at EMA resistance, before plunging yet to new lows on the day into the close.
Let’s put the above into the context of Elliott Wave to see if fast Ellioticians had any clues as to what the short-term structure might be developing during the day.
DIA 5-min chart with Elliott Waves:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes25.png
Hint - it’s always easier to view Elliott Waves from a closing basis rather than during the trading day, but the more you see these patterns and structure, the better you’ll be able to recognize it and count possible wave structures as they develop and form in real time, allowing you trade entries and risk management.
After Monday’s positive day, we began Tuesday in the middle of a corrective impulse down (no clue yet that it was indeed Wave 1).There was a 5-wave sub-structure which terminated around 10:00am as price sauntered upwards to fill the morning gap, doing so in a choppy fashion.Again, the bearish long-upper shadow candles formed, hinting that the upwards move had come to an end.
Still unsure of the count, price moved to the downside and formed support about the $88.20 level in a choppy corrective pattern before breaking down to new lows after 1:00pm.Savvy Elliotticians could have recognized the charicteristics of a possible Wave 3 “Elliott’s Dream” wave in the making, but particularly when Wave 3 completed its impulse down into new lows at 2:30.
Suspecting a Third Wave had terminated, one could have played the corrective move as it occurred (quick reflexes were required) into EMA resistance, but the easiest play - to me at least - is always the final (terminal) Fifth Wave if you can properly count (or reasoably count) the prior four waves in real time.
In this case, the Fifth Wave formed a truncation into the close on a positive momentum divergence.
As always, viewing ‘ideal trades’ and comparing your trades/fills to the structure when it is completed by the close can help you improve pattern recognition skills and enhance your real-time trading through viewing multiple specific trade set-ups and the ideal entries/exits.
Corey Rosenbloom
Afraid to Trade.com
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Airlines Showing Relative Strength with Crude Oil Down
December 9th, 2008 by Corey Rosenbloom
One of the beneficiaries of lower crude oil prices has been airlines companies, as evidenced by the $XAL Airline Index.Let’s take a look at these developments and what’s happening to the Airline Index right now.
$XAL Airline Index Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes15.png
The index is currently testing against overhead resistance via the flattening 50 week EMA, but there’s a multi-swing positive momentum divergence that has been building almost for the entire duration of 2008.Price is consolidating currently, coming off a pervasive and destructive downtrend.Although we’ve established higher lows, we’ve yet to establish an official ‘higher high,’ and so the official trend remains down until price can break above the weekly 50 EMA and form a higher high.Until then, we’re in ‘no-man’s land’ until we get that higher high… or price fails and forms a lower low, reconfirming the established downtrend.
Also, notice that the $XAL has been showing relative strength to the S&P 500 since July when Crude Oil topped above $140 per barrel (which was devastating the airlines due to high fuel costs).Though price is not making a series of higher highs and higher lows, the Relative Strength line is doing so, hinting at underlying strength perhaps yet to come.
One has only to imagine the price hikes and fare increases the airlines set in place as a necessity to combat higher fuel costs remaining in effect after the price of fuel has fallen dramatically - it’s like a double blessing to cash-strapped airline companies, adding a little fundamental strength to the developing technical picture.
Let’s look briefly at a comparison of Crude Oil prices and the $XAL itself - it’s almost a full inverse relationsihp… almost.Keep in mind that the weakening economy is somewhat decreasing commercial and personal travel.
$XAL Airline Index Weekly compared to Crude Oil:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes24.png
The airlines continued down while crude continued up… then in July 2008, the trends were reversed, though only to an extent.Again, a weaker economy put pressure both on company stock prices and ticket sales in the form of reduced passengers - that’s one reason the relationship has not continued strictly inversely to the present.
Still, lower (in this case, drastically lower) fuel costs have a bullish result on company prices, which may be a reason these companies are showing relative strength to the S&P.For sustained bullishness to return, we’d need to see a break above the $25 level in the $XAL, along with corresponding strength in many of the key stocks that make up the index.
Continue to scan here for potential opportunities, but watch out if crude oil prices begin to rise suddenly any time soon.
Corey Rosenbloom
Afraid to Trade.com
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Crude Oil Finds Longterm Support and Buy Signal at $40
December 9th, 2008 by Corey Rosenbloom
We’ve witnessed absolute destruction in the price of crude oil and in other commodities in such a short period of time.However, the situation might be changing and aggressive speculators might find a significant low-risk opportunity should crude oil find support at the well-established level of $40 per barrel.Let’s see this and how it might play out into the near future.
Crude Oil Monthly:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes14.png
A log-chart would show this better, but would also compress the most recent data and obscure the near vertical price rise (and inhibit the simple Elliott Wave Count) so be sure to view the $40 level from a log-chart in your own analysis.
Crude bumped the $40 level the first time in late 2000 and then oil fell as the economy went into recession (through the bear market of 2001-2002) before rising in early 2003 to challenge the $40 per barrel level yet again… only to find strong selling pressure there as well.
Crude finally broke above this significant barrier in mid-2004 and then the contract surged to new highs, doubling to $80 per barrel two years later. Price fell into an Elliott Wave 4 correction down to $50 per barrel in early 2007, only to rise rapidly (and almost unchecked), almost tripling in price to $144 earlier this year… only to plunge faster, further, and more devastatingly than the bumpy ride to the top.
Wall Street has a saying:“Stocks (or commodities) take the escalator up and the elevator down.”Look no further than crude to see this in action.
That being said, we just tested the $40 per barrel level and it appears we have found significant and strong support there - so much so that aggressive traders (or perhaps investors) could establish a solid buy position there with a stop around $38 per barrel or so to play for a large, possible upside target.Swing traders would be even more apt to profit from an inflection point off this level - though do your own analysis before making any trading or investing decisions.
If you don’t trade futures, you might want to see if a key stock like Exxon-Mobil (XOM) or Chevron (CVX) is setting up a buy signal, or more appropriately, you could try to trade one of the oil ETFs such as DIG (ultra-oil and gas) or my preferred oil ETF, The US Oil Fund (USO).Let’s look at its daily chart for a moment.
USO - US Oil Fund:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes32.png
Who would want to buy such a hideous chart that has been in such a pervasive down-trend?Is this appealing at all to a buyer?Not really from a trend or ‘classic’ chart analysis perspective, but that’s why this could be considered appropriate for aggressive traders - because it goes against the grain of the well-heeled established downtrend.
However, there are bullish signs of possible life.There is a multiple-swing positive momentum divergence forming as price continues to make new lows, which often precedes reversals - though a reversal is not guaranteed from that one indicator.
Second, we see a mini-hammer candlestick that formed on Friday’s trading (where the $40 per barrel oil was tested officially) which adds a little bullish fuel.Generally, hammers alone aren’t enough reason to turn bullish, but taken in the context of a larger picture, they can add weight to an argument, particularly at expected reversal points off support.
Third, we see a major volume surge in the ETF, with the most recent surge going above 25 million shares.Whether people (funds) are aggressively buying or aggressively shorting (or just bailing out of long positions) is unclear from this chart, and I’m not quite ready to call this ‘capitulation selling’ necessarily, but taken with other evidence, this could be a significant turn-around.
Continue to study the charts and crude oil for your own insights, but also realize that we could be experiencing a major or at least intermediate reversal off these levels.
Corey Rosenbloom
Afraid to Trade.com
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SP500 Fibonacci Price Clusters and Confluence Chart
December 8th, 2008 by Corey Rosenbloom
Here’s a chart you might want to save as a reference in terms of overhead possible Fibonacci resistance levels and their respective confluence zones.The graph takes the S&P 500 swing highs and runs corresponding Fibonacci retracement grids all to the most recent 750 spike low in November and highlights areas of Fibonacci clusters.Let’s see the grid.
S&P 500 Fibonacci Cluster Grid:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes13.png
You can click the image for a larger chart to appear.
I’m using a hybrid method of Constance Brown (www.amazon.com%2FTechnical-Analysis-Trading-Professional-Constance%2Fdp%2F0070120625%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1228763079%26sr%3D8-2&tag=afrtotra-20&linkCode=ur2&camp=1789&creative=9325]Technical Analysis for the Trading Professional) and Carolyn Boroden (www.amazon.com%2FFibonacci-Trading-Master-Price-Advantage%2Fdp%2F007149815X%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1228763145%26sr%3D8-1&tag=afrtotra-20&linkCode=ur2&camp=1789&creative=9325]Fibonacci Trading: How to Master the Time and Price Advantage) for this grid - namely Connie Brown advocates avoiding ’spike’ highs/lows in drawing Fibonacci grids (in favor of more meaningful, closing basis reference points) while Carolyn Boroden describes how to trace multiple Fibonacci grids to a singular swing high or low and how to analyze the grid properly - no, I won’t give away the secrets in this post… merely the grid itself.
I’ve taken each meaningful swing high and drawn a corresponding Fibonacci grid via StockCharts to the 742 S&P 500 swing low in mid-November.The middle of the chart - all the lines - represent each Fibonacci retracement grid drawn automatically off that key swing low.This chart and the analysis to be made from it will only hold IF and only if the 742 low is not taken out anytime soon.
This is a more formal way to answer the question, “How far might the counter-rally (or Elliott Wave 4) go?”
Also, this is a roadmap to note key areas of possible short-term resistance as price tries to make a move higher - these zones can be particularly helpful for intraday traders as price tests these upside boundaries and either finds resistance at them (setting up exit targets… or potential entries) or breaks through them (setting up long entries into fresh trades).
Now, one can do a lot with this grid, but I wanted to keep it simple, provide it as a reference, and comment that the two most obvious zones of Fibonacci confluence lie at the 1,085 and 1,162 areas.Keep in mind that this grid does NOT take into account longer-term Fibonacci grids (something you might want to do yourself).
The Blue grid will provide more significance than grids of smaller magnitudes, as it represents the key retracement zones of the entire bear-market price move (so far).
Apply your own analysis to the grid and feel free to share any insights in the comment section you discover for the benefit of other readers.
Corey Rosenbloom
Afraid to Trade.com
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Elliott Wave 4 Rally Appears Confirmed - with Targets
December 8th, 2008 by Corey Rosenbloom
As expected, it looks like the current price action as of Monday morning is confirming the large-scale Elliott Wave Count that we have freshly entered a corrective Wave 4 up-swing in the market, which could continue into the end of the year.Let’s take a look at the large-scale count and see which price targets the market might achieve, using Fibonacci.
S&P Weekly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes22.png
As I’ve been discussing and following the Elliott Count, the market appears to be confirming the structure of a terminal 3rd wave which ended in mid-November, and now a corrective “ABC” Wave 4 pattern may be the current Elliott structure underway right now.
Wave 1 took us to 1,250 while Wave 2 corrected to the 1,400 area.Wave 3 was particularly violent, dropping price almost 50% from 1,430 to 750 in the span of six months (so much has happened in that period).
We have a positive momentum divergence forming on the terminal fractal 5th wave, ending the 3rd Wave structure.
Where might the Fourth Wave take us?I’ve overlaid two Fibonacci retracement grids, one from the market top at 1,550 to the market bottom (so far) at 750.We get the following Fibonacci retracements:
50%:1,155
38%:1,057
Those alone could be possible targets, but I also confirmed a possible simple Fibonacci confluence using the entire Wave 3 impulse to see how much Wave 4 would retrace of the 3rd Wave.I drew these in orange:
38%:1,001
50%:1,083
62%:1,164
The two major confluence areas of these retracements are the following:
1,160 (a larger, more aggressive target)
1,065 (a more realistic possible confluence target)
I’ve drawn the possible 4th wave I envision - which may or may not happen - to terminate near the 1,065 area.We’ll take it day by day to see how price behaves with this price target in mind.
Let’s drop down to the daily chart to zoom inside the most recent murderous (to the bulls) larger scale Wave 3.
S&P Daily Elliott:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes12.png
Again, we see the positive momentum divergence forming on the terminal 5th wave.Price - in my opinion - is likely to move through the daily EMAs before forming a “B” Wave down.
Remember that the Elliott Wave 4 structure calls for an “ABC” or three-wave corrective pattern (A is up, B is down, C is back up).I suppose we’re in the Corrective “A” Wave now.Note also the upward break (so far) in the down-sloping trendline (not drawn) from the November and December price highs - that’s a bullish confirmation as well.
Ben at the Financial Ninja wrote an excellent post entitled “Rally… or Just a Bounce?” on the current S&P structure that adds detail to the analysis.
Take advantage of the two-month trial period to Market Club as their end-of-year gift to you.
Corey Rosenbloom
Afraid to Trade.com
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Elliott Wave Count on the 10 Year Note and Yield
December 7th, 2008 by Corey Rosenbloom
A reader asked for my take on a potential Elliott Wave count for the 10-Year T-Note and here is my current interpretation of the possible Elliott Wave structure building there.Let’s look at the yield chart and then the price chart (which are of course inverse).
10-Year T-Note Yield:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes11.png
The longer timeframe Elliott count is far more difficult (in terms of a monthly count) but perhaps the weekly count is a little more clear - at least this possible interpretation.
I’ve subdivided corresponding waves down into their logical fractals which meet the guidelines of EWT, confirming the count as best I can.
Wave 1 terminated in late 2006 to the 4.40% area, while Wave 2 retraced almost the whole amount of Wave 1, topping just shy of 5.20%.
Wave 3 is currently the largest wave, though the current Fifth Wave might rival it in length.Three began at 5.20% and then terminated just below 3.40% before embarking on an “ABC” corrective Wave 4.Notice the numerous positive momentum divergences that occurred during the Third Wave.From a Fibonacci standpoint, Wave 4 retraced exactly 50.0% of the prior Wave 3.
So if this count is correct, we’re currently in fractal wave 3 (I would actually suggest fractal sub-wave 4, based on the daily chart possibly) of the larger Wave 5 move down.Notice the significant new momentum low that formed on this fractal 3rd wave - that’s what we’d expect… only new momentum lows often occur in the larger third wave of the complete impulse.It’s possible that we could be in for a rather ‘nasty’ final fifth wave if the structure continues.
Rates may begin to rise soon into the corrective fractal (small-scale) ABC up into the fractal 4th wave which could take us to but not much beyond 3.20% (yield is currently at 2.65%).Afterwards, the final fractal fifth wave may take us down beneath the current 2.65% yield, but let’s see how and if the fractal fourth wave correction takes place.
To confirm the count - and for a little more perspective - let’s look at the 10-Year Note Price, which is unsurprisingly the inverse of the note price.
10-Year T-Note Price:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes21.png
I simplified the count to only the most basic Elliott Count for clarity - compare this to the more detailed Price chart above.
In terms of the price, if Wave 5 is equal to Wave 3, then that would give us a terminal price target around $128 (Wave 3 being $16.00 which is added to the bottom of Wave 4 being $112.00).
Of course, in classical Elliott, if Wave 3 is the longest, we can expect Wave 5 to be equal to Wave 1, which has already surpassed that target.Let’s let the common target be Wave 5 equality to Wave 3, and if that is surpassed, we’ll move to look at other Fibonacci targets and ratios.
Beyond that, just keep managing risk and looking for low-risk, high reward opportunities out there.
Corey Rosenbloom
Afraid to Trade.com
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Note Prices Soar While Yields Plunge
December 6th, 2008 by Corey Rosenbloom
File this under “In case you missed it.”The 10-Year Treasury Note price has surged 12% in just over a month, as investors surge to the safety of treasuries.Subsequently, yeilds in these safe investment vehicles has plunged dramatically.Let’s look at the 10 year note price, and then see the 5-year note and 3-month bill yields.
10-Year T-Note Prices:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes1.png
Though I haven’t explicitly labeled it, it would seem the recent surge from $114 to $127 is a potential Elliott Wave 3 in perhaps a larger fractal Wave (Wave 1 being from $112 to $116 after a quick “ABC” corrective phase took place).
I don’t want to get too deep into the intricacies of analysis on these markets, but I did want to point out this sudden and perhaps significant development which is potentially going unnoticed by a vast number of traders.Bloomberg has an excellent post on why this may be occurring which is worth a read.
The article begins as such:“Yields on two-, 10- and 30-year securities fell to the lowest levels since the Treasury began regular sales of the debt.”
Not an encouraging report.
Analyst/Manager Jamie Jackson states, ““You’ve rallied to points that are unprecedented from T- bills to 30-year bonds…. That’s obviously pricing in a pretty dire economic environment.”
Portfolio Manager Richard Schlanger sums it up a little… less tactfully:““People are just flocking to Treasuries…. All you can say is, ‘My God.’ Things are going to get progressively worse.”
Let’s move on to see these falling yields on the 5-Year T-Note.
5-Year T-Note Yield:
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes2.png
Yields have fallen to 1.60% after breaking key support about the 2.40% level.Take a look at a longer, monthly chart for more insight into the pervasive, multi-year downtrend in rates.
Finally, let’s see a shorter timeframe yield via the 3-month T-bills.
3-month T-Bill Yield (rate):
http://blog.afraidtotrade.com/wp-content/uploads/120708-0313-notes3.png
If I asked you to give me your money and I would hold it safe for 3-months and pay you virtually nothing for it, would you do it?Yet fear and other complicated reasons is driving investors and institutions to take that deal because - for lack of a better explanation - they’re terrified that anywhere else they put it would lose money.Thus, they’re willing to accept virtually no return on their capital for the exchange of complete safety.
Commodities are being crushed, the stock market is being crushed, foreign currencies are being crushed.Gold is not holding up as the ’store of value’ it is expected to be in uncertain times.The US Dollar Index is surging, but mainly because foreign currencies are falling faster relative to the dollar - isn’t not necessarily a sign of US or the Dollar’s strength.
As everyone rushes into safety in US backed Treasury Bonds, Bills, and Notes, that drives prices higher and yields lower.Unfortunately, it’s driven yields to all-time lows in some markets, meaning yes, you’ll probably be safe, but no you won’t get very much for it.
Study further into these developments and what they might mean going forward.
Corey Rosenbloom
Afraid to Trade.com
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Gotta Watch Those Rounded Reversal Days
December 5th, 2008 by Corey Rosenbloom
They’ll get you every time.Today’s intraday stock market action was an excellent example of the “rounded reversal” day concept in action.Let’s see it in the DIA and how we might have managed risk and traded it.
DIA 5-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/120408-1600-aapl14.png
The day started with the news that the market moving “Jobs Report” showed a loss of over 500,000 US jobs, indicating that the economy continues to deteriorate steadily - unemployment in November stood at 6.7%.You would expect a market freefall, right?I mean, how could the market end higher on such a day?It’s funny going and reading some official reports of the trading day vs the news - they’re looking for explanations as to why such an odd occurrence happened.
If you’ve been trading for any length of time, you know that it’s often best to ignore the expected direction we think certain major news reports will take us.I don’t mean run out and fade the news blindly, but don’t let yourself get emotionally hurt and suffer unnecessary losses by fighting the tape on a day such as this that goes beyond all normal instincts.
That being said, the day began with a downside gap that made a run to the upside to ‘fill the gap,’ but fell just short before price plunged - expectantly - to new lows on the day near $81.50 (Dow 8,150).Then the market did something… unexpected by many newer (and some seasoned) traders.
The new lows just prior to 11:00 EST formed on a distinct positive momentum divergence.The proper play was to short the market as it tested the falling 20 period EMA at 11:00am, particularly with the confluence of dojis at EMA resistance.
But the market didn’t fall.Stops should have been placed just above the green EMA (green arrow) and taken not long after the market breached that area.For me, there wasn’t enough to get bullish at that level, but it was enough to cause bearish pause and adopt a “Hmm.This is interesting - let’s wait and see” attitude.
Price then found solid resistance at the falling 50 period EMA and made a quick, 1-bar move lower… before reversing again and taking out any shorts who placed entries and stops just above this blue average.
Finally, when price found support at the confluence of the 20 and 50 period EMAs, and more importantly when these EMAs crossed ‘bullishly’ (green highlighted arrow), that was your signal that all bearish bets were officially off the table and to get long the market for a potential ’rounded reversal’ swing into at least yesterday’s close (dotted line) which occurred suddenly.
At this point, the second pullback around 2:30 was the golden entry, as price had proven itself by forming a series of higher highs and higher lows and finding support two times at the rising EMAs.Buyers were rewarded by a quick, surging market as remaining shorts threw in the towel and helped force price higher into the close.
It was a slightly irritating day in some senses, but bulls can end the week satisfied, given the turmoil caused in this week’s trading.
Let’s look just a bit closer at the intraday price structure to see something that was available only to the most astute traders and seasoned intraday Elliotticians.
DIA 5-min chart with Elliott Waves:
http://blog.afraidtotrade.com/wp-content/uploads/120408-1600-aapl23.png
The purpose of looking at these charts is to build your pattern recognition skills so that you can more easily identify patterns in real-time as they form and take advantage of them.
First Waves are usually known as “disbelief” waves that are seen as a reason to - in this case - get short again.Wave 1 terminated around noon into EMA resistance.First waves often form on positive momentum divergences as well, which we saw.
Second waves often are known as “gotcha” waves or are periods when - in this case - short sellers say “Ha - I told you so” but price fails to make new lows (remember Wave 2 cannot retrace 100% of Wave 1).
Third Waves often begin in confusion, as short-sellers slowly take their stops and price forms the “Sweet Spot” reversal structure (in terms of higher highs and lows) and price often crests above key EMAs at this point, and usually moving average crossovers occur in third waves.People begin to see price as rising and short sellers capitulate into the newly rising and strengthening up-trend.
Fourth Waves tend to be rather orderly (sometimes) and are seen as profit-taking waves and also places to re-establish (or enter fresh) positions to the long side - whether or not you’re looking at price from an Elliott Wave perspective - they just feel good (in terms of a retracement entry sense).
Finally, the Fifth Wave is where aggressive longs who have been holding since lower levels take their profits and latecomers enter the market, hoping for endless gains.Fifth waves often end in negative momentum divergences and on weaker momentum/volume readings.
That journey takes you in a little bit into some of the psychology behind a classic Elliott Wave impulse, one of which occurred today in the face of so much opposition (virtually everyone to whom I spoke before noon said the market was going to capitulate into the weekend - I didn’t disagree).
But ultimately, the market respects its own opinion, and the forces of supply and demand rule the day no matter what the headline news might be.
Take today’s action as an educational lesson, annotate the intraday charts in your own way, and enjoy the weekend upon us!
I wanted to take a moment and remind you that the Market Club is offering a two-month trial period to test-drive the full capabilities of their software/service.If you’ve wanted to see what the Market Club and Adam Hewison’s (and team) is all about and how it can benefit you, take a moment to browse over there and sign-up.
Corey Rosenbloom
Afraid to Trade.com
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Chicos Fashion CHS - Long Elliott Wave Analysis
December 5th, 2008 by Corey Rosenbloom
Chicos Fashion (CHS) was an ‘on-fire’ and in-demand stock a few years ago, but recently, the stock has soured along with the broader retail sector, driving many stocks to multi-year lows and wiping some out of the market completely.Let’s take a look at CHS to note the full Elliott Wave progression, and then compare the arithmetic chart to a logarithmic chart to note chart-type differences.
Chicos Fashion (CHS) Monthly:
http://blog.afraidtotrade.com/wp-content/uploads/120408-1600-aapl13.png
Price began the decade around the $2.50 per share level and it looks to be ending 2008 at that same level, but not after reaching a price high above $47.50 which could have given investors amazing profits.Once again, which investors exited at the top?
Taking the principles of Elliott Wave into account, we see Wave 1 was a lengthy process that topped early 2002 before giving way to a standard “ABC” correction, none of which pierced the rising 20 month EMA (a sign of price strength).
Wave 3 was also relatively normal, and I’ve subdivided the waves into their appropriate fractals, complete with the also standard “ABC” correction in Wave 4 (also, which didn’t pierce the rising 20 EMA).
Wave 5 was extraordinary, taking price from $17.50 to $47.50, rewarding investors with a relatively clean and sustained advance into a final fractal fifth wave which formed on a negative momentum divergence… and the impulse (bull move) was over.
The recent ABC large-scale corrective phase has been extraordinarily damaging for investors, shattering their wealth almost completely.Of interesting note in terms of the Corrective Waves is the clean “Bear Flag” which formed throughout most of 2007, suckering in investors who tried to call a potential bottom at that time.
Price was only able to touch the falling 20 month EMA before careening over the cliff as price plunged into a fresh “C-Wave” down as the EMAs crossed in a classic “death cross” (once again, if you waited for this signal, you were too late).
The bear flag has met its target and there’s a positive momentum divergence, but technical analysis can’t help if the company goes bankrupt, and some analysts claim that if Chicos fails to have a stellar holiday season, it most likely will file bankruptcy - but that’s another story.
I’ve been asked why I continue to use Arithmetic (default) charts when looking at long-term or large-price change data.The answer?I prefer analyzing pure price moves over percentage moves, and in addition, I feel more recent data (which is obscured by log-charts) is more important (to me at least) than past data (in terms of visualization).
Why do I stubbornly cling to my arithmetic charts?Compare the exact same stock and exact same period below on a logarithmic chart with the arithmetic chart above.
Chicos Fashion (CHS) Monthly Log-Scale:
http://blog.afraidtotrade.com/wp-content/uploads/120408-1600-aapl22.png
In fact, Chicos traded around $0.50 in 1998 which deeply compresses the chart as price reached all-time highs near $50.00, to a factor of 100 (in terms of price compression).
Logarithmic charts give extra emphasis to smaller (dollar) price changes and compresses price changes (dollar values) as the price continues higher.
From the looks of the chart, I’ve violated one of Elliott’s key three principles - that Wave 3 can never be the shortest - not to mention, the notion of wave proportionality is grossly distorted at first glance.
You have to sort of ‘over-rule’ the chart (visually at least) and realize that Wave 1 was roughly $10.00 in price change, Wave 3 was roughly $25.00 in change, and Wave 5 was almost $30.00 in dollar differences.To me, it’s extremely difficult to ascertain that from a log-chart.
I emphasize that this is my personal opinion and my chosen way to conduct price analysis - I’m not trying to win you over, but to explain my preference.It’s best to use both types of charts, and not to abandon either, for each has its advantages and disadvantates, which become more pronounced as you stretch out the time period and observe large price differences over time.
Chicos (CHS) and - as one reader observed - many stocks are showing similar Elliott patterns worth noting and interpreting.We’re in very interesting times, and the potential for the genesis of fresh Elliott impulses remains just around the corner - for companies that survive this recession.
Corey Rosenbloom
Afraid to Trade.com
Take advantage of a special two-month free trial to join Market Club (limited time).
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Gap Fade Stats for November
December 4th, 2008 by Corey Rosenbloom
The first of the month means it’s time to look at the performance of overnight gaps on the DIA!November was a particularly volatile month, with the average overnight gap being around $1.00 (100 Dow Points).Let’s look at the percentages and numbers of filled and unfilled gaps for the month.
Gap Fill Chart:
http://blog.afraidtotrade.com/wp-content/uploads/120408-1600-aapl12.png
Trading Days with Gaps:
http://blog.afraidtotrade.com/wp-content/uploads/120408-1600-aapl21.png
Let’s define a ‘gap’ as being an overnight change of at least $0.25 in the DIA (roughly 25 points in the Dow Jones).The Excel sheet lists the gaps and compiles the statistics for us.
Of the 20 trading days in November, 16 days resulted in a gap of at least $0.25.The number of days stays the same until the gap size is increased beyond $0.36.
Of these 16 days, 9 days resulted in a filled intraday gap giving us a ‘gap-filled’ percentage (edge) of 56.25%.How you placed your stops would determine the ultimate profit of the gap-fade strategy of course.
Four of Seven up-gaps filled (57%);
Five of Nine dow-gaps filled (55%).
If you raise your ‘gap’ criteria to $1.00, then there were 11 (55%) of trading days with a gap larger than $1.00, and 5 days filled the ‘large’ gap, for a fill percentage of 55%.
These are not historically normal times, and volatility is getting the best of us, but the gap-fill percentage remains consistent across virtually all my quick monthly studies.Of course, the larger the gap, the lower the probability of a successful fill.
To look back at previous months, view any of my prior monthly summaries:
January Gap Fade Statistics
February Gap Fade Statistics
March Gap Fade Statistics
April Gap Fade Statistics
May Gap Fade Statistics
June Gap Fade Statistics
July Gap Fade Statistics
August Gap Fade Statistics
September Gap Fade Statistics
October Gap Fade Statistics
At the end of the year, I’ll run a complete study and will try to add results from using various stop-loss strategies so we can see ideal combinations to generate profit from this gap-fading strategy that has worked so well throughout 2008.
Corey Rosenbloom
Afraid to Trade.com
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A Long Term Technical Look at Apple AAPL
December 4th, 2008 by Corey Rosenbloom
What has Apple (AAPL) been up to lately?Not much for long-term investors recently, but let’s take a moment to view the monthly, weekly, and daily charts and apply Elliott Wave combined with Fibonacci analysis to see where we’ve come, how we got there, and what might be in store for the future.
Apple (AAPL) Monthly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/120408-1600-aapl11.png
The monthly chart shows a potentially completed full Elliott Wave Impulse from start to finish - it’s extraordinarily rare to see such a chart like this develop at the structure we are now in real time.
Apple began its ascent in 2003 less than $10 per share to end late 2007 at $200 per share, creating massive wealth for shareholders during that period.Unfortunately, the last year has seen shareholder equity lose over 50% in a stock many believed to be inevitable or unshakable.
Take a moment to view the Elliott Count and notice the Fifth Wave was a grossly extended wave that terminated at the $200 per share level.Following that - and despite all the recent price destruction - the correction was an orderly “ABC” corrective phase as described by Elliott Wave Theory.
Notice how the final “C” wave is potentially terminating at the 61.8% large-scale Fibonacci retracement of the entire Elliott Impulse - that is distinctly significant and needs much greater attention.We would expect the $81.50 per share level to hold as long-term support, meaning Apple may be showing a favorable risk/reward relationship now… but if the $80.00 price is broken, then all bullish bets are officially off the table.We may have just hit a turning point in Apple stock.
Let’s zoom to the weekly chart for more insight.
Apple (AAPL) Weekly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/120408-1600-aapl1.png
I’ve shown the “ABC” corrective phase closer here.Waves A and B were almost strightline affairs, with nary a correction to enter or manage risk.They were rhythmic, almost syncronatic swings in price that led to the final violent C-Wave decline we’re in currently.
I’ve overlaid two Fibonacci retracement grids off recent price highs (to the $80 price low in November) and would like to note possible confluence areas.
Notice the $140 per share level serves as an important confluence level, which also would reflect resistance via the falling 50 week EMA - this would be a rather extreme target for price to reach short-term (suddenly), but if it broke above $140 per share, all bearish bets would be off the table and we could eventually look for a run up to test the $190 level or beyond - but that’s getting ahead of ourselves.
The more likely confluence target would be the $128 or so level, which corresponds to the 38.2% larger retracement (at $125.63) and $129.48 from the 50.0% retracement of the most recent price swing.Keep an eye on that level as an initial bullish target (should $80 not be taken out any time soon).
Notice also that price would need to break above the falling 20 week EMA to test these levels, so beware of that potential resistance (and price target - magnet) zone.
We have a slight positive momentum divergence setting up from the October lows to the November lows, but it’s minimal as the price swings were quite narrow.The fractal 4th Wave did touch the 38.2% retracement at $117 before falling to new lows - that is a significant development as well.
Finally, let’s step inside the “C Wave” decline to gather short-term insights and potential targets for swing-traders.
Apple (AAPL) Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/120408-1600-aapl2.png
Keep in mind that the $81.00 per share level corresponds with a large-scale Fibonacci retracement zone, so if this level is broken, all bullishness is off the table.
That being said, price is forming a distinct positive momentum divergence under the action, and we’re challenging the 20 day EMA and perhaps soon to challenge the falling 50 day EMA at $105.00 per share.The falling 50 might be an ultra-shortterm target, while the breaking above the daily 50 EMA would trigger entries from the longer time frame participants/position traders (potentially).Watch this area closely.
I have a little confusion as to how to interpret the current Elliott count, so your opinions are welcome, but the question now becomes “Have we already completed fractal wave 5 at the November 23rd lows… or are we about to begin fractal wave 3 or perhaps 5 back down to complete officially the wave 5 decline?”
What does that mean?We see Waves 1-4 completed rather orderly (and I could have drawn in fractal waves for the 3rd wave) but Wave 5 has already completed (with the slight price lows) or is in the process of forming a final terminal wave down (meaning it has not completed yet).
Until we work off that condition, it might pay to be a little cautious and let price action prove itself over the next few days, but if the impulse is indeed complete, that would signal the potential birth of a new Elliott Impulse in Apple - meaning we’re at the genesis of a potential first wave in a larger impulse (reference the monthly chart above).
I’ll let you conduct your own analysis from here and make your trading decisions, but be aware that the price structure in Apple could get interesting quickly, and if anything, it serves as an excellent educational example of applying the Elliott Wave principle (and Fibonacci) to multiple time frames.
Corey Rosenbloom
Afraid to Trade.com
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A Look at Dry Ships DRYS
December 3rd, 2008 by Corey Rosenbloom
I previously discussed the Baltic Dry (Shippers) Index, but now I wanted to discuss a potential method from trading your take on dry shipping companies in general, focusing specifically on Dry Ships Inc (DRYS) which enjoyed a meteoric rise through 2007… followed by rapid price destruction throughout 2008.Let’s look at the weekly and daily charts of DRYS.
Dry Ships (DRYS) Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp5003.png
Price entered 2007 around $20 per share and by October, price peaked above $120, appreciating six times over… but it’s quite unlikely that many investors sold at the top at that time.
Price ended 2007 and entered 2008 in a weak position which most likely turned out to be the first in a yet-to-come three wave Corrective Phase, the second wave (B) of which took price to challenge 2007 highs at $110… but that was all the strength bulls could show.
Price failed to reach a new high and then plunged just as quickly as they rose… and then they fell some more.The weekly EMAs crossed ‘bearishly’ in September 2008 and that was ‘all she wrote’ in terms of bullish hopes.
Notice how the rising 20 week EMA contained price for the majority of 2007 until price broke that level and found tentative support about the rising 50 week EMA.
Has there been a climax sell situation in DRYS? Time will tell - as will the possibly that we may be completing the final “C” corrective wave.Let’s zoom to the daily chart to see the most recent developments more clearly.
Dry Ships (DRYS) Daily:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp5004.png
There’s nothing to say this stock can’t go to zero, so by all means do more analysis than “Gosh, it’s cheap so I have to buy it” but I think you could make a rather compelling bullish argument.
For one thing, a full five wave Elliott impulse down looks to be nearing completing into the terminal fifth wave on multiple positive (swing) momentum divergences.
Notice also that volume is surging mightily to record highs as price stagnates in the sub $5.00 per share level - does that signal capitulation… or aggressive accumulation?Time will tell but around 10 million shares are trading hands daily.
I honestly wouldn’t get bullish until price broke above the rising 20 day EMA, but aggressive speculators could go ahead and enter here, not wanting to miss a possible quick ‘double’ should the market and this stock find key support soon.
Take a moment and look at the Elliott Wave count for this move down - I’ve broken down some of the waves into their corresponding fractals.You may have your own count for this stock as well.
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Corey Rosenbloom
Afraid to Trade.com
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Elliott Wave on the Baltic Dry Index
December 3rd, 2008 by Corey Rosenbloom
A reader requested an Elliott Wave count on the Baltic Dry Index to compare that count to the $CRB or Commodity Index to note any differences.Let’s compare the two indexes and price structures.
First, the Baltic Dry Index is mainly a survey of the price of transporting raw materials.From the Wikipedia article, the official definition is “…an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time-charter and voyage basis, the index covers Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”
It is also known to provide information on global trade as it is an “accurate barometer of the volume of global trade — devoid of political and other agenda concerns.”
Compare the count to my recent Elliott Wave Interpretation on the CRB Commodity Index.
That being said, let’s take a look at it on the Monthly and Daily charts (via StockCharts.com).
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50017.png
The count is similar to that of the CRB, with a little more confusion around the 2004 - 2006 period, and the pronounced Wave 2 triangle that formed just before the start of the explosive Wave 3 rally from 2006 to late 2007.
Since wave 2 was relatively orderly, it would make sense to expect a sharp or steep (violent) Wave 4, which is what occurred as the index plunged from 11,000 to 6,000 in three months’ time, finding support at the rising 20 month EMA and rallying up into the final 5th Wave impulse that formed on a negative momentum divergence (not shown).
Just like the CRB Index itself, the most recent corrective phase (Wave A) was brutal, much moreso on the Baltic Dry Index, as price careened six months in a row from 11,500 to the current lows at 700 - a roughly 90% drop.
What does that mean?Other than being cheaper to ship goods across the globe, it means that global trade is suffering tremendously and that’s not a great sign for bullish hopes.It seems the reality of a global recession has taken hold, and I’ll allow you to read into that what you may.
Let’s take a look closer at the 2005 to 2008 rally… and mid-2008 implosion to get a better view on the possible Wave Count.
Baltic Dry Index Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50025.png
I know that spanning such distance and price levels is better done on logarithmic charts where percentages are revealed better, but I enjoy looking at equal price changes so I can better measure equal (or relative) price moves. I would recommend also taking this count to a log-chart as well.
Price broke above a triangle pattern in July 2006 into a Wave 3 major impulse (which subdivided into two fractal waves - third waves can be particularly dramatic) as the EMAs crossed bullishly shortly after.Notice that the EMAs did not cross back bearishly until around September 2008.Signals from moving averages always come late and are best used - in my opinion - as viewing components of price structure instead of using them as solitary bases for making trading decisions.
The final 5th wave formed on a negative (flat-line) momentum divergence before price reversed precipitously into major lows beneath 1,000.While there are positive momentum divergences forming on the daily chart, the picture still isn’t wonderful for this Index it would seem.
If the Corrective Wave A is completing, we would expect a B wave to take us back up perhaps to the 4,000 level or beyond, but be careful in the wake of such dramatic price devastation - the structure has clearly been affected.
Corey Rosenbloom
Afraid to Trade.com
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Analyzing Tuesday’s Intraday Action
December 3rd, 2008 by Corey Rosenbloom
Tuesday’s trading action in the US Equity Markets was a fascinating experience in some ways - from the filled morning gap to the rounded reversal to the end-of-day reversal rally - all of which took place in two observable Elliott Wave impulse moves worth viewing.Let’s look at it all!
DIA 5-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50016.png
The day began with an opening gap that filled rather quickly and effortlessly - those who were quicker had the edge in this gap-fill trade.Price then found support at Monday’s close, formed a long-legged doji (potential reversal) and then surged strongly into EMA resistance (with a shooting star candle), forming a new momentum high.
Price retraced to the rising 20 period EMA which set up the “Impulse Buy” trade coming off the new momentum high.Price then retested ‘confluence support’ via the 20 and 50 EMAs before breaking strongly back to the upside into new price highs on the day … but formed a negative momentum divergence (not drawn).
Ultimately, price fell back to EMA support setting up a potential buy which was quickly stopped-out when the large red candle sliced both EMAs on a closing basis.The EMAs then crossed in a bearish cross and the market screamed to new lows on the day, revisiting and exceeding the prior lows slightly.
Ultimately, deja vu set in as price formed yet another long-legged doji (possible reversal) which was more of a “dragonfly doji” this time at prior support off a new momentum low.
Price rallied back to EMA resistance, setting up the “Impulse Sell” trade (off the new momentum low) and fell slightly but did not achieve its target (the prior swing low) as it reversed abruptly and surged into a push-pull pattern into the close on yet another new momentum high.The end-of-day trading was quite volatile and offered few clean entries or abilities to manage risk (notice also that the pullback into 3:45 cleanly broke confluence support before stealing away possible stops and surging into new highs on the day).
As if the above chart wasn’t interesting enough, yesterday’s action formed a quaint Elliott Wave impulse pattern worth examining further that could have helped if you were ‘quick with your Elliott’ during the trading day.
DIA 5-min chart with Elliott Waves:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50024.png
The gap served as a sudden “Wave 1″ which led quickly to a Wave 2 that filled the gap.
Price surged higher into Wave 3, and the “Third of the Third” fractal wave (not drawn) actually (officially) achieved the new momentum high and the final fractal 5th wave formed on a slight negative divergence.
Wave 3 completed in the $83.40 range before pulling back in a clean “ABC” fashion to find support at the rising 20 EMA.I sub-divided the final Wave 5 impulse into its corresponding fractal impulse as price achieved the final fractal and larger scale (though still very small scale) Wave 5 on a clear negative momentum divergence, hinting the bullish camp had done all they could do for the moment.
Price then reversed into a massive ABC wave down, the C wave of which also subdivided into its own bloody 5 wave fractal impulse (other interpretations can be made from this I’m sure).Notice also how fractal wave 5 terminated on a positive momentum divergence as well - that is a common occurrence in my experience for fifth waves.
What the move down into 2:30 completed, price then reacted to news/expectations and surged strongly higher into the close, forming a quick 5-wave impulse without clean fractal waves to accompany it - the price x time axis was compressed into 1 1/2 hours.
Yet again, the final 5th wave formed on a slight negative momentum divergence.
We’ve experienced a large-scale gap fade this morning.
Take time to look over Tuesday’s trading for your own experience and insights.
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Elliott Wave Count on the German DAX Index
December 2nd, 2008 by Corey Rosenbloom
A reader recently asked me to give a look at the German DAX Index in terms of a possible Elliott Wave Count to see how it related to the US Equity Indexes.Here is my preferred count on the DAX Index on both the Weekly and then zooming in on the fractal Daily Count:
German DAX Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50015.png
The DAX Elliott count is very similar to that of the S&P 500, with the exception that the topping process in late 2008 wasn’t as clear as the S&P 500 (though the multi-swing negative momentum divergences combined with the breaking of the 50 week EMA was evidence enough that all wasn’t well in the bullish camp).
So the first wave down is a little more complex than that of the S&P 500, and the Second Wave found resistance at the key confluence of the 20 and 50 week EMAs (a great place to establish a short) as well as the 50.0% Fibonacci retracement of Wave 1.
Wave 3 (as I have interpreted it) was just as brutal in the DAX as it was in the S&P 500, and the way I confirm that count is that the “Third of the Third,” or fractal wave 3 of the larger (circled) wave 3 move registered the lowest momentum low on the chart.This is also considered the “Sweet Spot” or is further known as “Elliott’s Dream Wave.”You’ll do quite well to seek out and identify “Third of Thirds.”
That being said, Fractal Wave 4 retraced just beyond 38.2% from the top of Wave 2 before bottoming in a “Truncated Fifth” wave (the S&P 500 fractal 5 did not Truncate, but made new yearly lows).
Notice the positive momentum divergence that build under the price on the 5th fractal wave.That is a clue that we could be looking for short-term higher prices, perhaps in the trajectory of the green arrow I have drawn for the possible larger-scale Wave 4.
Let’s zoom-in on the current structure, picking up in June during the top of large-scale Wave 2.
German DAX Daily:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50023.png
This count demonstrates more detail into the most recent vicious Third-Wave decline.Notice again that the new momentum low (oscillator) occurs during the “Third of the Third” wave, which is where the most violent downward price action occurred.
The third wave itself sub-divided and the fractal “v” wave terminated with a positive momentum divergence before the fractal 4 came into EMA resistance.
The Fractal 5 wave itself sub-divided into a full impulse and terminated officially as a “Fith Wave Truncation” into a positive momentum divergence.
It’s possible that we’re currently in corrective Wave “A” of a larger Wave 4 that’s developing, which is quite similar to the structure developing in the US Equity Indexes.
Let’s continue to watch these developments and counts as they progress in real-time, but always be willing and ready to adjust our bias as new information - particularly the breaking of 4,000 into new lows (which could invalidate the count) develops.
Corey Rosenbloom
Afraid to Trade.com
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Hewison on the Trend of the Dow Jones
December 2nd, 2008 by Corey Rosenbloom
Adam Hewison released a video yesterday regarding Monday’s bearish move and where it occurred in context and what it might mean for the broader market - it’s definitely worth viewing to see his views and price projections.
Entitled “The Dow Crash,” though it isn’t as tragic as it sounds, Hewison takes us through line, bar, and candle charts on the Daily and Weekly views of the Dow Jones and applies simple trend analysis and Fibonacci retracement/projection analysis to let us know where he thinks the Dow is headed.
Here’s a hint:
“We know the Dow topped in October 2007, but the question on everyone’s mind is ‘Has the Dow bottomed in November, 2007?’I believe it hasn’t and here’s a few reasons why…”
Here are a few chart examples from the video that also shows an example of the Market Club charting system:
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Hewison begins by discussing the weekly trend on the Dow Jones and how the current action fits in the structure.
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50022.png
He then moves to discuss how the “Thanksgiving Rally” came into key resistance at the 61.8% Fibonacci retracement on falling volume - bulls clearly were unable to overcome that level.Adam then moves to describe a projection through the end of the year and into the new year.
The video is just over 8 minutes long and is provided free thanks to Market Club’s educational outreach efforts.I support the service and recommend joining the Market Club if you have not done so already - the linked website offers the benefits of membership, including daily commentary, trading signals, composite scans, and educational materials across all markets.
Thank you to Adam and the group for making these videos available to the public after they are released to members.
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Interesting Intraday Action Today
December 1st, 2008 by Corey Rosenbloom
There’s so much to write tonight, but let’s focus first on the wild and unexpected events that occurred during the trading day which will be classified as a failed gap fade, failed “rounded reversal,” and - depending on your stop-loss placement - successful trend day down.
DIA 5-minute chart:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50013.png
Let’s start by discussing the overnight (weekend) gap.Price gapped 2% down from the start - not a great way to start a the Monday after a good rally in the market last week.Generally, gaps greater than 100 Dow points have a tendency not to fill, and there’s an inverse relationship between the size of the gap and the probability of a successful gap fill (the larger the gap, the lower the odds of a complete fill).
In this case, the buyers didn’t even try to fill it, as the market plunged over 100 as trading opened.That was your first clue - as if you needed it afterwards - that odds were quite high that the day could unfold as a ‘Trend Day.”
This meant you should establish a core position and hold until the close, taking every opportunity to short any rally whatsoever to the falling 20 EMA.A stop would be placed slightly above the falling 50 period EMA.
The thing about trend days is that they can have a tendency to be ‘over-ruled’ by a “Rounded Reversal” structure like we had today.A “Rounded Reversal” develops off a lengthy, multi-swing positive momentum divergence such as we had today as price forms a lengthy bottom and then curves back up slowly, breaking the 20 and 50 period EMAs and making a near identical price move as the down-move that preceded the reversal.
The lines were clearly drawn and the guns were aimed and ready - would it be a trend day or a rounded reversal day?
Depending on your stop-loss placement, you could have gotten smacked on both sides.If you’re like me and place stops (erroneously) too close to the levels you should (such as above the 50 EMA) then your trend-day positions (and opinion) was stopped out at the red arrow and perhaps you went long, assuming the day was perhaps now a Rounded Reversal.Fair call.
But if you chose to apply your stops more liberally (which testing - and today’s example - shows often works better than tight stops), and had the patience to feel the heat of a potential price rally, then to the victor go the spoils of the day - or at least, to those with strong trading stomachs.
Price ultimately did breach the 50 EMA gently before rolling over into a sudden and violent trend move lower, mercilessly burying those who positioned long into a possible reversal (and endlessly frustrating the shorts who took too tight stops).
Of course, if you are stopped out, it doesn’t mean you can’t shift positions if need be (or if another criterion is met) and join the other side of the market, which takes strong discipline in admitting analysis error and quick wits to reverse positions, but to the nimble go the spoils.
Ultimately, price closed on the lows of the day, shaving 9% off the NASDAQ Index and over 7% off the Dow Jones and S&P 500.It was particularly devastating for swing traders who went long into the latter part of last week’s rally.
Today’s trading offers various lessons for participants.Print off your own chart and analyze the price action according to your methodology and don’t be upset if your trading performance today wasn’t as brilliant as you expected.
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What is Meant by Price “Structure?”
December 1st, 2008 by Corey Rosenbloom
I’ve had a couple of questions recently on the meaning of price ’structure’ so I thought I’d take this opportunity to explain it and show an example of how analyzing price structure can give you a guideline in your trading.
Let’s think of ’structure’ as components that hold up price, or the arrangement of price itself that builds upon a basic level to greater complexity.
The easiest way to look at price ’structure’ is to compare subsequent swing highs and swing lows to determine if price is building upwards or tearing downwards.All it takes is drawing dash-marks on a chart.
Let’s use this example of the S&P 500 Index from 2006 to mid-2008 (prior to the ‘crash’) to see if we can ascertain the price structure.
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50012.png
The Blue lines represent higher highs and higher lows compared to the previous high or low while red marks represent lower highs or lower lows as compared to the prior swing.
Also, these lines themselves mark potential support or resistance zones, but more importantly, you are seeing how the ‘picture’ is evolving as new information inters the market (or new bars are being drawn on the chart).The current bar is influenced by so many forces, one of which is the current ‘structure‘ of the market or price trend.
Higher highs and higher lows - as was the period on this chart from 2006 until November 2007 - is the most bullish ’structure’ possible.The first lower low in November was a warning sign that the foundation of the uptrend might be cracking.As price formed a lower high in December 2008 then swung down, that was a further sign the structure was weakening considerably.As price *took out* (broke beneath) the lower low formed in November, the “structure” collapsed and the trend was officially reversed (red arrow pointing up).
Contrapositively, lower lows and lower highs - the series from November 2007 to present - is the most bearish ’structure’ possible.We would need a higher high and higher low to change the structure - or trend - from down to up.“Foundation Building” must take place and this evolving ’structure’ is part of that in terms of price/trend reversals - but you can’t ascertain that easily if you don’t look at the underlying structure itself.
The second way to analyze price structure is to look at key moving averages - their structure - and how price behaves towards them.
I frequently refer to “The Most Bullish Orientation Possible,” by which I mean that the 20 period EMA (exponential moving average) is higher than the 50 period EMA which itself is higher than the 200 period SMA (simple moving average).These numbers are not absolute - you can use your own MA calculations to analyze structure as well, but these are the ones I have chosen and work within my style of market analytics.
This bullish orientation persisted all the way to January 2008, when the 20 week EMA broke beneath (bearish cross) the rising 50 week EMA as both averages turned negative.This chart ends with the 20 week EMA crossing (bearishly) beneath the 200 week SMA (downward sloping red arrow).
Of course, the “Most Bearish Orientation Possible” is where the 20 EMA is beneath the 50 EMA which is beneath the 200 SMA - an orientation we are experiencing currently on the weekly chart and have been for quite some time on the daily chart of the S&P 500.
When price crosses above or below a key moving average, that says something about the underlying price structure - how the average ‘contain’ or support price.I sometimes tend to think of moving averages as floors or ceilings, particularly in strong trends.When price has broken beneath a key average after supporting above it repeatedly, the “structure” has changed bearishly.
The same goes for moving average crossovers themselves - their orientation or ’structure’ give us clues about the price trend itself as it builds or is torn down.
Of course, there are other ways to measure price structure, such as Elliott Wave, Market Profile charts, etc but I still feel the easiest and perhaps most reliable method is to view the price itself in conjunction with the orientation (or structure) of key moving averages.
Corey RosenbloomAfraid to Trade.com
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Elliott Wave Count on the CRB Commodity Index
November 30th, 2008 by Corey Rosenbloom
Commodities across the board have taken massive falls throughout 2008.Let’s take a look at a possible Elliott Wave Analysis for the monthly and daily $CRB Commodity Index to see if we can place these moves within a broader structure.
CRB Index Monthly
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50021.png:
This structure takes price from the 1999 lows as the start of Wave 1 all the way to the 2008 highs as the termination of the final Wave 5.
Wave 1 terminated into resistance at the 200 month moving average before retracing almost all of the previous Wave 1 impulse on a closing basis which was startling at the time - second waves can be violent and catch many people off guard.It’s immensely difficult to detect them in real time.Elliott is far easier to apply in real time during or after a third wave materializes.
The Third Wave here was a particularly prolonged impulse, which is fitting with the teachings of Prechter and Elliott that it is often the most complex, largest (longest) wave of the 5-wave impulse.
The third wave sub-divided nicely into a fractal of the larger impulse, only that the fifth (fractal) wave was quite extended, which I have labeled in red as a fractal impulse.What’s interesting is that the “fifth of the fifth” or the final fifth wave in the fractal wave itself subdivided, which I could have labeled if space were not an issue.Take a look at that for yourselves - quite interesting.
Wave Four corrected just beyond the 38.2% Fibonacci retracement (intra-month) of the previous third wave, and found support twice via the rising 50 month EMA.Price formed a quick “ABC” correction which led to the final Fifth Wave advance.
Though the Fifth Wave was not the largest, it was the sharpest, advancing its gains rather quickly and arguably violently as price surged from late-2007 lows to mid-2008 highs, bringing renewed fears of inflation as oil and other commodity prices soared to record levels.At present, those realities and fears seem to be a distant memory, as we currently are discussing deflation, where the prices are falling too rapidly.Alas, but that is another story.
If this wave count is correct, then we are in a particularly violent corrective “A” Wave down which should at some point find support and then begin a “B” Wave corrective move back up - I’ll set targets later as that materializes and we confirm the bottom of the first corrective wave.
Speaking of that wave, let’s look inside it, on the daily chart.
CRB Index Daily:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp50011.png
I would be appreciative if more experienced Elliotticians could provide their views on their counts, or on this count, but what I am showing (following Prechter and Elliott guidelines as best I can) is that we have concluded a third wave down possibly and are looking for a corrective fourth wave to materialize.
This is similar in structure to the analysis and question I recently posed on the “Elliott Wave Analysis on the Euro” particularly on the Daily Chart where I asked “Are we about to experience a 4th wave up or have we already experienced a five-wave complete impulse move down?”The comment section gave some great responses from experienced readers - feel free to join as well.
Nevertheless, unless there was an extended or complex wave that I missed, the current wave structure makes the most sense to me until proven otherwise.
If that is the case, then we’ve experienced Wave 1 down which was complete with a full Elliott 5-wave fractal (labeled) with wave 2 also being complete, having been comprised of an “ABC” Correction.
Wave 3 has been particularly violent - we should expect nothing less - and itself has potentially terminated into a final fifth wave (fractal waves labeled) on a multi-swing positive momentum divergence.
If this is correct, then we could expect some sort of “ABC” Corrective wave pattern back up, perhaps to the 300 level or so, but we could reasonably expect price to break above the 20 and perhaps 50 day EMAs in this potential corrective pattern.The positive momentum divergence should send warning signs at least to aggressive short-sellers.
Feel free to weigh in with your thoughts or alternate interpretations.The more patterns we see and discuss, (and practice) the better we’ll be at interpreting potential wave counts and possibilities ahead which helps in trade selection as well as risk-management.
Corey Rosenbloom
Afraid to Trade.com
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Weekend SP500 Overview with Projection
November 29th, 2008 by Corey Rosenbloom
We’ve had a steady rally all last week in the major US Equity Indexes, but let’s focus on the technical position of the S&P 500 and view both the daily and weekly charts and note possible projections and confluences.
S&P 500 Daily:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp5001.png
Price is clearly in a daily downtrend with a distinct series of lower lows and lower highs.The orientation of the key daily moving averages is in the most bearish orientation possible.
However, there is a positive momentum divergence building under the price action, which hints at underlying bullish strength (or the diminishing influence on the part of sellers) which could change (or is currently changing) the price structure of the market.
Price is currently testing and gently breaking above the 20 day EMA, an occurrence which happened in early November that resulted in a price ‘failure test’ of this key average.Should price hold above this level, the next target would be the falling 50 day EMA which would be just above 950.
Volume plunged during the week as price moved higher, which is a bearish non-confirmation (of higher prices) but also take note that last week was a shortened, holiday trading week so don’t try to read too much into last week’s volume trend.
S&P 500 Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/112908-1721-sp5002.png
The weekly chart leaves much to be desired for the bulls.Price peaked in October 2007 and has steadily fallen since that peak to its current low of 750 in November 2008.The market has shown clean Elliott Wave patterns, complete with fractal moves in each larger wave, and odds are that we have finished the brutal third wave down and are beginning a fourth-wave corrective (three wave “ABC”) impulse up.Notice the positive momentum divergence on the weekly chart as we go into this structure.
How far might the fourth wave go (if indeed that is the current structure)?
I ran some Fibonacci confluence numbers and - sparing you all the lines on the chart - the number that seemed to generate the highest confluence was 1,093.
1,063 is roughly the 38.2% retracement from the 1,550 price high to the 750 price low.
1,093 is the 50.% retracement of the 1,440 to 750 price swing which composed Wave 3.
1,096 is the 61.8% retracement from the 1,300 to 750 price swing which took us from the doji at confluence resistance in August 2008 to the most recent price lows.
When working with Fibonacci, it often pays to study ‘confluence price zones’ rather than just a singular Fibonacci grid.There are even more price grids we can draw that take us further back but be careful not to draw dozens of lines on your charts.
That being said, look for the next move in the market possibly to be an up-move through the end of the year (of course, not straight up, but with smaller waves up and down) that take us into confluence resistance via the 20 week EMA (currently just above 1,050) and the important Fibonacci cluster zone of 1,093.
All things being equal, I will set this as our next target price to reach in the market, if not by year’s end, then slightly beyond.
Of course, this view will be invalidated should price move down and take out the 750 price lows at any time prior to the possible up-move materializing.
We’ll continue to follow these developments day-by-day as they happen.
Corey Rosenbloom
Afraid to Trade.com
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Holiday Linking
November 28th, 2008 by Corey Rosenbloom
I hope everyone had an excellent Thanksgiving!Let’s end the week by checking out a few links courtesy NewsFlashr Business and Blog section to head us into perhaps an early weekend.
The StockMasters asks is Google (GOOG) stuck at $250 a share?
Bespoke Group shows research which declares this The Most Volatile Market Ever.They report that the average absolute daily performance change of the S&P over the last 50 days has been 3.82%, or almost a 4.0% range per day!The last time this happened - daily volatility at 3.5% - was in 1933.
Brian Shannon of AlphaTrends shows a video he posted last year in which he explained “…this could be the beginning of a multi-year decline for the markets” in his post “One Year Ago Today.”
Barry Ritholtz of “The Big Picture” shows us the multi-year Case-Shiller (Housing) Index and notes the severity of the recent decline in “Case-Shiller Index Falls 17.4%“.
Investment Postcards asks, “Is the tide turning for stocks?” as well as Does the stock market rally have legs?” They share research, summaries of global stock market returns, and notes that the last four days of returns at just over 18% in the S&P 500 has been the largest four-day surge since… the Great Depression.
VIX and More notes activity in Recent Gold Volatility.
Rob Hanna of Quantifiable Edges examines The Dangers Of Shorting Near A Potential Bottom as well as whether or not there is a Thanksgiving Edge.
Chris Perruna wonders whether or not Oil a Value Buy? He provides charts as well as listing ETFs to trade bullish and bearish biases.
The StockChartist explains “Golden Cross” and OBV: An Update and describes how this scan can help find potential winners.
PhilsStockWorld describes some news behind key stocks in Investors lose appetite for fresh stimulus package as Caterpillar bears growl.
StockTickr posted a few videos on their automated trading robot which show it in action - interesting!
The Bonddad Blog examines Commodities in a weekly round-up posted Wednesday.
Enjoy the holidays!
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Elliott Wave Analysis on the Euro
November 26th, 2008 by Corey Rosenbloom
A reader brought to my attention to look at the Elliott Wave Count for the Euro Index, and there’s an interesting development you might find interesting, or want to share you interpretation of what the count might be, or what might be in store next for the Euro.
First, let’s set the stage with a Weekly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci19.png
The complete Elliott Five Wave Impulse began just before 2006 and terminated in July, 2008 for a two-year pattern.
Wave 1 began with positive momentum divergences and carried price above the key 20 and 50 week EMAs as well as officially reversed the trend (series of lows and highs) to up.
The first wave terminated in late 2006 and was followed by a quick “ABC” zig-zag style correction.
Wave 3 proceeded for almost all of 2007 which subdivided into its own fractal.There’s two ways I see to sub-divide Wave 3.Notice the way I’ve shown it here violates the “Wave 3 cannot be the shortest wave” principle, so an alternate interpretation would be the following.
Sub-wave iii is actually the top of sub-wave i with wave iv being wave ii.Now, the move from iv to v could be actual sub-wave iii, in which case the “abc” correction would be sub-wave iv, while the unlabeled wave from c to $157.50 would be the final sub-wave v which would move the circled “3″ to that level, leaving us with a miniature and truncated final 5th wave (that also ended where I have the circled “5″ on the chart).I would be open to suggestions, but either interpretation has Wave 5 peaking at the same location, thus beginning the corrective phase we are experiencing currently.
Let’s begin at the top of Wave 5 and zoom in for a little more detail… and an open-ended question.
Next, let’s move down to the Daily Chart for an open-ended interpretation:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci27.png
We see Wave 1 subdivides nicely into a classic Elliott impulse with Wave 2 also subdividing as expected into a three-wave “ABC” pattern which completed at the falling 50 day EMA (signalling a short-sell signal).Notice also that sub-wave 5 of larger Wave 1 ended on a positive momentum divergence.Elliott can help add structure to signals you’re seeing otherwise.
Wave 3 was a relatively clean impulse wave down, except sub-wave ii was a little too short for my comfort.That being said, wave 3 terminated at the October price lows and began what is now open to interpretation.
I see two possibilities:
FIRST, Wave 4 has completed with an ABC pattern into $130 and Wave 5 has also completed, forming a complete small-scale5-wave fractal move down into the final $125.00 level in late November.If that’s the case, then Waves 4 and 5 are already complete, with the 5th wave extending ever so slightly beyond that of Wave 3 (almost becoming a truncation).Notice also that there are multiple positive momentum divergences setting up which hints that this *might* be the case.Also price is breaking above the key 20 day EMA… but that same structure occurred in Wave 2 which brings us to the second possibility.
SECOND, the entire flat-line move - almost like a rectangle - is actually Wave 4 and the recent move to $130 is actually part of a complex corrective wave.This view would be invalidated should price continue to move into the territory of the larger scale Wave 1 which terminated at $140.00.We would abandon this view if that happened.
What are the implications of these scenarios?
If the first scenario is correct, then we’ve completed a full five-wave impulse down which is part of the larger corrective A wave on the Weekly chart, and we could then expect the $125 level to be a bottom, and that the Euro would likely be moving higher in the short-term (and the US Dollar moving lower while commodities might be moving higher).This view would be proved wrong should price take out the $125.00 level.
If the second scenario is correct (that we are in corrective wave 4 and Wave 5 down is yet to come), then we would expect price to swing back down and take out the $125 level to make new lows into Wave 5, which implies that the Dollar will strengthen and commodities will continue to weaken.
Until proven otherwise, I am inclined to support the first interpretation, but I leave this post open for you to share your thoughts and insights into Elliott Counts, indicator signals you’re seeing, or other structural points you’re analyzing.
What are your thoughts?
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Examining Tuesday’s Fluid Intraday Swings
November 26th, 2008 by Corey Rosenbloom
Tuesday was an extremely fluid or rhythmically flowing day in the US Equity Indexes.Let’s view this price action through the DIA including a gap-fade with two bear-flags (Dow Jones ETF) and see what trade set-ups and structure we observed during the trading day.
DIA 5-min Chart:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci18.png
The morning began with a large-scale gap (though that definition is narrowing in this environment) which still had a bit higher to go until price met resistance into the falling 20 day EMA (not shown) which was sufficient to contain price and create a reversal.Price then moved swiftly to fill the gap, but most traders who attempted a gap-fade early on likely experienced a stop-loss due to the early upward action.Nevertheless, the day will be recorded as a ’successful gap fill’.
Price moved into new lows on the day, breaking yesterday’s close slightly before finding key support at that level (after forming a new momentum low) and retracing 50.% of the prior impulse down to form a possible bear flag.Notice the two dojis followed by a shooting star candle at the 50% Fibonacci retracement (grid not drawn) which signaled a high-probability, low-risk (high reward) short entry to target potentially a “measured move” of the prior impulse down (about $2.25 in the DIA).
In a demonstration of the ‘fractal’ nature of the market, look closely at the “measured move” portion of the larger bear flag from 10:00am to 1:00pm.The final impulse into 1:00pm also had a miniature bear flag as well, which set up into confluence EMA resistance before hitting its target as well, which was also the target of the larger impulse.Study this closer - very interesting.
By this point, we were observing a positive momentum divergence which hinted that selling pressure was likely decreasing and indeed at the price projection target from the bear flag (achieved), a nice counter-rally materialized into confluence EMA resistance.Price then swung cleanly back down actually making a new low on the day on two very important structural notes:
First, price completed a triple-swing momentum divergence, which almost is like igniting a fire or perhaps compressing a string to its breaking point.
Second, on the new lows on the day, price formed a strong reversal candle - a powerful hammer - which, when combined with the triple-swing divergence, hinted quite strongly that odds were greater for an upside move than a downside one, leading you to place a stop beneath the $82.75 lows and perhaps play for a large price move up.
We got the price move up quickly, and as price paused to retrace - allowing a second-entry - price found its way to major confluence support via the 20 and 50 EMA as well as support from yesterday’s close.That was also a high-probability, low-risk trade set-up (idea).Ultimately, price did not close on the highs of the day, but day traders many times exit positions at the close.
With that being said, let’s overlay a potential Elliott Wave impulse count over price to see if that would have added additional probability or structure to the trading day.
DIA 5-min Possible Elliott Wave Moves:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci26.png
We could even call this a sort of ending diagonal or compression wave, since Wave 1 was the largest with Wave 3 being shorter than W1 and Wave 5 (which was almost a truncation) being shorter than Wave 3.Each wave subdivided into smaller fractal waves.
I’ve found that trying to keep Elliott counts during the day to be helpful, though it requires a good understanding of Elliott and quick reflexes and the ability to adjust counts if need be.It also helps to view Elliott analysis as analyzing probabilities of what might NOT happen as opposed to what WILL happen.
To me, it adds an extra layer of probability, meaning if I observe a momentum divergence into support, that’s usually enough to trigger a trade entry, but it can be helpful to observe if that set-up might be part of an Elliott structure which can add just a little ’something extra’ to the confidence level.
That being said, yesterday’s price action was a good example of many concepts, and it would be wise to take your own chart and annotate the day’s action in terms of where you deemed the ‘ideal trade set-ups’ or price structure to be.
The more practice you get, odds are the better you’ll be at seeing these patterns in real time, and more importantly, acting upon them.
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Reversal in the US Dollar Index Underway
November 25th, 2008 by Corey Rosenbloom
An interesting potential reversal is underway in the US Dollar Index, which could give a boost to commodity prices in the short term.Let’s look at this development, and also a potentially complete Elliott Wave Impulse graph of the Dollar Index.
Dollar Index Daily:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci16.png:
The US Dollar Index has surged steadily from its April bottom to a peak of $88.00 earlier in November.Price is now forming complex momentum divergences and potentially has completed a full Elliott Wave Impulse to the upside.
Notice how the key 20 and 50 day EMAs have contained price movement and served both as support and as potential low-risk entries into a moving trend.The rising 20 day EMA has been broken on a closing basis officially today, so the structure could be changing and we need to be aware of this shift.
The next logical ‘test’ or magnet zone price will likely reach is the $84.00 level, which represents the rising 50 day EMA.Failing this level - which may be more likely than not - price would fall further, perhaps to test the $80.00 level which represented the September swing high (old resistance becomes new support).
Also, I wanted to highlight the complex divergence pattern in the 3/10 momentum oscillator.It appears that the oscillator (focus only on the black line) has formed a sort of head and shoulders pattern underneath price, which could hint at further weakness to come.Regardless of this complex interpretation, one can see - provided you look at the red arrow - that the most recent price high into $88.000 has formed a significant negative momentum divergence that is currently unwinding with declining price.
Combine this fact with the apperance of positive momentum divergences on various commodities (crude oil included), and we could have a significant cross-market shift underway which requires your further attention and analysis.
Let’s take a look at a possible Elliott Wave Analysis of the US Dollar Index (Daily Chart).
Dollar Index Possible Elliott Wave Count:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci25.png
Also, notice how momentum divergences play into the Elliott count.Oftentimes, negative momentum divergences occur in 5th Waves, which is a further sign of weakness (and non-confirmation of higher prices).
That being said, Wave 1 was a rather complex ‘bottoming’ wave that I highlighed in the past (of course I didn’t know it was Wave 1 then) as having multiple swing divergences, and it appeared that momentum was building to the upside.
Price then formed a rather standard Wave 2 correction becfore bottoming in July, slighly higher than the April lows, which also locked in a ‘higher low’ in terms of price structure.
The uptrend was officially confirmed as price broke above its June high, having taken out the most recent swing high along with forming a higher low - this was your highest probability entry and created what I like to call the “Sweet Spot” structural trade.This structure formed the base of the Third Wave Impulse up to September highs, which also created a negative momentum divergence.
Wave 4 was a rather sharp (steep) ‘abc’ corrective wave down to a $76.00 level price low.
Price then topped the $80 level, which confirmed we were likely in the structural Wave 5, which itself sub-divided into a (relatively) clean five-wave impulse before forming the current negative momentum divergence and potential ‘topping’ pattern we see now.
Continue to study this with your own interpretation, but be alert that a potential shift could be occurring quickly.
Join the Market Club for additional analysis, videos, education, signals, and commentary, particularly on FOREX and the US Dollar, as well as other commodities.
Corey Rosenbloom
Afraid to Trade.com
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Extreme Volatility in Leveraged SKF
November 25th, 2008 by Corey Rosenbloom
During the Financial Crisis of 2008, the Ultra-short (two times leveraged) Financial ETF - symbol SKF - has generated a grand profit for some traders.However, such grand profits are not without extreme risk, as we saw in the recent three-day 50% slide in the ETF.Let’s look at this development and add a little reality to trading leveraged funds.
SKF (Ultra-Short Financials) Daily:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci14.png
Ahh, the beauty (and curse) of leveraged funds.For each corresponding 5% move down in the Financial sector (XLF), we would expect to see a 10% move UP in the ultra-short (2x leveraged) SKF.But what happens when the Financial Sector (XLF) rallies 25% in two days?Absolute disaster for investors in SKF.
There was a massive sell-off in Financial stocks throughout November as economic uncertainties continued, but we’ve seen concerted efforts with the New Administration as well as the current Treasury and Fed officials attempting to reassure shaky markets.
As such, Financial Stocks - such as Citigroup especially (C) - have rallied quite nicely.
Of course, with every bit of good news in the market, there is the ‘other side’ of the trade, and in this case those who were short financial companies - or long the SKF (inverse fund) - bore the brunt of the last couple of days of the market rally.
SKF just fell from a peak of $300 per share last Friday to (as of today’s) an intraday low of $152 for a 50% decline in just under three days’ time.
Let’s zoom in to the 30-minute chart to see this development a little closer.
SKF (Ultra-Short Financials) 30-min chart
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci23.png
I’m showing a few positive and negative momentum divergences which set-up throughout the course of part of this rally in SKF which was finished with a clear negative divergence going into Friday’s action.There’s currently a positive divergence setting up which could lead to a challenge of the $180 or perhaps $190 area, but let’s take that day-by-day to see how it officially plays out.
For a bit of fun and practice, I wanted to share my interpretation of a possible completed Elliott Wave impulse - complete with each wave broken down into fractal waves - of the move throughout November in SKF.
Complete Elliott Wave Impulse with Fractals:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci15.png
This is a near text-book Elliott pattern (in my humble interpretation) with each fractal wave obeying the main Elliott principles as well.
Wave 1 was extended in the impulse with Wave 3 being roughly equal to Wave 1.Wave 5 was the shortest in this case.
Remember that with great reward comes (or accompanies) great risk, and though you can make money very quickly with inverse or leveraged inverse funds when the Financial sector is selling off, you can lose it just as quickly (or - in this case, far faster) when price reverses and you don’t honor your stops or money management parameters.
Corey Rosenbloom
Afraid to Trade.com
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Large Scale Fibonacci in the Dow Jones
November 24th, 2008 by Corey Rosenbloom
I wanted to thank a couple of readers who brought to my attention the Fibonacci retracement grid from 1975 to the 2007 highs in the Dow Jones Industrial Average which recently has interesting if not outright actionable information regarding the current structure and possible large-scale inflection point (support) we just tested.Let’s look at this development.
Dow Jones Industrial Average Monthly chart from 1975:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci13.png
Click on the images for larger than normal grids.
From the 568 low in 1975 to the 14,200 high in 2007, we get the resultant Fibonacci retracement grid if drawn from the highs to the lows.
From this, we’re able to see the significance of the 7,382 price level, which contained the 1998 “Asian Contagion” market crash as well as three successful tests (with the actual low breaking the price just slightly) during the 2001-2003 bear market, and recently a (currently) successful test of the level last week.
Let’s zoom in to see these developments in a more compressed chart-scale.
Dow Jones Industrial Average Monthly chart from 1996:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci22.png
With the exception of an intra-month “nip” below 7,382, that level has held like a rock each time price tested it.Thus, from a technical perspective, we cannot underscore how important it is that the 7,382 level held (actually 7,449) from a chartist’s perspective.
Coincidence?That’s the largest argument against Fibonacci principles, but regardless, the level has provided support multiple times which - in and of itself - makes the index level quite significant and should not be ignored from a trader’s or an investor’s perspective.
What are the possible implications from this (currently) successful test?
Again, use your own analysis going forward, but it could mean at least a short-term if not intermediate term bottom in the market, should this level indeed be so significant.It also means we have an extremely favorable reward to risk ratio from a swing to position trader’s perspective to place a stop beneath this level and ride a potential counter-trend wave up to the 10,000 or 11,000 level at the most.
It most likely means that any shorts need to cover if they have not done so already (Friday and today have been brutal for the shorts, and heaven-sent for the bulls).
What if we break these levels?Again, trading is not about foreknowledge, but more about managing risk relative to potential reward - and finding high-probability ‘windows’ of opportunity amidst a sea of seeming randomness.
If we break these levels, look for the next downside target to be Dow 6,000.But that’s… a whole other story.
Corey
Afraid to Trade.com
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Is Gold Set to Rise?
November 24th, 2008 by Corey Rosenbloom
Recently, gold prices broke out of a month-long consolidation phase which should send us on a countertrend rally to the upside.Let’s see this potential devleopment and where might some targets be set.
Gold Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci12.png
Price formed a swing high near $980.00 in July before falling $300.00 per ounce to a swing intraday low of $680 in late October.From there, price formed a consolidation pattern (a type of triangle) and broke above both the upper trendline and the falling 50 day EMA - both significant developments worthy of your attention and analysis.
Keep in mind that the broader trend is still down, so let’s not expect any sudden bullish miracles.To change the tren back to up, price would have to cleanly overcome the $940.00 most recent swing high (resistance) and to add even higher probability of a reversal, we’d also need to break above $980 to $1,000 per ounce to fuel a large-scale bullish fire.
Until then, we need to consider any rallies as technical ‘counter-trend’ rallies with initial Fibonacci retracement targets.
Adam Hewison of the Market Club released a video I wanted to share with you concerning the current structure in gold, including the most recent ‘trade triangle buy signal’ and Fibonacci retracement grids for potential price targets.
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci21.png
Entitled, “Is Gold the Last Store of Value,” Hewison describes these developments and writes:
It has been a difficult time for gold bugs for the past two months as gold has been trapped in a broad trading range which made it seem insulated and immune to all of the financial chaos around it. The action on Friday the 21st put all of that in action to rest as gold soared to trade over the $800 in a matter of hours. This may be the move we’ve been looking for and coming from a two-month base, it seems large enough to propel this market higher.
I have just finished a new video on gold that goes into some depth and shows you potential upside targets for this market. The video can be played on any computer and does not need any special plug-in. It is available free of charge from MarketClub as part of our ongoing educational outreach program. Our goal is to help traders improved the timing and trade selection in a scientific way using tools that are real world tested and have stood the test of time.
Let’s continue to see if this structure continues to play out, and how far it plays, and what that might mean for the broader markets (commodities as a whole, especially oil, have traded roughly in tandem - to the downside - with the US equity markets).
Corey Rosenbloom
Afraid to Trade.com
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A Look at the Devastation in US Steel X
November 23rd, 2008 by Corey Rosenbloom
The commodity collapse or demand destruction in prices has hurt commodities across the board, including companies that rely on them.I wanted to take a special look at former high-flyer US Steel (X) to show the boom and bust and underscore the volatility in commodity-based stocks.
US Steel (X) Monthly:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci11.png
I added an Elliott Wave count to show the completed five-wave large-scale impulse which terminated just shy of $200.00 per share in mid-2008.The initial impulse began in early 2003 at the stock market bottom.Of course, I’ve rarely seen a corrective Wave A flush this deep, but these certainly are unique times across all markets.
That being said, price began its ascension slowly from the $10.00 per share level in 2003 up to a record peak just shy of $200.00, yielding a potential (though I’m sure few if any investors achieved it) 2,000% return in five years.Don’t get too excited - virtually every penny of the wealth generated to investors in this stock was obliterated in 5 month’s time with price plunging 90% from June to November, 2008.It was a shocking and my guess wholly unexpected move for such a well-established company.
That being said, let’s zoom a little closer to the weekly chart for additional clues.
US Steel (X) Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci2.png
Though the chart cannot capture the entire move due to the scaling, we have the largest part of the move which took price in mid-2005 from just above $30 per share to the $190 price peak in June 2008.One thing that remained consistent throughout the entire price move was that price structurally stayed above the key 20 and 50 week EMAs with the exception of four quick breaks throughout the price rise.It’s generally best to view these EMAs as support in a rising trend and to help interpret the price structure (including how far the EMAs are from each other, what their orientation is, etc).
These quick rinses beneath these averages would have triggered stop-loss orders which would have been frustrating, but nothing is perfect in market analysis.
Price formed a compact bull flag pattern throughout most of 2006 which found support at the rising 50 week EMA before breaking above the upper trendline to complete (actually exceed) a measured move (of the prior impulse) before finding resistance about the $120 level and forming yet another large-scale consolidation pattern which was a sort of ascending triangle pattern which triggered a powerful buy (entry) as price broke above the $120.00 per share resistance.The target would have been the height of the triangle added to the break-out point which was roughly $50.00 (added to the $120.00 breakout), giving us a target of $170.00.
Price ultimately exceeded this target but then found difficulty climbing above the $190.00 per share level and as fears (expectations?) of a global recession took hold, “Demand Destruction” took down commodity prices across the board, bringing commodity-based stocks with them, including US Steel.
US Steel gives us a founding to build our analysis in terms of a meteoric rise followed by a boulder-like fall.It also teaches the accumulation/distribution principles in terms of the four-stage process (from accumulation to realization to ‘euphoria’ to wide-scale distribution).
It also teaches us that “even strong stocks can suffer greatly” and, of course, not to attempt catching falling knives, no matter how great we think the company is or thinking “gosh, it just can’t go any lower.”
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Interesting Fibonacci Development
November 22nd, 2008 by Corey Rosenbloom
I was doing some work with Fibonacci retracements this afternoon and found a particularly interesting confluence I thought I’d share with you.It’s on the Dow Jones and it involves the current low and how it almost mysteriously fits within the current structure.
Dow Jones Weekly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/112208-2335-fibonacci1.png
First, let me start by saying this is not the ‘classical’ way to use Fibonacci, but stay with me for a minute.
Constance Brown in her book “www.amazon.com%2FTechnical-Analysis-Trading-Professional-Constance%2Fdp%2F0070120625%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1227397516%26sr%3D8-2&tag=afrtotra-20&linkCode=ur2&camp=1789&creative=9325]Technical Analysis for the Trading Professional” describes a method of drawing current Fibonacci grids and using them as projections, and to look backwards to ‘eyeball’ if the grid is containing price swings relatively accurately or not (I recommend this book but some of the concepts are quite complex, and there’s no way I could adequately explain her Fibonacci method here).
That being said, the ‘normal’ use of Fibonacci was doing what I was attempting, which is to start with a swing high (14,198) then drag to a swing low (7,450) and then draw the Fibonacci grid upwards to figure out where a possible up-swing move could run into resistance (or for setting price targets).That’s what the blue numbers actually represent, and that’s the most common interpretation you’ll get for a Fibonacci grid and you can leave it at that before moving on to the ‘eerie’ portion.
However, what’s fascinating (and potentially monumental) is that the entire Fibonacci grid represents the perfect 38.2% retracement which stopped the January down-move, and the 50% retracement which stopped the July move, both to the near exact Index Level which I find endlessly eerie.
Connie Brown describes using this exact technique to project price targets using a standard grid.Meaning, say in January, you could have extended the grid to make it look like this (of course there would be no price action to the right) to have received the same grid.Actually, it would have been a better practice to do so in July (lows) when you could have seen the price terminate at the 38.2% retracement as well at the 50.0% retracement and then drawn the grid down to the 7,450 lows for a target.Now, that’s an extreme (mis)use of Fibonacci, but I am quite intrigued that the current Dow lows forms this completed structure.
What might this mean?I’d recommend reading Mrs. Brown’s book for more information, but if her method is correct (or at least I’m interpreting it correctly), then this recent Dow price low could be part of the larger structure that will hold in at least a short-term bottom here, which is confirmed by past Fibonacci price action.
Even if you don’t want to take it that far, you have to admit that it’s a little strange that the January and July price lows coincide exactly with the respected large-scale Fibonacci relationships of the broader down-impulse.
If anything, it’s just a neat little pattern to help try to add some potential structure to this wild recent market action - if that indeed can be done.
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Divergences and a Potential Completed Elliott Pattern with Projection
November 21st, 2008 by Corey Rosenbloom
Wow - what another surprise today’s final hour of trading brought us.I’m sensing a pattern developing here.Let’s see the 15-minute chart structure and observe the divergence that preceded the action, and then see if we can count a completed 5 wave impulse - complete with mini-fractal waves - of the final potential wave of the devastating Wave 3 down we just experienced.
DIA 15-min (divergence):
http://blog.afraidtotrade.com/wp-content/uploads/112108-1744-blog12.png
I didn’t want to spend too much time on this chart, other than to point out the major short-sell signal (two bearish dojis at key EMA resistance) mid-day Thursday which preceded a stunning collapse in the market that pushed us to new lows on a double-swing momentum divergence that preceded today’s end of day rally.Remember the goal here is to build your pattern recognition skills so that you can perceive and act on developing price structures in real-time.
The new lows set this morning occurred on a positive momentum divergence - it was a “flat-line” divergence which carries less ‘weight’ than a strict positive divergence, but it was a clue nonetheless.
The more powerful signal came as price came into new lows about the 2:00pm hour which clearly (and unmistakably) formed a positive swing divergence just prior to price skyrocketing into new highs on the day thanks to some end-of-day good news and oversold technical conditions.
I actually wanted to draw your attention mainly to the potential that the final fractal wave of the current large-scale Wave 3 (which has devastated investors endlessly) might be ending, meaning we could (I underscore *could*) be ready to begin a corrective Wave 4 back to the upside which would certainly be welcome news to battered investors.
DIA 60-min (focus on Elliott Wave 5):
http://blog.afraidtotrade.com/wp-content/uploads/112108-1744-blog21.png
Check out my earlier posts “Elliott on the Dow” and “Elliott on the S&P 500” for the larger, weekly (and even monthly) structures.
That being said, let’s focus on the current fractal wave 5 down.It appears now (at the close) to have completed a full, five-impulse Elliott pattern, which - if official - would finally put an end to the selling short-term and end this most vicious large-scale Wave 3 (perhaps of a large-scale corrective ABC pattern) for the time being.
Wave 1 took us from $96.00 to just above $86.00 which was painful.
Wave 2 formed a typical and straightforward “ABC” Corrective pattern that retraced just over the 38.2% Fibonacci retracement of Wave 1.
Wave 3 was brutal, as most third waves are.Price formed a complete fractal 5-wave impulse, though a questionable one - from $91.00 to $80.00 which was a near “measured move” or 100% projection of the prior Wave 1.
Wave 4 was quite violent and puzzling, but that fits in with Elliott principles because Wave 2 was calmer and less ’severe.’Applying the guideline of alternation (if Wave 2 is flat/calm, then Wave 4 will be sharp/violent), we could argue that Elliott’s principles played out in real time yet again for us, with the only questionable action being that Wave 4 slightly nipped into the price territory of Wave 1… but also keep in mind this whole structure is a fractal wave.Wave A was steep and stunning; B retraced a near exact 38.2% retracement of Wave A; Wave C stopped as wave A did at the falling 200 period SMA.
Wave 5 most likely has just terminated into new price lows (and on a divergence as well), having formed its own 5-wave Elliott impulse as you see above.
Consult your own analysis before making trading decisions, but it *could* be a low-risk trade idea to buy in for a potential large scale swing trade while placing a stop beneath the $75.00 level.The ultimate Wave 4 price target *could* take us all the way to $100.00 on the DIA or beyond (10,000 Dow). That’s about a $20.00 target with a $5.00 stop or 4 to 1 reward to risk.
Take it day-by-day, but realize that sometimes price structures offers irresistible risk/reward conditions, knowing that the ‘edge’ will bear out long-term if you properly manage your trades in terms of price structure and risk-reward.
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Just How Low Can the Dow Jones Go
November 21st, 2008 by Corey Rosenbloom
This trading week so far has been an absolute disaster for long-only investors.Let’s take a look at the current Dow Jones structure and see if we can pick up any clues on what might be in store next.
Dow Jones Monthly:
http://blog.afraidtotrade.com/wp-content/uploads/112108-1744-blog11.png
As of this writing, there’s still an hour left in this trading week but I wanted to give a quick update.It looks so far like we’ll get a higher close today but anything can happen in the final hour (UPDATE - should have waited that extra hour before posting - the Dow rallied 500 points into the close).
The main thing to take away from this chart - beyond how far and fast we’ve fallen - is that the monthly 20 and 50 EMAs are completing a bearish ‘death cross’ of sorts, a similar occurrence as what happened in late 2003.It didn’t pay then to get aggressively, manically short the market at that seemingly most bearish development then, but past may not always be prologue especially in this environment.
From a percentage basis, the Dow Jones actually held up quite well (showed relative strength) against the S&P 500 and of course the NASDAQ during the 2000-2003 bear market.Unfortunately, all three major US Equity Indexes are being slammed roughly equally in this environment.
Notice also that the MACD oscillator is registering a new momentum low near -2,000, meaning the 3 and 10 monthly EMA differential is negative 2,000 “Dow Points.”That’s stunning and is a new numerical low not seen in the Dow’s history.
Let’s drop the perspective to the Weekly chart where I can discuss a potential Elliott Wave pattern that is near identical to that of the S&P 500.
Dow Jones Weekly (with Elliott Count):
http://blog.afraidtotrade.com/wp-content/uploads/112108-1744-blog2.png
For more detailed analysis, see my similar post “Possible Elliott Wave Interpretation for the S&P 500” which shows a near mirror structure.
It looks like we’re completing (or in) sub-wave 5 of the particularly bloody Wave 3 Down which all may be part of a larger ABC correction (on the Monthly charts).If this is the case, then we could expect a Wave 4 to take us to around Dow 10,000 into the new year before heading lower - that is IF that is the proper Elliott interpretation.
Many 5th waves (in this case a fractal 5th wave) form on positive momentum divergences, which is what we may be seeing develop here.Of course, I need not say what could occur after a possible Wave 4 completes itself perhaps early to mid 2009 but we’ll take the market week by week and day by day until then.
Adam Hewison of the Market Club released a video this morning that I wanted to share with you - in fact, it inspired this post.Adam’s video “How Low can the Dow go?” discusses current ‘trade triangle’ signals, commentary, and a possible projection of which to be aware. Market Club members receive such videos and more as they are released.
I wanted to share a little bit of “Hewison wisdom:”
“An investor’s goal should be to capture 70% of a move. The middle is the sweet spot, and if you make enough in the middle then who cares about the tops and bottoms. Forget picking up the 15% on the top and 15% on the bottom, it doesn’t work consistently to use it as a trading strategy.”
“The key in trading is not to get out at the top, or in at the bottom. Anyone who tells you to do that isn’t playing smart in the markets, and most likely claims that they are holding the ‘holy grail’ of trading.”
I can’t tell you how many times I’ve been disgusted with the “TV People” constantly asking each other, “So, are we at the bottom?!”But that’s a whole other story.
Capital Preservation must be your #1 goal in this environment.
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Free Live Streaming Video from the Vegas Traders Expo
November 21st, 2008 by Corey Rosenbloom
I just discovered this link and had to pass it on to you.The MoneyShow.com is featuring dozens of select presentations via webinars from speakers at the Las Vegas Trader’s Expo.
Specifically, the link is their “Upcoming Webcast” page off the homepage which offers you to participate or view in a chat-room while listening to the presentation and watching an accompanying video, usually of the slideshow from the speaker(s).
http://blog.afraidtotrade.com/wp-content/uploads/112108-1744-blog1.png
Thursday featured a couple of “live trading challenges” as well as some excellent presentations (which, I believe, will be archived for future viewing) and the videos run through Friday and Saturday.You’ll need to register to see the videos and to create your ‘viewing schedule’ which is accessible in your ‘videos’ account which almost creates your own iteneriary of remaining shows.
There’s no need to travel to Vegas to get good trader education!That’s not actually true, having attended a few previous trader’s expos.These are great venues to meet other traders, speak with professionals, see new industry software/products, and have a little fun in Vegas.The conferences are well-organized and draw thousands of traders from all experience levels across all markets.The conferences themseleves are free but offer a good deal of promotional material amidst the shining gems of trading wisdom/education, so you have to be selective time-wise (at any given hour period, up to ten simultaneous presentations can be occurring so you need to plan very well).
The next Expo will be in New York in February and you can access information there on the New York Trader’s Expo page.
Should the market survive and there be any traders left (that’s a joke), the Summer Expo will be in Los Angeles in June.
If you can find some time this afternoon or evening, check out some of these webinars and participate in the chats if they’re available.
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Inside Today’s DIA Trading Patterns
November 20th, 2008 by Corey Rosenbloom
What a day.Let’s take the DIA (Dow Jones ETF) trading structure on the 5-minute and 30-minute charts to see what insights we might can learn from any pattern recognition examples that might emerge on such a historic day.
DIA 5-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/111908-1613-index13.png
The first pattern that jumps off the chart at you is what I call the “Measured Move” pattern, or more technically the “A to B equals C to D” structure - keep in mind these are not Elliott or any other special kind of chart notation.
A Measured Move pattern is very similar to a ‘flag’ pattern but the measured move does not take prior trend as much into consideration.It’s based on the principle of ‘equality’ or equal-impulse moves and this basic figure is used in many complex strategies, including some work in Gann.
That being said notice the A to B move was roughly $3.00 from bottom to peak and we had a slanted movement upwards.Price retraced beyond the standard Fibonacci zones before finding support and swinging higher into the afternoon highs just above $82.00, which was a near exact $3.00 impulse swing off the $79.00 zone, completing a ‘measured move’ in the C to D swing.The B to C ‘connector’ swing would be similar to the ‘flag’ portion of a bull or bear flag, though the rules are more stringent for actual flags.
Once price broke above the down-sloping trendline in the B to C swing, you could have placed a stop beneath the perceived “C” and played for an equal or measured move near $82 off the new momentum high.
Other than that, we had a gap fill that will go down as a complete “gap fill day” but closer inspection shows that virtually any sort of ‘gap fill with a stop-loss’ strategy would have been triggered, creating a ’stop-loss’ situation taking you out of the eventual fade.
Price really didn’t ‘respect’ either the 20 or 50 period EMA all that much throughout the day as the averages converged around the $80.50 level which represented yesterday’s close.Keep in mind that during the 10:00am EST swing, the S&P 500 broke the 2002 lows which triggered a few major headlines but resulted in a (puzzling to many) successful bounce off these levels.
Ultimately, selling pressure overcame buying pressure, confusing the confused (I guess - is that possible?) as price broke to new lows on the day.The afternoon selling was - to many - unexpected, sudden, and unrelenting (there really wasn’t a clean pull-back retracement to enter cleanly).It was a rough day that will go down in history as the day the S&P 500 officially broke to fresh 12-year lows, having broken beneath the 2002 intraday bear market low near 768.
DIA 30-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/111908-1613-index22.png
The 30-minute chart reveals an interesting pattern I wanted to show.Notice that as the noon hour and intraday highs approached (on the 5-minute chart), price actually formed a strong, long-tail tombstone doji candle at the 20 period EMA resistance - a major short-sell signal.
Ever since the negative divergence that set-up at the 200 period SMA, price has been steadily down-trending, forming lower lows and lower highs while the EMA orientation has been in the most ‘bearish’ position possible.I placed small, red arrows at each point the 50 (or 20) period EMA served as key resistance, or a good opportunity to establish a new short-sell position.Also, the momentum oscillator registered a fresh new momentum low into the close.
Hale Stewart of the Bonddad Blog did probably the best job I’ve seen so far on explaining the significance of the day in his post simply titled “Today’s Market.”I really couldn’t have said it better myself:“There nothing good on these charts; all the technical signals are bad.”
The “Chart Swing Trader” also posted a good summary from a broader basis than the charts in the “State of the Market - 11/20/08″ post.He writes, “Trying to catch a bottom here is likely going to prove very difficult. hese declines can last much longer and be much more severe than anyone expects. ays like today are the worst. The morning bounce probably rose some hopes, but then those hopes were slowly dashed. And the type of selling that occured - the slow, deliberate selling - is very frustrating to watch….
In a conference I attended with her, Linda Raschke called conditions that occurred in today’s close as the “Slow Oozing Trend” or “Insidious Creeping Trend” - the type that dashes both sides of the market.In the case of a down-move like today, longs are saying “Well, I’ll hold just a little longer until we get a counter-swing up and then I’ll sell” while shorts are saying “I’ll stay out just until we get a good up-swing then I’ll get short.”The problem is, the upswing never comes and the downtrend is continued by the “slow ooze” of buyers throwing in the towel with shorts standing aside or saying “Gosh, I can’t take it any longer - I have to get short now.”We’re conditioned to wait for retracements to enter or exit and just can’t justify pulling the trading trigger on a new low.It beats everyone up.
Don’t beat yourself up if you lost money today.I keep saying it but it continues to be true:Capital Preservation is Your #1 Goal!
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A Look Back at the 2002 Bear Market Bottom
November 20th, 2008 by Corey Rosenbloom
With the US Equity market breaking to fresh 2008 lows, challenging and breaking support levels formed in 2002, let’s take a look at how the actual bottoming process formed in the 2000 - 2003 bear market.
S&P 500 Bear Market from 2000 to 2003 (Weekly):
http://blog.afraidtotrade.com/wp-content/uploads/111908-1613-index21.png
The bull market peak occurred at 1,530 just before October 2000 before the S&P 500 lost a full 50% to bottom in October 2002, almost exactly two years later.
This chart captures the entirety of the bear market during the “technology bubble burst” (the same time at which the NASDAQ market lost 80%).You can see that the bottom was not a magical, one time event, and clearly no one ‘rang a bell’ or anything at the bottom.
I would argue the best point for re-entering the market came around 950 when price broke the 20 and 50 period EMAs to the upside after forming a triple-bottom style pattern about the 780 index level.I would suggest you do the same in the current environment - wait for positive price movement above key averages before re-entering.
Notice also that the bottom was formed on a large-scale and small-scale positive momentum divergence.The large-swing divergence occurred as price made the “September 11th” low at 944 with a new momentum low (remember, ‘momentum precedes price’) and then as price formed the 775 low in July ‘02, the momentum oscillator registered a marginal higher low.As price breached the 775 low to form the 768 low in October, it was clear that a positive momentum divergence had formed, which was the ultimate bear market bottom.
As price came back to stop at the 788 index level - only slightly higher than the previous low - the momentum oscillator registered a clear higher low, completing a multi-swing positive divergence that took over a year to build into the price structure.
Let’s see the actual bottom a little closer.
S&P 500 Bear Market zoomed in (Weekly):
http://blog.afraidtotrade.com/wp-content/uploads/111908-1613-index12.png
StockCharts.com registers the actual low at 768 while I just heard on CNBC that the commentators were proclaiming the actual low to be at 775 so there’s a slight discrepancy there.
That aside, notice the obvious positive momentum divergence going into the 768 price low.Price then returned to test the 20 week EMA before failing at this level and swinging back down to find support at the 788 level.Until we formed this higher low at 768, there was absolutely no reason to get bullish - the positive momentum divergence by itself is never enough to confirm a market turn.
Price then formed its first “higher low” and then swung back up to break the 20 and 50 week EMA while forming a “higher high” which confirmed as a market re-entry signal (having formed a triple bottom, multi-swing positive momentum divergence, breaking above key EMAs, and completing a ‘pure price’ trend reversal).
One notable yet significant difference in the previous bear market and the current bear market is that it took roughly 3 years for the S&P 500 to fall from 1,530 to a bottom near 770 for a 50% drop.We peaked in October 2007 above 1,550 and have already tested 775 for a 50% decline in 1 year and one month.I cannot underscore how significant that fact is.More insidiously, there are no major technical signs (like we saw in 2002/2003)that we’re at a bottom yet.
Take a moment to pull up these charts and apply your own analysis and indicators to see how they reacted during the 2000 - 2003 market and see if you can draw possible parallels to the current environment.
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Midweek SP 500 Overview
November 19th, 2008 by Corey Rosenbloom
Now that today’s close is firmly in place, we have a potential game-changer in terms of the technical structure.The monthly chart also shows a major bearish developmentLet’s look at the current S&P 500 chart closely to see what this means.
S&P 500 Daily:
http://blog.afraidtotrade.com/wp-content/uploads/111908-1613-index11.png
Not a whole lot has changed on the daily structure, provided you note that today’s price marked a fresh 2008 intraday and closing low at 805 which takes us back to levels not seen at all since 2003.
Price etched out a ‘trend day down’ today which took the form of one of the most bearish ‘candle’ structures possible (open at one extreme, form a long range, close at the opposite extreme).
I don’t want to get too caught up in the bearishness, but note that the new price low is occurring on a multi-swing positive momentum divergence.Still, that doesn’t change the picture drawn by the trend structure and moving average orientations.
I did want to highlight (at least) two major developments on the monthly chart, one of which changes the game completely that you might miss otherwise.
S&P 500 Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/111908-1613-index2.png
First, let me note that the intra-month low is currently 805, which takes us beneath the closing low of the entirety of the 2000-2003 bear market.That monthly closing low was 815.Now, the month of November is not over yet (though we’re down 16% already - a ghastly figure) and we could still hold that closing low, but if we don’t, you need to pay close attention to what that means.Look to see if we end November above or below 815.Also, look to see if we breach the absolute price low of the prior bear market at 775.Keep in mind that value IS a price target eventually so let’s see how price reacts to those levels.
Second, the momentum oscillator - the difference in a 3 and 10 month EMA - (a standard MACD) is registering a significant new momentum low at -200.That means that there is a -200 point spread between the 3 and 10 monthly EMAs - that’s huge and sets a record price (indicator) low.
Third and perhaps most importantly, look at the orientation of the 20 and 50 month exponential moving averages - they have formed a bear (some say “death”) cross.I want to make two sub-points here.First, that is a sign of major bearishness, as price has moved a great distance to have the shorter 20 month EMA cross beneath the longer 50 month EMA.Interestingly enough, moving average systems are triggering fresh ’short-sell’ positions, but moving average systems far lag the price and I find little to no value using them on long-term charts - that’s my opinion though.
Second, if you look closely - I’ll try to sprinkle a bit of bullish news despite everything to the contrary - the last time the 20 month EMA crossed beneath the 50 month EMA was roughly mid-2002, about 6 or so months prior to the absolute bottom in the market.If you absolutely want to find bullish news in all this, there it is.Moving averages lag price - sometimes by a good deal - and the last time this structure set-up, we were near a bottom.Of course, price moved from 1,050 to 800 before the bottom was found (after the bear or ‘death’ cross) but eventually the bottom formed.
Keep managing your risk, preserving capital, and staying on top of any new information as it comes in.
The Market Club does a great job of providing daily commentary, charts, videos, signals and the like - be sure to check them out if you have not done so already.
Stay safe and don’t be disheartened.
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Midweek Dow Index Overview
November 19th, 2008 by Corey Rosenbloom
As we near the halfway point in Wednesday’s trading, let’s look at the current Dow Jones Index structure on the daily chart to assess the current technical picture.
Dow Jones Daily:
http://blog.afraidtotrade.com/wp-content/uploads/111908-1613-index1.png
The 8,100 level has held key support five times since October with only two instances of price ‘nipping’ beneath that level.Mid-October brought us the 2008 price low of 7,750 which has currently held, and the lowest closing low has been in late October as well just beneath 8,200.These would no doubt be key levels to watch.Were they to break on a closing basis, there would be no logical support zones near where price is currently.
Price appears to be forming a descending triangle as evident from the steadily declining upper trendline since early November.The height of the triangle is roughly 1,250 points, so a break above 8,500 or beneath 8,100 would set-up respective simple price projection targets as price breaks forth from this current consolidation pattern - that’s not to say we get there immediately however.
The structure of the daily moving averages is in the ‘most bearish orientation possible,’ and notice that the 200 day SMA is steadily declining - that’s not a good sign for buyers.
One good sign is that the momentum oscillator is ‘diverging’ with price and is showing positive momentum as price languishes at the current levels.Note that the last two days (and today’s action so far) have been low-range days which is an interesting contrast to the large, triple-point swings in the Dow we’ve now been accustomed to experiencing.It’s odd when you can call a 100 point Dow day “low-range” relative to the recent past but that’s what it has become.
What’s the take?Odds of holding short might be slightly higher risk than holding long, but during a consolidation pattern, it’s best to wait until a clean break up or down occurs rather than trying to predict the direction of the break.Join in once price breaks its currently narrowing boundaries for a potential expansion move.If you do decide to bet directionally prior to the break, pay close attention to your stop-loss placement just beyond the range - if you’re correct, you’ll likely achieve a low-risk (tight stop) and high-reward (upwards of perhaps 1,000 points or more) move.
Still, the number 1 goal in this environment should be capital preservation.
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Sears Holdings SHLD Steady Price Plunge
November 18th, 2008 by Corey Rosenbloom
Sears Holdings (SHLD) is a large retail stock I tend to follow from time to time, but today I noticed just how far the stock has fallen this year and since 2007.Let’s take a look at the devastation long-term SHLD investors have endured recently.
SHLD Weekly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts110.png
Price reached an all-time high at $190 in April, 2007 before breaking weekly EMAs and switching its trend officially from up to down (lower lows and lower highs) which has not changed as we step into the present new lows beneath $30.00 per share.
It would seem that a counter-trend move up may be likely, but that doesn’t change the pervasive down-trend structure.
A casual look at the weekly chart shows key EMA resistance holding at mostly the 20 week EMA, with the most recent counterswing up taking us to EMA resistance via the falling 50 week average.
One thing I wanted to highlight was the multi-swing positive momentum divergence that continued for almost a year as price continued its journey lower.The divergence was only good enough to give us a move from $70 to $100 per share before the downtrend took over and became the dominant structure.
Price has now made a new momentum low and the divergence pattern has worked its way through price and no longer has any effect at the moment.
One note of possible bullishness is that the volume pattern has declined as if volume is not confirming these new price lows - or at least volume is setting up a potential non-confirmation.Keep an eye on that.
Let’s zoom in to the daily chart.
SHLD Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts24.png
The daily chart shows a few momentum divergence examples along with key EMA tests in terms of how price reacted to these technical ‘nodes.’
The most recent cuonterswing formed on a positive divergence which took price only to the falling 20 EMA before reversing and resuming the dominant downtrend in price.Watch to see if price can form a positive momentum divergence off these levels and if so, it would indicate more risk remains on the short-selling side than the long side - at least in the near time frame.
Sears Holdings (SHLD) helps remind us not to bet against prevailing downtrends and privides a few lessons for us in terms of basic chart analysis.
Update: Andrew Horowitz of the Disciplined Investor site (with excellent weekly Podcasts!) posted his take on Sears and Stock Valuation last year which includes an excerpt from his book which I highly recommend entitled www.amazon.com%2FDisciplined-Investor-Essential-Strategies-Success%2Fdp%2F0978708377%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1227114984%26sr%3D8-1&tag=afrtotra-20&linkCode=ur2&camp=1789&creative=9325]The Disciplined Investor.He was quite precient in his analysis!
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Pivot, Divergence, and Elliott
November 18th, 2008 by Corey Rosenbloom
As we head into the ‘lunch’ period, I wanted to show a fascinating price structure occurrence that led to a couple of high-probability, low risk trading opportunies this morning.It includes a Daily R1 Pivot Point, a negative momentum Divergence, and a possible complete Elliott Wave minor count.Let’s see them in action.
DIA 5-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts19.png
The market actually opened without a gap this morning - fancy that.
Price initially surged to meet confluence resistance via the falling 20 period EMA and the “Daily Pivot” (blue dotted line - autogenerated).Price failed to overcome these levels and then fell but did not make a new low on the day.Notice that had it done so, it would have likely made a major positive momentum divergence.As such, price formed a doji just above support from yesterday’s low (a retest) and headed higher, breaking the two key EMAs only to fail at the upper Bollinger Band before swinging back down.
Price then found support at the 61.8% Fibonacci retracement of the prior Wave 3 before forming a mini-Elliott 5-wave impulse higher which completed the 5th Wave in my chart.Keep in mind that Wave 4 gently entered the price territory of the previous wave 1 so keep that in mind.
Price made new highs on the day on a precarious note - price tested the daily R1 (First Resistance) Pivot (again, auto-generated using yesterday’s price data via TradeStation) on a clear negative momentum divergence.That was a sufficient signal to exit any long position and set-up an aggressive ’scalp’ short which targeted the EMAs.
Price ultimately failed at EMA support and plunged now to new lows on the day.Of interest, the day’s S1 (First Support) pivot - not shown - is near $81.80.We could see a move down temporarily pause there or reverse if a positive momentum divergence develops.
This represents a quick example of how to combine multiple methods into trading decisions throughout the day.
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Jerry Yang Steps Down as Yahoo CEO - With Charts
November 17th, 2008 by Corey Rosenbloom
CNN News just reported that current Yahoo! CEO Jerry Yang will be stepping down and his replacement will be named soon.Let’s review this news and look at the current and past charts of Yahoo stock.
From the CNN article, Yang stated, “”I will continue to focus on global strategy and to do everything I can to help Yahoo realize its full potential and enhance its leading culture of technology and product excellence and innovation,”
After the replacement is named, he will then be known as “Chief Yahoo”.Yang founded Yahoo in 1994 and has grown into the #2 most popular search engine, eclipsed only by rival Google (GOOG).
This transition is not unexpected, and the news was greeted with cheers by some.Technology analyst Rob Enderle declared “The shareholders were ready to pick up pitchforks and torches.If Jerry wasn’t a founder, he already would have been gone months ago.”
Only a few months ago, Microsoft (MSFT) CEO Steve Ballmer offered to buy Yahoo for $33.00 per share, an offer CEO Yang declared as “too cheap” for Yahoo - he demanded at least $37.00 per share, a figure Microsoft was unwilling to pay.Many shareholders were stunned as Yang refused the offer, seeing Yahoo (YHOO) shares surge then plunge… and now shares currently (as of this writing) trade just above $10.00 per share (which will change as we face Tuesday’s market open certainly).
The CNN report hints that Yang’s “tenure as CEO is unlikely to be remembered fondly by shareholders….”Perhaps that is an understatement.
Let’s view the weekly and then daily charts to see the roller coaster ride Yahoo (YHOO) investors have endured recently.
Yahoo (YHOO) Weekly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts18.png
I’m actually going to take off the ‘technical analysis’ hat and focus on the initial Microsoft offer of $31 per share in February 2008 (later raised to $33), Yang’s refusal of this more than generous offer (the stock was trading beneath $20 per share at the time of the offer), and the subsequent (recent) share price plunge as a result of Microsoft (MSFT) withdrawing the offer, and talks with Google failing.
What might have happened had Yang and the board accepted the $33.00 per share deal?Investors and historians might look back and proclaim holding out to be an expensive $4.00 mistake.
The offer was withdrawn in May 2008 and Yahoo stock has never even remotely looked back from those levels near $30.00 per share.
Let’s take a brief look at the damage that has occurred since May 2008.
Yahoo (YHOO) Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts23.png
Bear in mind, technology stocks across the board including Google (GOOG), Apple (AAPL), Baidu (BIDU), Research in Motion (RIMM) and many others have suffered greatly in the 2008 ‘bear market’ declines as the US and global economies deal with recessions.It’s absolutely unfair to attribute all losses in Yahoo stock to Mr. Yang’s decision - I’m being facetious to do so.
Nevertheless, the ‘price picture’ or chart of Yahoo on the daily timeframe is a classic text-book example of a downtrend, with key moving averages serving as overhead resistance and volume accelerating as price continues to move to new lows.
I’d expect a pop in shares as this announcement is discounted into the market on Tuesday, but one can never be certain which way shares will trade on the news.This market has shown many times that classic expetations have been off-base more than a few times as price continued to slide to new lows on various stocks and the broader indexes.
Continue to watch these stocks mentioned above and how they trade on this news - and what the effect (if any) may be on the broader market tomorrow.
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ADX Compression in the DIA
November 17th, 2008 by Corey Rosenbloom
It’s quite rare to get a reading in the ADX (Average Directional Index) of less than 10, but the DIA 5-minute chart is currently showing compression such that the ADX value is 8.77.Let’s look at this and see what it might mean.
DIA 5-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts17.png
In StockCharts, the ADX actually displays the + and - DMI (Directional Movement Indexes) as the green and red lines in the bottom panel indicator.Ignore those for a moment and focus on the average, or the Black Line traditionally known as the ADX.
A Low ADX represents market compression, while a high ADX represents market expansion and is based on the principle “Price alternates between range compression and expansion.”
Traditionally, when the ADX is low, we need to be looking for an expansion move to occur, and also we need to avoid using moving averages for trading decision assistance.Also, we need to eliminate usage of the 3/10 Oscillator because it is giving no discernible reading.I highlighted that to show that you receive no trading signals off the 3/10 either.
I wanted to highlight the current chart with 30 minutes left in the trading day because I wanted to show a screen cap of this action as it was happening and place up a quick comment.
Basically, in these conditions, traders want to stand aside (not trade) but wait for a breakout of consolidation to enter a trade to play for perhaps a large relative target.We don’t know which way price will expand, but we can have our guesses.You might even want to place a bracket order outside the ‘rectangle’ that has formed about the $84 and $85.50 level.Either way, it’s best not to beat yourself up trading within this narrowing range.
Watch this closely into the close.Markets can’t stay ‘balanced’ or rangebound for ever.
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Begin the Week with Links
November 17th, 2008 by Corey Rosenbloom
What a better way to start your week than browsing around the news and blogosphere, courtesy NewsFlashr? Here, I wanted to highlight selected blog or news posts that you may find interesting that might help you in the upcoming week.
The Big Picture tries “DECONSTRUCTING THE FINANCIAL CRISIS (so far)” which is a rough timeline of key events.
KWaves.com is a site I recently came across that details the Kondratieff Long-term Wave with charts and information.
Brian Shannon of AlphaTrends.com discusses his emphatic belief that Risk Management is the #1 goal.
Bill Luby at VIX and More makes a Prediction: Direxion Triple ETFs Will Revolutionize Day Trading. He also lists the new ETFs so you can use that as a reference as well.
Chris Perruna discusses various charts and ETFs in Health Care and Pharmaceutical Bottom?
Always providing us with information-packed posts, “Gaming the Market” shows and discusses Three Great Banking Documentaries.
StockTradingtoGo discusses brief principles in Understanding Economics, Trade Gaps and Deficits.
FundMyMutualFund writes an ambitious article discussing the potentials for the next 6-monts to a year in the future in November 2009 Thoughts/Roadmap.
Dr. Steenbarger of TraderFeed introduces new concepts regarding a novel concept in his series on creativity in trading:The Role of Creativity in Trading and Conflict and Creativity in Trading Performance.
Have a safe week as best you can - keeping your focus on risk-management in the week ahead.
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Possible Elliott Wave Interpretation for the SP 500
November 16th, 2008 by Corey Rosenbloom
Not too long ago, I evaluated the S&P 500 in terms of a possible Elliott Wave Interpretation which is still playing out as anticipated according to basic Elliott Wave Principles.Let’s update that count and see if we can glean any information from the current structure.
S&P 500 Possible Elliott Wave Count - Monthly Structure:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts16.png
Let me put in the disclaimer that I am NOT an Elliott Wave expert, nor do I claim to be.I’m attempting to apply the principles I have learned and understand from basic Elliott Wave interpretation as applied to real time charts as best I can.
That being said, the larger structure shows that we could be experiencing an “ABC” corrective wave which is either forming an “Expanded Flat” (because the “B” wave exceeded the high of the previous Wave 5 in 2000) or we are experiencing a slightly irregular Zig-Zag pattern, with the “B” wave (in both instances) being a complex corrective wave.
In either scenario if they are correct, the larger structure hints that we will - at a minimum - retest the 2002 lows and are more likely to exceed them by some measure - though both give different targets as to how much (to what magnitude) we’re likely to exceed the 815 *closing* price low (though the actual low was 775 on the S&P 500).
Remember, that if this structure is correct, Wave C is expected to unfold in a five-wave impulse down.Let’s pull the perspective in to the recent weekly chart.
S&P 500 Possible Elliott Wave Count - Monthly Structure:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts22.png
I’ve darkened the previous “Wave 5″ action so we can focus on the current possible structure unfolding.
October 2007 marked the ‘high’ and that is where I chose to begin the potential 5-wave impulse down.Others can chart their Elliott counts differently.
Wave 1 often unfolds in a fractal 5-wave impulse itself, which is what I have shown here.Wave 1 terminated in March 2008 before rising in an “abc” corrective pattern to complete corrective Wave 2 (which often unfolds in three waves) in May 2008.
Wave 3’s are “Elliott’s Dream Waves” and this current wave 3 - as I have chosen to label it - indeed fills that desire.This is because third wave impulses are often violent, volatile, and contain the ‘heart’ of the entire pattern - and of course arguably offer the best trading opportunities.
I have us currently STILL in Wave 3, though it is finally coming to a welcome close.Fractal wave 1 took us down to the July lows, corrective wave 2 took us up to the August highs… and then bloody fractal wave 3 itself subdivided into a minor Elliott 5-wave impulse that completed with the October lows.
I highlighted that development a couple of times on the blog, calling for a fractal wave 4 to occur which completed as price attempted a test of 1,000 before failing down to the current structure:Fractal Wave 5 which is expected to be the terminus of the rather remarkable Wave 3 structure from 1,400 to 800 (or below).
Remember this is one interpretation of the current count, and I am lending my opinion on the structure. Consult your own analysis for your own conclusions and trading decisions.
IF this wave count is correct, then we could expect to see a little more downside as fractal wave 5 plays itself out and then will likely see some sort of major corrective Wave 4 that could take us all the way to S&P value 1,200 IF bulls can push us to those levels.That would coincide with the seasonal “End of Year” tendency, better known as the “Holiday” Rally or “Santa Claus Effect” rally (tendency for equity prices to rise into year’s end).
After that, it’s “look out below” as Wave 5 might take hold into the new year and drive us back down to the 2002 lows or beyond, which would fulfill the possible Corrective ABC pattern shown above on the Monthly charts.
As with any Elliott Count, it’s best to follow it day-by-day (or week-by-week) and try not to get too rigid with the interpretation.
Guard your capital whatever your interpretation may be.
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Weekly SP 500 Overview
November 16th, 2008 by Corey Rosenbloom
With a wildly volatile week behind us, let’s step up the perspective and see if we can glean any information from the S&P 500’s weekly chart.
S&P 500 Weekly Chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts15.png
Don’t we wish we could turn back the time to October 2007?Alas, we have to take what we’re given in the market and do the best analysis we can with the information we have.
In terms of the top-down structure, we are in a clear weekly downtrend as evidenced by a series of lower highs and lower lows, which are confirmed by the “most bearish orientation possible” of the key moving averages (the 20 is beneath the 50 which is beneath the 200).One should not look to get aggressively net long until this structure changes.The ‘trend’ path of least resistance remains to the downside.
That being said, it ‘feels’ or seems like we are due for a (however brief) counter-trend retracement perhaps to test eventually the falling 20 week EMA, which would be an eventual target (though it clearly won’t happen next week unless something radically changes).Notice how the market ’swings’ from up to down in relatively stable ’swings’ (for lack of a better word).It almost feels like a rhythm you can trace out and measure.
This rhythm was evident and stable until the October 2008 market drop, when the downswing became so exaggerated and intense that the market made a near record percentage loss in a singular month. Right now the ‘rhythm’ seems to be indicating an upswing (counter-trend retracement) is in order but is by no means guaranteed.
The momentum oscillator has registered an extreme new momentum low, registering beneath -150 last month which was quite remarkable (an indicator value exceeding that of the entirety of the 2000-2003 bear market).The oscillator measures the difference between a 3 and 10 week EMA, so to have an S&P value of -150 is quite extraordinary.
The red and green arrows I’ve drawn represent swings that have come into ‘moving average support or resistance,’ particularly the case in August 2008 where price came into strong “confluence” resistance.Pay close attention to price when it interacts with key moving averages, especially when they come into contact with “confluence” or cross-over zones of key averages as well.Those can sometimes be major turning points in a market that are difficult to anticipate using other indicators.Pay even more attention when candlestick patterns (such as dojis) form at these areas.
What’s up next?There may be more risk short-term by being short the market, particularly if we do rise eventually into a counter-swing back up, but at the same time, do not underestimate the power of a pervasive down-trend.“Surprises” often happen in the direction of the prevailing trend, but shorts must also be on guard against stunning short-covering rallies (short squeezes) such as we saw on the daily frames last week.
Regardless of your strategy, do be careful in your tactics and keep a close eye on your money management techniques and strategies.Ultimately, those might be what save many traders in this uncertain environment.
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A Look Back at Last Week via the 30 Minute Charts
November 15th, 2008 by Corey Rosenbloom
I actually missed this development until a reader pointed it out to me, but Friday’s action seems to ‘make more sense’ when viewed through the 30-minute chart.As a bonus, this timeframe allows us to see the broad picture of the whole interesting action of last week.Let’s look.
DIA 30-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts14.png
The blue vertical line represents the ‘divider’ between weeks.Monday gapped open after a definitive positive momentum divergence and reversal, but ended up being nothing more than a vicious “Bull Trap” that zapped a good deal of short-sellers and drew in some buyers only to have the market reverse sharply on them.
Tuesday gapped down, drawing in sellers and removing buyers… only to have it reverse on them with a major (that really wasn’t so “major” when compared to Thursday’s rally) reversal that took price to confluence EMA resistance… and set up the week’s second “Bull Trap.”
Price then unfolded in trend-day momentum fashion to the downside through all of Wednesday and virtually all of Thursday… until price hit technical support and funds began to trigger buy orders (apparently) into the market, causing volume to surge to very high levels as price rallied from DIA value $80 to $89, or roughly 900 Dow Jones points in half-a-day’s time.
Friday’s action stalled early at the 200 period SMA and just above prior resistance from Tuesday’s trading highs before falling sharply intoEMA confluence support (green arrow) and forming a “Rounded Reversal” pattern that took price back to the 200 period SMA (on the 30-min chart) which was also roughly the same price as the falling 20 day EMA (on the daily chart).
Such timeframe confluence moving average resistance proved to be too much for eager buyers to overcome, and price fell sharply and more violently than expected into Friday’s close.One could argue a short-term ‘double top’ has formed as a result.Notice also that the price on Friday afternoon made a marginal new high on a rather significant negative momentum divergence - a reader properly noted that gave him cause to believe the new highs were unsustainable.
Last week virtually had it all in terms of successful and failed classical trade set-ups.I suggest you go back and analyze the week through charts using your own method to see what insights you can glean from the action.Trade small if need be and guard your capital as best you can (though don’t necessarily put it under your mattress).
As always, check out the expanding Market Club for daily commentary, blog, education, signals, and video.
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Rounded Reversal Structure Underway
November 14th, 2008 by Corey Rosenbloom
Today’s US equity index markets completed a classic “Rounded Reversal Day” pattern worth examining.Let’s see this pattern and also view the “optimal entry point” that confirmed that this structure was likely forming.
DIA 5-min intraday (incomplete) chart (courtesy TradeStation):
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts13.png
The day opened with a downside gap that quickly filled (or actually came just shy of filling) and then price began moving lower on the day after forming two ’shooting star’ type candle patterns (indicative of potential bearish reversals near resistance via yesterday’s close).
Price then moved to the confluence of the 50 period EMA and the “Daily Pivot” price (the horizontal dotted line - simple pivot point analysis). After making an attempt to support here just beneath $86.00, price eventually broke to new lows but did so on a clear positive momentum divergence (around 11:15am).
It’s surprising to me (or perhaps it shouldn’t be) how many intraday lows (or highs) are formed with some sort of momentum oscillator divergences, and today was no exception - provided price does not plunge in the last trading hour (UPDATE … which, quite shockingly, is exactly what happened).
Price then broke above both the 20 and 50 period EMA after the divergence, signalling potential bullish strength, or at a minimum the need to ‘cover short positions’ at that time.
Price completed the next down-swing to form a higher low in price and subsequently the momentum oscillator as well, hinting at possible ‘hidden’ bullish strength building.
The next up-swing was powerful, taking price once again above the flat EMAs and making a new swing high and officially reversing the day’s trend from down to up (after having made a higher low and then taken out the prior swing high).
I labeled the $86.00 ‘hammer’ candle at confluence support AFTER price etched out a freshly confirmed up-trend as being the “highest probability entry” because the structure now favored higher prices yet to come.Also, should price have broken down beneath those levels, a tight stop could (or should) have been used to limit losses were the price to reverse back to the downside, giving you a low-risk, high reward opportunity.
As price held support, the odds for completing a “Rounded Reversal” Day were highest and that is what price achieved, forming a sort of ’saucer’ bottom or as I like to call it, a “Rounded Reversal” pattern. Let’s see how this day plays out but for now, today’s action so far gives you a near perfect example of the “Rounded Reversal” Pattern.
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Gold at Resistance - Watch Closely
November 14th, 2008 by Corey Rosenbloom
Gold prices are testing major resistance, but have a positive momentum divergence building beneath the action - let’s see these developments - using the Gold Trust ETF (GLD) as a proxy.
GLD (Gold Trust ETF) Daily:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts12.png
Before viewing the chart, keep in mind that StockCharts represents the gold price index ($GOLD) with end-of-day data only, so to get the most recent intraday data - or for a vehicle to trade your views on gold prices without using futures - you can trade GLD and receive intraday updates as well if you don’t have access to futures data otherwise.
That being said, price is clearly in a daily downtrend, as price has made a series of lower lows and lower highs in terms of the swing ’structure’ of the market.We’re now coming off a recent swing low - or one could reasonably argue that a ‘double bottom’ formation may have occurred about the $68 ETF price level (or the $700 per ounce level in gold prices itself).
As such, a clear positive momentum divergence has formed, which is often a precursor to potential reversals as evidenced by comparing the recent price lows to corresponding indicator lows.
Price formed a bullish ‘hammer-like’ candle pattern on Thursday as the market reversed and the ETF gapped up this morning and is currently forming a doji at technical resistance via the falling 20 day EMA.At the time of this writing, December mini-gold futures (@YGZ08 in TradeStation) are trading near $750 per ounce, which is just shy of the 20 day EMA at roughly $753 per ounce.
Price sits at a critical junction with a decent chance of breaking above EMA resistance and challening perhaps the 50 day EMA (at roughly $790 per ounce in the futures or $78 in GLD).
The overall trend is still down, so we need to take that into account if we’re looking to position for a swing or perhaps even scalp-style trade here.A failure at these levels with the potential double-bottom and positive divergence would be particularly damaging to the gold bulls, particularly if price swings back to take out the $70 GLD level or $700 per ounce level in gold.All bullish bets would be temporarily off the table were that to happen.
Let’s watch price at these levels extremely closely and look for continued signs of strength… or resurgence of price weakness via EMA resistance.
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Chaotic Day - A Look Inside the Action
November 13th, 2008 by Corey Rosenbloom
I feel like every day this week has provided a wonderland of strange opportunities to discuss on the intraday charts - today was no exception.We experienced a 900 point swing in the Dow Jones from intraday low to high.Let’s view this action and see what sense we might have made from it.
First, let’s look at the 1-min chart of the opening (a chart I saved because of its uniqueness):
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts11.png
It’s rare to see such an ‘equal swing’ in price.Notice that as price made new lows into 9:50, the momentum oscillator formed a positive momentum divergence that preceded the reversal.
Also, note that the day began with a near perfect “gap fade” situation which was within the $1.00 gap territory.After the first two minutes of up-thrust (often volatile), price moved strongly to close its gap quickly.
Price found resistance beneath yesterday’s closing price and the confluence of the 50 period EMA, but the buyers - with minimal effort - overcame these barriers to push price to marginal highs before rolling over as the sellers took charge for the remainder of the morning session.One could almost call the morning a draw… until sellers swiped the bulls… only to be definitively defeated by afternoon bulls.
Let’s see the 5-min chart structure:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts2.png
When viewed in this light, the morning action looks almost inconsequential - but that’s all a matter of your timeframe and perspective.
Price continued as expected in its downtrend, failing at key moving averages with the one exception of rising above the 50 period EMA just after 10:00am which likely snagged away any tight (or logically placed) stop-loss orders on the short-sell side… just before rolling back over to make a significant swing to the downside and destroy virtually any buy-side stop-loss orders.
As is the case when ‘big money’ or large-scale hedge fund plays are underway, price reversed suddenly, appearing to do so at no apparent or logical technical (chart) point before surging with violence and sustained movement to the upside for the remainder of the day.
The S&P 500 along with the NASDAQ and Russell 2000 all made fresh intraday lows today - the Dow Jones was the only major US Index not to do so today, which - at the moment - doesn’t necessarily say anything about relative strength in the general strength.
Perhaps funds had buy trigger orders simultaneously at those levels or perhaps it was a ‘herd effect’ or some other reason, or perhaps the market was quantitatively (or perhaps fundamentally) oversold and multiple computer (trading strategy) models all had similar price levels for “the bottom” or whatever parameter, but the buying pressure - and subsequent short-covering - was intense and is quite likely to carry over into the Friday session in some form.
Let’s see how far the bulls (buyers) can push this market and what might come of this sudden turn-about.
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Google GOOG Dips Beneath $300
November 13th, 2008 by Corey Rosenbloom
That’s a headline I never anticipated writing:“Google closed beneath $300 yesterday for the first time since August 2005.”The 2008 bear market has seized another casualty in high-flying Google stock, pulling it off 60% from its $750 price high in late 2007.Let’s take a look:
Google (GOOG) Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-1544-charts1.png
Price is on a clear and present downtrend both on the daily and weekly charts.In the case of the daily, the 20 and 50 period EMAs are serving as consistent resistance too difficult for buyers to overcome.Also, any pullback to these key averages did little more than set-up a low-risk, high reward short-sell entry in the direction of the stronger down-trend.
Price is now making a new 2008 (and 3-year) low… but momentum does not appear to be confirming this new price low.This is interesting, as it may set-up a divergence retracement trade (targeting the 20 period EMA or beyond) soon.
Should there be a bullish candle, an upside target would be established near $330 to $340 per share which would represent a counter-trend retracement trade back to EMA resistance if indeed the divergence forms and plays out as expected.
Keep in mind that divergence style trades are counter-trend in nature and are slightly more ‘risky’ than outright retracement entries into a prevailing trend so I wouldn’t fault you for waiting to establish a short-sell trade should the retracement occur.
Volume has been surging higher as price continues to make new lows, which on the surface signifies “confirmation” of the lower prices but also walks a fine line between “capitulation selling” so use caution before becoming overly bullish or bearish.
Also, do not play the “Well, it can’t go down much farther” game because the market has recently punished that mentality on virtually all fronts - from individual stocks to ETFs to gold to crude oil and other commodities.
Play it safe and realize that we’re participating in a very difficult environment at the moment virtually across the board.
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Dollar, Stocks, Crude - What is Next?
November 13th, 2008 by Corey Rosenbloom
It’s rather ambitious to tackle all three topics in one blog post, but Adam Hewison released a brief video and commentray this morning that I wanted to share with you.Hewison addresses the Dollar trend, makes a projection using the NASDAQ market, then reviews the current trend and projection for Crude Oil.
Entitled “Dollar, Stocks, Crude:What’s Next?” Hewison briefly touches on each market in his five-minute free video and challenges you to view these markets on your own to draw your own conclusions.
Here is a brief reproduction of his remarks (reprinted with permission):
“A plan to save the world — part two, or is it three?
When Paulson came out today and stated that his earlier plan to save the western world was not working, he offered up a plan “C” (or is it “D”?) to relieve pressure on consumer credit, scrapping his earlier effort to buy the value mortgage assets.
No matter what happens or what the next plan is here, are the 3 reasons I believe stocks are headed lower.
* Number one: The trend in most all stocks is down. This trend is likely to persist and last longer than most people imagine.
* Number two: There is no plan. The government is floundering and does not have a plan that is going to work anytime soon.
* Number three: We have a lame-duck president, and nothing is going to happen of any consequence until President-elect Obama is sworn in.
Okay, so let’s look at the first problem. Most people trading the market today have had no experience in a prolonged bear market like the one we had in the ’70s. That bear market was brutal as it did not let anyone out. Over the course of the early ’70s, the bear market basically wore people out to the extent they eventually just threw in the towel. We believe the market is going to make another new low and take out the recent lows that were put in place in early October. Unlike a bull market that constantly needs positive news to drive it higher, a bear market just falls under its own weight.
The second problem we have is that there is no concrete plan in place to rescue the economy. In fact, the domestic and global economic issues are so great that they are overwhelming in scope. The Paulson plan, which is being changed and will continue to change, is a major concern and creates significant uncertainty in the marketplace. Only when we see the new regime take office this coming January will we see any meaningful changes.
The third problem we have is a lame-duck president. This is a major problem for the markets as President-elect Obama can not make any sweeping changes until he is sworn into office. Yes, he may hit the ground running, but the reality is, it’s not for over two months from now and a lot can happen to the market in two months. The key levels that everyone is going to be watching for are the recent lows we saw in early October. If these lows are taken out, and I expect they will be, it’s going to push this market and everything else down to new lows. It will exacerbate the housing situation, the unemployment situation and most of all, the morale of the country.
Having lived through the bear market of the ’70s, I know firsthand how difficult the journey we face is going to be. Now this may seem like a very pessimistic outlook and in some ways it is, however there are always opportunities to make money in the marketplace. These opportunities may not be in stocks, it may be in FOREX or the commodity markets.”
My thanks to Adam and the Market Club for providing their information.
As always, capital preservation needs to continue to be your #1 goal if at all possible.Take it day by day but focus on the larger trend structure of inter-related markets.
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Another Trend Day Down Example
November 12th, 2008 by Corey Rosenbloom
While Tuesday’s action ultimately resulted in frustrating losses for ‘trend day traders,’ Wednesday’s action offered a picture-perfect example of a trend day for review.Let’s view it.
DIA 5-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/111308-0036-trend1.png
I’m reminded of the Willy Wonka song, “Pure Imagination” that states, “If you want to view paradise, simply look around and view it.”
If you want to view a trend day example, look no further than Wednesday.
Price opened with a large-scale (greater than 1%) downside gap which could not complete a 50% fill before plunging to new lows on the day.The moving averages shifted to “the most bearish orientation possible” and early volume was quite steady (instead of the normal ’smile’ that often occurs).
If you missed the early portion of the day, the first ‘ideal trade’ set-up then occurred at 11:30am (EST) as price retraced quickly to the falling 20 period EMA, formed a doji at the average, and then fell sharply in four bars after this, testing the $84.00 level for support.
The positive momentum divergence may have been too tempting to pass up, but remember that (virtually) all divergences are - by their very nature - counter-trend moves.
In terms of a core position (short), you should have trailed a stop just beyond the 50 period EMA and I wanted to show today’s price action as to why - even then - you need to place it *just beyond* the 50 EMA and not *at* the 50 because price nipped just above the key average before falling down, making new lows on the day and continuing its “trend day” structure into the close.
This also served as a good “get short” entry as well.
Price ultimately broke below the 20 EMA and retraced once more to the ‘falling 50 EMA’ before finding two sudden intra-bar tests of resistance (also excellent short-entry trades) and plunging yet again to new lows on the day and into the close.
Once again, it’s best to “throw oscillators” and most indicators “out the window” on perceived trend days and focus almost exclusively on the moving average structure as support/resistance (or entry/stop-loss).
This leaves us looking pretty weak on the daily index charts.Take the time to look closer at the intraday action for your own annotations and insights.
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Two Recent Insidious Bull Traps Revealed
November 12th, 2008 by Corey Rosenbloom
The past few days have presented two complicated situations known as “Bull Traps” which have potentially resulted in large losses for those who took these trading signals.Let’s review these two situations and see if there were any clues to avoid them… or if they were just ‘part of the game.’
DIA 15-min Chart:
http://blog.afraidtotrade.com/wp-content/uploads/111108-2242-charts11.png
Keep in mind that price is in an overall, strong daily (and weekly) downtrend, so that is the ‘backdrop’ or structure (headwinds) with which we trade at the moment.It’s quite common to ask “when will the downtrend end?” or perhaps “is this selling swing too overextended and ready for an upside retracement?”.
On November 7th, there was plenty of reasons to believe a fresh upswing had begun, as the action on November 6th created quite a strong multi-swing positive momentum divergence (on multiple intraday time frames) and Friday’s (Nov 6) action was indeed an up-day that closed at the highs that featured a strong positive close.
The weekend passed by and price gapped strongly to the upside, signaling more strength from the buyers… but that strength never materialized.Personally, I spent the day trying to trade long, finding many support areas taken out which resulted in small losses.However, the day ended as a perverse trend day (I say perverse because most trend days open with a large gap and then continue IN the direction of the gap until the close) which left many traders perhaps confused.
Ultimately, the day was classified a “Bull Trap,” meaning price sent initial siganls one way… yet continuously dashed these bullish hopes all the way to the close.
Not to be outdone, the market created a very similar structural set-up on Tuesday, forming a large downside gap, continuing half the day as a “Trend Day” but reversing sharply after creating multiple positive divergences on intraday time-frames, breaking key resistance, and surging sharply higher, perhaps triggering many fresh but exhausted buy orders in the process… only to give back all those gains and more into the first part of today’s (Wednesday’s) trading.
The morning’s overnight gap was large and only a minimal ‘fade’ was attempted, and price is (currently) sharply on the lows of the day as Treasury Secretary Henry Paulson speaks to reporters.
The large upswing will also be classified as a “Bull Trap” which also caused many short-sell trades to be stopped out - perhaps it was a relatively large short-squeeze… perhaps both moves were.The thing is that you have to take your predetermined stops and not look back - trade with a predetermined edge with concrete parameters (such as exiting when price breaks a key moving average or prior swing high/low) and not look back should the action be later deemed to be a “trap.”Fortunately or not, no one has absolute foreknowledge of market moves.We must control our risk and do the best we can within our own limitations.
So here we are now on a new price and momentum low on the 15-minute DIA chart and are left concluding “This is a very difficult market for everyone, both long and short.”
As that is the reality, it serves as a testament that capital preservation - and I don’t mean staying 100% in cash necessarily - is the #1 goal.This might mean avoiding leverage, switching from futures to ETFs (be it DIA, SPY, or QQQQ), reducing normal trade position size, focusing only on known, high-probability set-ups, or tightening stops (which I don’t necessarily recommend in a highly volatile market).
Either way, let’s not get overly aggressive either long or short until some of the dust in the market settles.
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A Day of Structured Chaos
November 11th, 2008 by Corey Rosenbloom
Whether or not you did well trading intraday today (Tuesday), you have to admit that it was a rather intensely difficult day.Let’s see if we can discern order from the day’s seeming chaos and view the DIA (Dow Jones) 5-minute chart for insight.
DIA (Dow Jones ETF) 5-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/111108-2242-charts1.png
Just like Monday, Tuesday’s action began with a large scale (greater than $1.00) overnight gap.Generally, we have lower confidence (and profits) attempting to fade gaps of this magnitude, and sure enough, one would have been stopped out using virtually any stop-loss strategy on a supposed gap-fade play.However, by 2:30, the market made a valiant attempt to fade the gap and rallied roughly $3.00 (300 Dow Points) to close the gap… yet it fell just short.Despite the closeness of the gap, the day will be recorded as a “failed” gap-fade day.
Also, one of the main precursors for a “Trend Day” is an overnight gap that fails to fill.On such trend days, one would expect price to open at one extreme and close towards the other extreme, provided there is no violation of the 50 period EMA which should always serve as a sort of active trailing stop.
Let’s walk through the day in terms of ‘obvious’ trade set-ups.Following the gap and thrust down, there was a pullback to the 20 period EMA which fell just short at 10:30 which set-up an “impulse sell” or more aggressively a “bear flag” trade.Price achieved the target, rallied once more to the falling 20 period EMA, triggering a short-sell (with tight stop) and then that trade also met its objective.
Astute traders noticed the developing triple-swing positive momentum divergence developing, but my main comment is to throw indicators out the window when you feel we have a trend day developing, and pay close attention only to the moving averages (and relation of price to them).
Price first breached the 20 period EMA to the upside, formed a higher swing low, and then burst strongly through the 50 period EMA, triggering any stop-losses being trailed by the possibility of a trend day.I labeled this “Optimal Entry” because once price formed a higher low, broke above the moving averages (which had held as resistance) and then burst above the most recent swing high, that created the “Sweet Spot” Trend reversal trade which clued us in that the day’s downtrend had reversed officially to an uptrend.
A slight retracement down occurred and price completed a “Measured Move” to the upside, falling just short of filling the gap, though this area served as strong resistance.
Now in an uptrend, we should be looking to buy pullbacks in price.The first opportunity came as price tested the (now) rising 50 period EMA, formed a rally… that quickly faded out in less than 30 minutes.Price then swung down to take out any stops for ‘long’ trades before moving sharply to the downside… then reversing back to the upside into the close leaving both longs and shorts baffled and perhaps screaming “Foul!”
This was a hard day to trade.Classic technical set-ups were both successful early in the day and failures later in teh day in their own regard.The media is reporting that the late-afternoon surge… and fade… were caused perhaps by a BlackRock executive saying that the Bear Stearms mortgage portfolio might be worth more than originally expected… but that the economy clear was not out of the woods yet.
During holidays, volume typically is lower and price swings can develop suddenly and become very violent with less participation than on ‘normal’ days.Today’s trading action was a testament to that fact.
Again, guard your capital and stay safe in these uncertain times.
***
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Originally published by Corey Rosenbloom at Afraid to Trade.
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Gap, Flag, and Divergence: A Day that Had it All
November 10th, 2008 by Corey Rosenbloom
I know that today’s trading was frustrating for many reasons, but by the end of the day, we’d developed a successful gap-fade trade, a couple of bear flags, and a couple of positive momentum divergences - all of which are worth reviewing for educational purproses to build pattern recognition skills for the future.
DIA 5-min chart:
http://blog.afraidtotrade.com/wp-content/uploads/111008-1641-charts12.png
The day started with an overnight gap of roughly $2.00 in the DIA, which usually does not result in a successful fade trade, but today was the exception thanks to the rampant volatility that still remains in the marketplace.Price quickly moved down to fill the upside gap with only a minimal retracement before hitting its target (yesterday’s close) and finding support there about the 50 period EMA.
Price attempted a rally - which would be a good place to buy - but the rally was unexpectedly short-lived and found resistance via the falling 20 period EMA.At this point, a new price and momentum low were established as support was broken, hinting that lower prices were yet to come.
By Noon, the key moving averages crossed over as price mounted a ‘flag’ style 45 degree angle retracement up to confluence resistance, which held as price completed (and exceeded) a measured move down to further new price and momentum lows on the day.
Finally, at 1:00, price mounted a swift though quite choppy counter-trend move up that penetrated both the 20 and 50 period EMAs, likely taking out any stops the short-sellers were trailing… just before moving swiftly lower into the 3:00 hour.Price actually set-up a bear flag, though generally I like to place stops just beyond the 50 period EMA which - in this case - were taken out.I like for flag set-ups to retrace no more than 50% of the prior impulse and find resistance (or support) at key moving averages.
Those with strong stomachs survived the ‘rinse,’ while those like me who tend to prefer tighter stops (though we know we shouldn’t) were washed.I’ve since learned to re-enter trades that ‘nip’ away my stop-losses and develop the courage to do this over time and multiple experiences.It takes practice.
Anyway, as price trended to new lows on the day, the momentum oscillator failed to confirm these lows, setting up a positive momentum divergence that hinted at bearish weakness and the potential for short-term bullish strength.Bulls finished the day strong (relative to their previous performance on the day) and pushed price above the key moving averages and away from the day’s lows.
It was a semi-confusing day in practice, though a much clearer picture has emerged now that the price action has completed.The day serves as a great example of how a gap-fade, bear flag, and positive divergence interact to create possibile trades in the larger price structure.
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US Dollar Index Holding Strong
November 10th, 2008 by Corey Rosenbloom
To the surprise of many, the US Dollar Index - once feared to be in a hopeless downtrend - has resurfaced to new life and is forming a potentially bullish continuation pattern on strong technical strength.Let’s look at the daily chart to see these developments.
US Dollar Index:Daily Chart
http://blog.afraidtotrade.com/wp-content/uploads/111008-1641-charts1.png
Price bottomed in July on a mini-positive momentum divergence before breaking above both the 20 and 50 day EMAs, surviving a ‘confluence support test,’ and then reawakening into a strong upwards move which has shown considerable and surprising technical (price) strength and resiliency.
Price has formed a series of new momentum highs, the most recent of which was confirmed by a new price high in late October prior to our current pullback to support at the rising 20 day EMA.The EMA is holding as support currently, and price is forming a potential bullish continuation, symmetrical triangle, which would be confirmed by a break above the $87.00 index value level.
A break below $84.00 would invalidate the pattern and would set-up a likely test of the rising 50 day EMA around $82.00.
One has to wonder, “How far will the US Dollar Index go up and how low will certain commodities go?”Keep that in mind when interpreting these charts, as Crude Oil is trading near $60 per barrel (after challenging $150 per barrel highs) while gold is trading near $730 per ounce (after challenging $1,000 per ounce highs).
In terms of the weekly chart, the US Dollar Index is holding strongly above all averages, and we can see just how impressive the recent rally is in the larger picture:
http://blog.afraidtotrade.com/wp-content/uploads/111008-1641-charts11.png
Momentum has been steadily trending upwards, and price ’survived’ a significant moving average confluence ‘test’ in September.
Let’s continue to watch these developments for signs of continuation or weakness, and observe how a stronger dollar plays out in other markets and certain stocks (generally, a strong dollar hurts large, multinational companies based in the US).
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Goldman Sachs Triangulates to New Lows on Positive Divergence
November 9th, 2008 by Corey Rosenbloom
Financial Giant turned bank Goldman Sachs (GS) formed a fresh five-year closing low on an interesting triple-swing positive divergence on the daily time frame.Let’s view this development as well as a monthly chart spanning back to 2001.
Goldman Sachs (GS) Daily:
http://blog.afraidtotrade.com/wp-content/uploads/111008-0334-charts1.png
Goldman had strong support about the $155 level, but once that broke cleanly to the downside in September 2008, all bullish bets were off as price entered a steep move to the downside, complete with multiple violent up and down swings in price.We closed at fresh lows Friday, but there’s a little bullish news worth discussing regarding this stock.
Goldman Sachs has set-up a rare, triple swing positive momentum divergence with the recent close, which could put a slight damper on further downside action.Notice how the momentum oscillator trends upwards as price trends downwards.The oscillator also made a new swing high in late October that eclipsed the earlier October high, while price made a lower high - also a positive divergence.
Generally, divergences by themselves are not reason enough to enter an aggressively bullish position, but they’re certainly reason to tighten up or perhaps consider exiting short positions (or long puts perhaps).As you’ve seen in the past two months, Goldman has a tendency to snap back (to the upside) quickly, leaving short-sellers in the dust.
The most recent “snap-back” that resulted in a momentum divergence was near October 13th, where price surged from an intraday low beneath $80 to an intraday swing high just shy of $130 for a $50 move in three short days.
That being said, note that the moving averages are in the ‘most bearish orientation possible,’ and ideally we would not prefer getting ‘long’ until price closed above one or both of these averages, or they completed a ‘bullish’ crossover.
Let’s pull the perspective back to the Monthly chart to see just how far Goldman has fallen so quickly.
Goldman Sachs (GS) Monthly:
http://blog.afraidtotrade.com/wp-content/uploads/111008-0334-charts2.png
What took five years to build, sellers have managed to destroy in roughly one year - such is the nature of bear markets.They can destroy gains much quicker than they were earned.Take a look at other financial or homebuilder stocks for further examples.
Price reached a high just shy of $250 per share and have now closed under $80 in one year, destroying shareholder equity positions in the process.Notice also how volume surged to significant highs during the ‘down-draft’ we’ve recently experienced.
Capital preservation needs to remain the #1 goal, and that might mean missing a bottom at times - but these markets have claimed many victims, and many more could be in store for the non-vigilant among us.
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Weekend Linking In
November 9th, 2008 by Corey Rosenbloom
With another week behind us, let’s take a look at some key insightful blog or financial posts courtesy Newsflashr’s Blog and Business pages.
Dr. Brett Steenbarger at TraderFeed writes Learning to Trade: Viewing Yourself, Reviewing Your Trading as well as Learning to Win at Trading by Learning to Lose provide insights into the psychological world of trading methods.
Barry Ritholtz (The Big Picture) asks with comic genius, “Is this the Bottom?”
Stock Trading to Go takes us through a chart of the 1930s and describes “Understanding Bear Market Price Swings Through History“.
Bill Luby at VIX and More shows a chart of VIX Jumps 10% on Consecutive Days that takes the Dow back to 1990 as he writes, “From a market timing perspective, the history of consecutive double digit jumps in the VIX does show a significant bullish bias going forward, but not one that develops until after the first day.”
Rob Hanna at Quantifiable Edges runs TradeStation statistics in “Down Another 5% - History Being Made Again.”He states, “There have been 4 times that the Dow dropped 5% or more 2 days in a row. They were all between 1929 and 1933.”
Chris Perruna argues that Follow-through not Likely.
The Site “Gaming the Market” focuses on informational posts that reveal possible market manipulation across multiple tactics, and always has great posts that are well-documented.
Declan Fallond notes that the First bottom test: S&P 900 key.
Feel free to send me links you find valuable for inclusion into possible future link posts.
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Inside a Volume Divergence
November 8th, 2008 by Corey Rosenbloom
Much has been made about the recent rally into resistance on lower volume, and the subsequent sharp correction following Tuesday’s election.Let’s step inside this situation for clues on how volume could have helped you anticipate a reversal… or at least suspected that ‘things weren’t quite right’ with the recent rally.
Let’s step inside the Dow Jones Index on the 30 min chart:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold17.png
Price began a large momentum burst on October 28 which was a counter-trend rally that lasted until November 4th, taking the DIA from $83 to $96 - a large jump - in a matter of days.
What was volume saying to us at that time?Volume - participation - was NOT confirming these higher prices, as you can see each day’s activity slowly trailed off until reaching a low on November 3rd, one day before the swing high in price appeared.A negative momentum divergence also accompanied higher prices, which was a further non-confirmation of bullish strength.
As price broke the 20 and then 50 period Exponential Moving Averages, volume began to trend higher as price began its down-swing to the $87 level.The green arrow represents incresing volume on declining prices, which serves as a ‘confirmation,’ or more specifically, volume was increasing in the direction of the price movement.
A “non-confirmation” by volume occurs when volume is declining in the direction of price movement.It’s not so much an “up or down” thing, but moreso “is the volume trend rising and falling, and what might that say about the possible future direction?”
Generally, in a strong up-trend, we would expect volume to be rising as well as price travels higher which indicates that more people/funds are participating, increasing demand and pushing price higher.We would like to see volume decline on sell-offs (counter-swings down) because this would serve as a “non-confirmation” of lower prices, or that people were willing to hold shares and not actively distribute them.
The same is true in a down-trend, in terms of we want to see the volume trend rising as price is making new lows, which serves as a confirmation of these new lows and then trend lower as price rallies in a counter-trend fashion, as the above example shows.
In short, we expect “Volume Goes with the Trend” to the be default expectation, though we’re not always granted this luxury.
The take-away from this example is that price was structurally in a counter-trend rally up on subsequently declining volume, combined with a negative momentum divergence.That, combined with other analysis, was reason to doubt the short-term sustainability of the higher prices, and caused a higher probability of a downward price move coming.
Volume is only a piece of the puzzle, and by no means can any one piece give an accurate picture in isolation.
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New Hewison Video: Where is the Bottom in Crude Oil
November 7th, 2008 by Corey Rosenbloom
Just a day after I asked the same question, Adam Hewison of the Market Club released a nine-minute video and analysis of crude oil and explained their trading signals as well as tactics for trading with the recent trend that are of great interest.
The video is entitled:“Where is the Bottom in Crude Oil” and is made available free to readers here, as well as a portion of the text copied with permission.
Let Adam interpret the proprietary trade signals via their Market Club “Trade Triangle” technology and let him walk you through this chart step-by-step:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold25.png
Hewison writes:
“I’m sure as a trader you’ve heard the expression, the “trend is your friend.” That was never more true than today as crude oil (NYMEX_CL) crashed to new lows and the stock market resumed its downward trend.
Today we are focusing on crude oil and the reason why it fell to new lows. We’re also going to be looking at all of the “Trade Triangle” signals that we have received on crude oil since last July. The video is about nine minutes long and I highly recommend you watch it, simply because it shows you just how powerful trends can be.
The video also shows you why price action is more important than fundamentals. If you have a few minutes, please take the time to watch the video and learn how the markets really work.
Since Barack Obama was named President elect, we can see how the markets have reacted at least in the short-term. Maybe not a reflection of Obama’s potential as a president, maybe a reality check for problems in the economy. Not even the record cut in interest rates by the UK could help the markets today.”
He demonstrates the six weekly trading signals since July, of which four yielded good profits with two losing trades that yielded small losses.
I strongly recommend joining the Market Club, as beyond their charting software and ‘trade triangle technology, they do a great job of releasing pertinent educational videos across various markets and stocks as well as keeping up their daily blog and commentary for members.They offer one-month free if you simply want to see what the service is about.
Perfect timing on Adam’s part!View my post “Just How Low can Crude Oil Go?” for my previous analysis.
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A Perfect Trend Day Example
November 6th, 2008 by Corey Rosenbloom
As depressing for the bulls as today’s equity index price action was, it allowed us to witness a near-perfect “trend day down” example.Let’s at least learn a lesson from today.
Dow Jones 5-minute chart:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold16.png
Where do I start?First, the day began rather quietly, with price being beneath all key moving averages on the 5-min chart, and the averages themselves being in the ‘most bearish orientation possible,’ combined with an expectation of a continuation of the downswing in progress on the daily chart.Price opened flat, contined its downtrend, and with the exception of one hour, continued to move steadily and comfortably (creeping) lower all day long.
Interestingly enough, a lenghty, multi-swing positive momentum divergence set-up all day long, but all we got (in terms of a retracement) was an hour long, miniture bull flag that I’ve highlighted for you.Notice also how the 50 period EMA contained price to the penny when tested - that is the hallmark of a true trend day.Also, it’s best to throw away, or delete all indicators from your charts and focus exclusively on moving average analysis, combined perhaps with the TICK, TRIN, volume, breadth, or whatever you prefer that is NOT a derivitive of price (especially in the oscillator sense).
The rule is the following:Once you realize we have a trend day in force (which you might not realize until 10:30 or perhaps even later), establish a core position in the direction of the trend and play to the end of the day (exit on close) while trailing a stop using the 50 period EMA.IF you are correct and it is a trend day, your initial trade entry will be irrelevent because price is expected to close on the lows or highs of the day.
With that being said, you can trade on leverage (if so inclined) when price retraces to the 20 period EMA - provided it ever does so - again with a stop just beyond the 50 EMA.These will be scalps only in the direction of the trend and usually you’re targeting the most recent swing low or just beyond it.
So annotate the chart using your own analysis and print out today’s action for further insights.
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Just How Low can Crude Oil Go?
November 6th, 2008 by Corey Rosenbloom
I must admit I’ve been shocked by the massive, unrelenting sell-off in crude oil.Let’s look at the current daily chart structure to see what clues we can glean from price information.
Daily Crude Oil:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold15.png
Price peaked above $145 in July prior to the global recession realization (or anticipation thereof) and has slid to fresh 2008 lows near $60 per barrel, meeting the forecasts of the most bearish prognosticators and leaving those with bullish targets above $200 per barrel scratching their heads endlessly.Price is the ultimate arbiter, not our expectations, so we must look at where we’ve come and where we might be headed.
Of course, the simple lesson to learn is “not fight a downtrend” or as usual “do not try to call bottoms” but those axioms seem too simplistic sometimes.However, had you tried to call a bottom in this market, you would have been sorely disappointed, as there have only been two (or perhaps three) minor counter-trend rallies ever since price broke its rising 20 and 50 day EMAs and found resistance (via a doji) at the cross-over point (in early August) of these averages, which was your first hint lower prices were more likely.
Once price cleanly breached the 200 day moving average, that was your last hope (or last exit) of bullishness and price has unrelentingly fallen - with the September exception - since then.
At present, we appeared to be on a mini-counter trend rally back up to test moving average support, but support - as evidenced in USO (chart below) appears to be strong and holding, despite a positive momentum divergence that is developing.
The Red arrows on the above chart represent new momentum lows as price continued to trend lower.There was a minor positive divergence in August but it was worked off with little effort as well.Momentum has continued to accelerate to the downside as price continues to make fresh lows.
It almost ‘feels’ like there should be a bottom at some point - particularly around the $60 per barrel level (let’s get realistic - how low can it go?) but I would argue that - if you share the “it can’t go any lower” view point, you wait for the following before buying:
A clean positive momentum divergence (which may be developing)
A cross above the falling 20 day EMA (or cleanly above $75 per barrel)
A higher swing low form in price (which would be the most conservative play)
Of course, there are other conditions you might choose to trigger entry but until then, it’s probably best to get or stay short or (preferably) stay out long until conditions improve.After all, it rarely pays to fight a trend as strong as we’ve seen here.
If you don’t (or can’t yet) trade futures but would like to participate in this move, traders often use the USO or the US Oil Fund (among other ETFs, some leveraged such as DIG - ultra long oil and gas or DUG - ultra short oil and gas).
So, let’s look at USO which roughly mirrors the price movements in oil (though not the price per barrel).
USO - US Oil Fund:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold24.png
See above for chart analysis - there’s no point in stating the same analysis twice.The reason I included this chart is because StockCharts provides Crude Oil prices on an “end of day” basis and USO is traded intraday so you can see what’s happening right now with the contract (or as of 1:29 EST).We tipped down for a new low on the year, and the USO is down 7% from yesterday’s close.
Exxon-Mobil (XOM) is suffering a 5% decline while DIG (ultra-short oil/gas) is off 12.5% as of this writing.
For a lesson in volume (and possible capitulation selling or at least ultra-high volume surges), take a look at the volume bars in October for DIG (ultra-short oil/gas).It’s quite impressive.
Those following the MarketClub service with particular respect to crude oil prices have done exceptionally well, as Adam has continued to keep members updated and their trading signals have signaled a lengthy short-sell position for a majority of this price move.Check out the service if you have not done so already and I’ll try to keep you up to date on some of the free material they publish that is of interest to you all.
Stay safe and guard your capital.
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Current Dow Structure and Possible Resistance
November 5th, 2008 by Corey Rosenbloom
Now that the United States has a new President Elect - Barack Obama - let’s take a current look at the Dow Jones average and take note of the current counter-trend retracement rally up into potential resistance areas ahead… and view an interesting triangle pattern that occurred early last night in the futures market.
First, the Dow Jones Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold14.png
The Dow is completing an impressive counter-rally to the upside, taking price from a closing low near 8,250 to yesterday’s high near 9,750 for a remarkable 1,500 or 18% rally!That is welcome news to long-term investors.
However, let’s continue to look from a trader’s perspective, and ask the question, “Where might this rally hit resistance… or will it?”
Using the current structure, we see a confluence of resistance about the 9,800 - 9,900 level, which is a confluence zone of the 50% Fibonacci retracement with the falling (stabilizing) 50 day EMA.Price is now above the 20 day EMA which provided minimal resistance.Look closely to see price formed a doji (indecision - small range) candle at the 38.2% Fibonacci retracement level, as this brought in minimal selling, but buyers were able to overcome that zone with confidence on Election day.
Update:Currently (as of this writing), the Dow is down roughly 200 points at the open, trading at 9,425.
One note of caution is that volume is trending lower as price is trending higher, setting up a significant non-confirmation of higher prices (which is to be expected on counter-swing rallies).Keep a watch on this closely.
A positive momentum divergence preceded this rally, which could be construed as a possible Elliott fractal wave 4 counter-advance.Let’s continue to watch these developments closely as they develop.
From an educational standpoint, I wanted to highlight a rising triangle formation that set-up on the Dow-Mini futures (@YM) around 2:00am that led to a quick and sudden - expected range expansion - sell-off.It’s an example in pattern recognition.
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold23.png
Price often breaks out of triangles 66% to 75% of the way to the Apex - the point at which the triangle trendlines converge.This case is no exception, and the rising and horizontal trendlines were exceptionally clear.The target - the height of the triangle - was met quickly with a large expansion move out of consolidation.
Guard your capital until the volatility settles down, unless you’re a trader who thrives on volatility.
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US Election Day - Current Projections
November 4th, 2008 by Corey Rosenbloom
It’s certain that the US Election will have an effect on the equity markets and markets beyond, as the market anticipates the next president’s administration and shifts to reflect perceived policies he might create.Let’s turn to the current state-by-state polls to give us an overall electoral vote projection to see who that next president might be when polls close later this evening… provided we don’t go into recount mode.
I’m pulling non-partisan data from Real Clear Politics.com, which aggregates multiple polls into a broad state-by-state average and then computes these onto an “electoral map” that shows the current standing in the “Race to 270.”The US elects its leader through the “Electoral College,” where each state is given a number of electors who, in turn, vote to elect the President.There are 538 total votes, and 270 are required to become elected - each state is delegated electors based on population (or more specifically, its Congressional representation delegation of two senators per state and a population allocated number of House members).
With that bit of data out of the way, let’s look at the current projection from RCP:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold12.png
This map represents the ‘poll of poll’ averages and allocates the winner of each state based on who is currently leading in the poll, even if the margin is less than 1%.I wanted to highlight the ‘closest’ polling states according to their averages currently:
North Carolina (NC):McCain +0.40%
Missouri (MO):McCain +0.70%
Indiana (IN):McCain +1.40%
Florida (FL):Obama +1.70%
If these numbers hold - remember there are various factors that could lead to inaccurate polling this year (such as the “Cell Phone” effect and the “Bradley” effect or models that don’t incorporate many new voters - then Democratic Senator Barack Obama would defeat Republican Senator John McCain by 338 votes to 200 votes, winning a clear majority of the Electoral College and the Presidency.
Regardless of the Presidency, most political analysts are projecting Democrats to gain 5 to 8 seats in the US Senate and perhaps as much as, or more than 20 seats in the US House of Representatives.Democrats currently hold majorities in both Congressional chambers and would be expanding upon their current margin.
Real Clear Politics also allows you to view the Electoral State-by-State vote by pulling out states where no candidate leads by more than a 5% margin, and - though it may be confusing at first - it gives a more accurate view of the possibilities that could occur today when all votes are counted.States where no candidate leads by 5% or more are colored gray and are deemed “Toss-Up” States.
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold22.png
Given this count, Senator Obama is more likely than Senator McCain to win the Presidency, which currently gives Senator Obama 278 ’solid’ votes (leading by more than 5%) to Senator McCain’s 132 votes.
By this count, Senator McCain would need to win each and every gray ‘toss-up’ state and then pull away Pennsylvania (PA - 21 votes) and/or Colorado (CO - 9 votes).McCain’s campaign made an aggressive push in Pennsylvania recently, and polls have narrowed there, but perhaps not enough for a clear victory - the RCP average in Pennsylvania shows Senator Obama leading by an average of 7.3%.In my personal count, if Senator McCain cannot win Pennsylvania, he cannot win the Presidency.
What’s troubling for him is that Senator McCain’s home state of Arizona (AZ - 10 votes) is listed by RCP as a “toss-up” state, showing him up by an average of 3.5%.The last time for a Presidential candidate to lose his home state - and I do not forsee McCain losing AZ - was Vice-President Al Gore who lost Tennessee and its 11 electoral votes in 2000, which would have been sufficient to grant him the Presidency (President Bush won the 2000 election by four electoral votes).
Being a political buff as well, I’ll be anxiously awaiting election results as polls close at different times across the US.
Generally, a ‘clean’ election (and certainty in the winner) benefits the Market short term while uncertainty (such as occurred in 2000) is detrimental to the market, though in both cases, the market rallied quite sharply once a winner was declared.Keep that in mind as we may be entering a natural counter-trend swing up (retracement) in the equity markets.As of 11:00am EST, we’re already up over 2% on the day.
Let’s see how all this will affect the stock market!
Update: As the polls predicted, Barack Obama is now President Elect of the United States of America and will be sworn in on January 20th, 2009.
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Post Number 1,000
November 4th, 2008 by Corey Rosenbloom
Today hit a milestone with the Afraid to Trade blog, as this is the 1,000th post since I began blogging in February, 2007!
I wanted to take a moment to thank all readers deeply for their support and for reading, emailing, and commenting.Traffic has been increasing virtually every month, especially so in the current environment.
My goal has always been to provide education to overcome uncertainty and anxiety in the marketplace, and share my thoughts and experiences on current markets and educational examples through charts and other methods.I will continue to work with this goal in mind and continue to count on your support as we continue to grow and expand.
My posts address various facets of Technical Analysis across multiple markets and leading stocks, and attempt to show examples of ‘lessons in action’ through charting and commentary.I’m happy to link to other resources so feel free to make me aware of new sites or favorite posts elsewhere that would be of benefit to readers.
As always, if any of you have suggestions on how I can improve the site or the experience, please let me know.
Let’s make it a thousand more!
Corey
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Intro to Elliott Wave Article in SFO
November 3rd, 2008 by Corey Rosenbloom
This month’s SFO (Stocks, Futures, Options) Magazine has an excellent introductory article on Elliott Wave Theory entitled, “Roadmap or GPS - Lessons in Elliott Wave Analysis” by Jim Martens of Elliott Wave International.
Martens compares Elliott Wave analysis to navigating a car during a drive - do you use the flashy GPS device or do you stick with more tried and true methods, such as using a standard roadmap?Is there a difference?If so, how does it apply to the markets?
Martens encourages us to “Embrace the Zig-Zags” (and detours) as well as provides a quick “Road Map” of Elliott Analysis.He describes the standard five-wave impluse and the three-part corrective phase, as well as describes the inherently fractal nature of Elliott analysis.Further, he describes a little about the ‘controversial’ technique of using alternate counts, when to do so, and why to use them.
He also describes Elliott interpretation as being partially about finding the count that meets the most guidelines while not violating any of the three major Elliott Rules.
A refresher:
1.Wave 2 cannot retrace 100% of Wave 1
2.Wave 3 cannot be the shortest wave
3.Wave 4 cannot enter the price territory of Wave 1
Check out the article and more from SFO!
(may require free registration)
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Gap Fade Stats for October
November 3rd, 2008 by Corey Rosenbloom
The volatility of October in the stock market provided a remarkable number of gap openings which provided risk and opportunity for nimble gap fade traders.With the new month upon us, let’s see how the traditional DIA opening fade gap statistics fared during October.
For the first study, let’s look at DIA prices (downloaded from Yahoo Finance) and define a ‘gap’ as being at least a $0.25 (25 Dow point) difference from yesterday’s close to today’s open.
DIA overnight gap size = $0.25
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold11.png
Of the 23 trading days in October, all but one (22) days (95%) resulted in an overnight gap of at least 25 cents, and 54.5% of these gaps filled intraday.The average up and down gap was an amazing $2.02!
In terms of upside gaps, 5 of 9 filled (55.5%)
In terms of downside gaps, 7 of 13 filled (54%).
Let’s raise the gap sensitivity filter to $1.00 (or roughly 100 Dow Points).
DIA overnight gap size = $1.00
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold21.png
Generally, the trend through gap research is that the larger the gap, the less likely it is to fill.This chart helps add evidence to that concept.
Sixteen of twenty-three trading days (70%) yielded a gap greater than $1.00 which is outstanding, reflecting the underlying uncertainty and volatility in October.Of these 16 days greater than $1.00, only 6 gaps filled for a “gap fill” percentage of 37.5%.
Finally, the full data table showing the massive amount and value of October gaps:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold3.png
Your success at deploying the gap-fade strategy will be based to your stop-loss strategy, execution/fills, scaling in/out decision, among other factors.Many gap-faders may have even chosen to stay out of the market most of the time due to the volatility, and that is a decision you’ll have to make too (in terms of comfort with the current volatility environment).
As always, guard your capital and trade lighter if need be.
Click for prior gap fade statistics for the previous months of the year:
January Gap Fade Statistics
February Gap Fade Statistics
March Gap Fade Statistics
April Gap Fade Statistics
May Gap Fade Statistics
June Gap Fade Statistics
July Gap Fade Statistics
August Gap Fade Statistics
September Gap Fade Statistics
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Gold Hits Resistance - Target Below
November 1st, 2008 by Corey Rosenbloom
Gold prices completed their counter-trend rally on Thursday and found confluence resistance at the 38.2% Fibonacci retracement along with the 20 day EMA.Let’s see this event and see if we can make out a weekly Elliott Wave count structure as well.
Gold Daily Prices:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold1.png
If there ever was an ‘anatomy of a sell signal,’ Gold provided it this week.Price formed a new momentum low last week and then began a sharp retracement back to the upside.What was the target for the retracement?It was the 20 period EMA as I pointed out at the time.
Price retraced quickly to this level which formed powerful “Confluence” Resistance as the 38.2% Fibonacci retracemen coincided with the falling 20 day EMA about the $779 level.Combine this with two “long-legged” or long upper-shadow candlesticks and you have an ultimate short-term sell signal (highlighted in green).
Price is still in a downtrend and we still need to work off the recent new momentum low (meaning a new momentum low often precedes a new price low… or that with the new momentum low, a new price low is perhaps yet to come).
Where might price find support (or where is the target for this current short-sell trade)?Initially, it’s the old $680 low but let’s raise the time frame to the weekly chart for possible additional clues… and a favored Elliott count.
Gold Weekly Prices:
http://blog.afraidtotrade.com/wp-content/uploads/110108-1937-gold2.png
Ignoring Elliott for a moment, we have the rising 200 week moving average coming in around $650 per ounce.Let’s set this as our target for the swing.
Picking up with the possible Elliott Wave count, we’re currently in Wave 5 down, and are deep in Wave 5 at that.The $650 to $675 rough area is a decent target for the wave to end.
The one major caveat to this count is that labeled Wave 4 dipped into the price territory of Wave 1 which violates the basic Elliott principles.Some Ellioticians allow 4 to enter wave 1 in regards to futures markets due to their leverage, but it is far more appropriate not to have to use this situation, meaning the above count may need to be altered.
Perhaps my Wave 1 down was actually an “A” Corrective Wave with Wave 2 being the “B” corrective wave and then my labeled Wave 3 is actually the “C” corrective wave - and that perhaps a complex correction is forming.
Let’s see if this possible structure plays itself out in the coming weeks.
***
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Published by Corey Rosenbloom of Afraid to Trade.
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The Rise and Fall of Nokia NOK
October 30th, 2008 by Corey Rosenbloom
Nokia (NOK) Weekly:
http://blog.afraidtotrade.com/wp-content/uploads/102608-1939-stocks12.png
Nokia investors have experienced a very wild ride in a short period since the start of 2006.From a low near $16, Nokia rose to $40 per share in two years (though not exceeding is 2000 split-adjusted $55 high) and then has spent the better part of 2008 in virtually total free-fall.
I did want to point out a larger “accumulation-distribution” pattern (or cycle) that was evident in the stock.
From 2001 (after the ‘dot com’ collapse) until 2007, Nokia traded with a range of $10 to $20 before breaking out above this range clearly in 2007.This would be considered a period of quiet “Accumulation” by long-term investors in hopes of higher future prices - it could also be considered “Phase 1″ (or even Elliott Waves 1 and perhaps 2).
After price breached the $20 level and began a near 45 degree ascent, we would call this the “Realization” (Phase II) period where everyone begins to ‘catch on’ that prices will continue to rise and funds begin to accumulate shares more aggressively (though volume was not significantly different during this period).This could be also described as an Elliott Wave 3 impulse if you like).
Finally, price went “near vertical” in the October period of 2007 (after a slight pullback to the rising 20 week EMA - Elliott Wave 4?) which constituted the final Phase 3 of the Cycle which is known as the “Euphoria” phase, meaning everyone is clamoring over each other to acquire shares in Nokia and the price soars to unsustainable highs.It is at this time that the professionals are starting to distribute shares to the mass public (Elliott Wave 5?).
Finally, price peaks above $40 intra-week and then begins a lengthy slide down to current lows of $14 per share.I don’t so much label this Phase but it can be called the “Mark-Down” phase or “Distribution” phase or the like - now, investors are clamoring to rid themselves of shares of Nokia they had earlier purchased at much higher prices.
(Elliott Wave Bonus:
Corrective Wave A took price down from the $40 highs to $28 lows rather quickly, when many perhaps saw the drop as a chance to get back in - after all, we buy on pullbacks, right?
Wave B then formed as price surged (literally) from $28 to $36 before rolling over as “B” held its reputation as a “sucker wave” before falling back down into the final Wave C decline from $38 down to $28… and beyond.It’s possible that a new 5-wave impulse down began and may be completing… or more likely we may be setting up corrective Wave 4).
For an additional bonus, let’s look at Nokia’s current daily chart, which offers perhaps a little bullish hope at these low prices.
Nokia (NOK) Daily:
http://blog.afraidtotrade.com/wp-content/uploads/102608-1939-stocks21.png
A multi-swing positive divergence has taken price up to moving average resistance (similar to the broader markets) so let’s see if buyers can step up and burst through the $17 per share level and turn the tide of selling.
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Strange SP 500 Confluence Ahead
October 30th, 2008 by Corey Rosenbloom
The S&P 500 is striking a strange chord that will resolve eventually into a potentially large trend move - the question is “Which way will it move?”Let’s see this and look for clues.
First, the S&P 500 Daily Chart:
http://blog.afraidtotrade.com/wp-content/uploads/102608-1939-stocks11.png
If you look at this structure, you likely see a powerful “sell” signal setting up as price tests the falling 20 day EMA and has formed a shooting star (yesterday - bearish reversal candle) and a similar pattern (so far) today - both of which have upper shadows at resistance, which hint at a bearish reversal.
However, you also see a clear and present positive momentum divergence on the prior two swings down (the wave structure is very choppy and volatile) which hints at possible bullishness.
Ultimately, I feel we’re in an Elliott Wave 4 retracement up which is taking the form of a classic descending triangle formation (which isn’t technically the same as an Elliott 5-wave triangle).
It’s also quite possible - from an alternate count - that the recent wave 3 down ended at the spike down around October 13th, formed a sudden and violent wave 4 up to 1,050, and then formed a 5-wave (mini) impulse down into new price lows at 850.IF that is the structure, then we’re likely in a larger wave 4 up of the larger structure, but let’s not get too caught up in that for the time being.
Let’s drop our timeframe down to the hourly chart to see the recent action and see if it offers any sell signals too.
The S&P 500 Hourly Chart (showing recent triangle structure):
http://blog.afraidtotrade.com/wp-content/uploads/102608-1939-stocks2.png
Here’s where it gets interesting.
A classic Elliott triangle pattern is a five-wave affair (which is what we could be seeing) and that the “E” corrective wave may be finishing and ready to roll back over to the downside.
However…
I wanted to point out a couple of points of bullish developments.
Most obviously is the triple-swing positive momentum divergence that has set-up for the better part of October.Momentum precedes price, and divergences often resolve in reversals.
Second, we see that - no matter how you draw the descending trendline (off the spike high or off the ‘most touch’ method) we see price has indeed broken out of the triangle formation on the hourly charts, and in fact, both trendlines could provide potential support at the 920 level.
Finally, we see “Confluence Support” via these trendlines and from a cross-over of the 20 and 50 period EMAs at the 920 level - the 20 EMA just crossed ‘bullishly’ above the 50.
So what’s going on and what might happen?
I hate to say that it’s unclear, but there are possibilities.
1.Should price find support at this level and break above the 20 period EMA on the daily chart, that would be a strong buy signal for a potential larger move up (retracement only - likely not to go beyond 1,150).Keep in mind that multiple positive divergences on different time frames can lead to powerful moves.
2.If price breaks support at the 920 (and especially) 900 level, look to get aggressively short, as we would be set-up for a test of the lows at 840 and could see if that level would hold and if not, then expect new lows to materialize from that.
Now, we’re near the US Presidential Election, and historically there’s a burst in the stock market as the new president is elected - provided there are no recounts (even after the recount fiasco in 2000, the market surged once certainty was achieved).Keep in mind this possibility.
Historically, November/December have been good months for the market - let’s see if they continue to do so in this highly volatile environment.
Stay alert and continue to guard your capital.
***
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Published by Corey Rosenbloom of Afraid to Trade.
Also, click to join the Afraid to Trade blog as it continues to expand.
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CMT Level 3 Exam Today and MTA Sponsorship Request
October 29th, 2008 by Corey Rosenbloom
Today’s the big day I’ve been studying almost two years to accomplish - the final examination in the Market Technicians Association’s Chartered Market Technician Exam track (Level 3 written essay exam) Wednesday afternoon.
Wish me luck in this four hour essay exam that makes all aspects of Technical Analysis and Market Dynanamics (including psychology and sentiment) fair game for a comprehensive exam that spans three levels of formal education in the field of Technical Analysis.
Check out the MTA’s website (www.mta.org) for required reading lists for the three levels, as well as information regarding becoming a member and the examination/formal study process.
Specific areas of study include Candlestick analysis, Indicator Applications, Trading Strategy analysis/comparison, Elliott Wave Principle, Intermarket Relationships, Sector Rotation, Statistics, Sentiment/Psychology, Fibonacci, chart patterns, Point and Figure charting, relative strength analysis, Cycles, and other forms of study.
As taking the three exams is not enough to earn the CMT designation, the MTA requires sponsorship from three current MTA members familiar with a candidate’s work.I am humbly requesting any current MTA members (or current CMT holders) who perhaps are familiar with my daily work on the blog here to contact me for sponsorship.I would be honored and would enjoy working together with you for the sponsorship process.Please email me at corey AT afraidtotrade DOT com (more information via my “About Me” page) so I can provide more information as needed.
In addition, I’d be happy to provide any information I can via email to anyone thinking about, or interested in the MTA or the CMT program - and will be happy to sponsor new applicants as well once I become a CMT charterholder.
Thank you to all who read the blog posts and who have been so supportive of me over the two years I’ve been blogging publicly to the Afraid to Trade blogsite.I’m almost to the 1,000th post mark!I’ll soon be launching the formal Afraid to Trade website, so continue to stick with me as the website team finishes their work (hopefully before December).
If I can be of further assistance via email or mentoring or just to answer general questions you may have, feel free to contact me.
Corey
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