S&P VI

Well, tonight’s the first night of a series of reports culminating in the Non-Farm on Friday. Today I want to examine what I’d look for if I were seeking to trade the ES. The fact is I am not: I am not convinced that the volatility is at a level that suits my comfort level. But if I were seeking to trade, here would be my thought processes:

  • The 18-day (monthly trend) has confirmed a change in trend by completing a Whole Point Count, a Line Change Count and accepting below the Maximum Extension (see Nature of Trends). the 12-M may or may not confirm the 12-m change in trend. We’ll know come January 31st.
  • I’d be looking for a zone to go short; that zone (see S&P I to V) is 1382 to 1386 basis cash. The stop would be above 1410.
  • I’d be looking to enter the trade off the FOMC report.
  1. If the FED cut rates by 0.25 or less, I’d expect the market to sell off without reaching my zone. In that case, I’d give the sell a miss for now. If the market did rally, I’d still stand aside on the basis that a cut of 0.25 ought to have provoked a sell-off but didn’t.
  2. If the FED cuts rates by 0.50, I’d expect either a knee jerk rally or a rally that lasts till the close of today. In any event, the rally would have to reach my target zone. Once there I’d look for a sell setup and entry based on Market Profile and Market Delta Volume. This is my ideal sell scenario.
  3. If the FED cuts rates by 0.75, I’d give up the sell idea for tonight and reassess the picture tomorrow.

There you have it, a clear-cut picture. Unfortunately the current True Ranges would result in stops way outside my comfort zone. I am looking to trade elsewhere.

S&P V

Last night’s price action was equivocal at best.

  • The market retraced approximately 50% of the current swing up. If the low holds, the 80-min projects a target to 1440 to 1390 (if this is a bear rally).
  • The normalized volume was the lowest for the past 14 days except for Jan 14 but still in the mean +3 zone based on data prior to the current volatility.
  • The range yesterday was 31 points which is large if we take the view that it was supposed to be a small range day.

Tonight may throw up some clues on the volatility of the market. This series will end tomorrow. Once we have the FED rate decision, we may be able to determine whether the bull or bear is alive and well.

S&P IV

First off: thanks to all who have written in to compliment the blog. I greatly appreciate your comments.

On weekends, I like to review the markets I trade and adopt a blank slate when I do the analysis. This process is different to weekdays when I compare price action to my weekend scenarios.

The figures for the analysis below are basis cash.

Figure 1 is the 12-month (yearly trend) of the S&P The market has provided an Upthrust Change in Trend reversal signal. I need to see a close at 1339 or lower on Jan 31st to trigger the signal. For this view, I have assumed that we will not see a breach of the highs at 1471 before Jan 31st.

01-28-2008-12-m.jpg

FIGURE 1 12-M S&P

The 13-week (quarterly trend) needs the Whole Point Count to confirm which means 7 consecutive weekly highs at or below 1370.6 Note that in previous posts I think I wrote 1364 – if I did, that was incorrect. 1370.6 is the correct figure.

01-28-2008-13-w.jpg

FIGURE 2 13-W S&P

Figure 3 is the 18-d (monthly trend). I am looking for a 5-wave structure where wave-5 will be the longest Ray Wave. Since wave-[2] was a simple correction, I’d expect wave-[4] to be complex.

If we have completed wave-[4][A] (i.e. wave A of wave-[4]) on Friday, we can now expect a retracement for wave-[4][B]. If wave-[4] is to form a sideways, horizontal correction, we can expect wave-[B] to be at least 78.6 of wave-[B] and not exceed the Maximum Extension i.e. 1291 to 1250. I’ll worry about the other types of corrections once wave-[B] appears to be forming in earnest.

My ideal target for the end of this correction is around the 1382 to 1386 zone. But I’d like to see the structure of the rally I am calling [A]-[B]-[C] confirm the targets.

01-28-2008-18-d.jpg

FIGURE 3 18-d S&P

So the review has provided no surprises. What about tonight?

Tonight is difficult to call given the volatility of last week and FOMC Wed and Non-Farm Friday. If I were day-trading, I’d have to see the open to make up my mind. Since I am not trading the S&Ps at the moment, I only need consider tonight’s pattern tomorrow.

FOMC Decision January 2008

I normally don’t post on weekends. But Monday’s post is likely to be a long one because I shall be reassessing the S&P technical picture. So today I am passing on what I consider an interesting insight by John Mauldin (http://www.frontlinethoughts.com/gateway.asp) See his latest post: “What Does the FED Know?”

I had assumed that with their .75% cut, Bernanke and Company had reacted to the decline in world equity markets, a decline now known to be have been precipitated by Societe Generale’s panic unwinding of its futures positions in a market that was already falling and nervous!

John posits an alternative view that is worth reading. In essence he argues that: “..the monoline insurance companies like Ambac and MBIA are in worse shape than most realize….(John believes) that the concern that there is the potential for a much worse credit crisis than we are currently experiencing is what is driving the FED”.

It seems to me that unless we see a rate cut of .75% or greater, the equity markets will tumble after Wed. The problem is one of perception. The FEDS are now perceived to be responding to rescuing equity prices so that a rate cut that fails to satisfy market expectations will result in negative prices – whatever may be the true economic picture. The scuttlebutt is the market is expecting at least a .5% cut and some pundits are calling for a 1% cut. Speaking for myself, any cut less than 0.75% will probably cause a decline in days to come.

A cut of 0.5% may cause a rally on Wednesday but I doubt the sustainability of any such rally. This is only an opinion but this thinking forms part of my context in asssessing the technical picture.

S&P III

With last night’s price action, we are left with a probable 3-wave structure on the 18-d. If the bear market is to be confirmed, we’ll see a successful retest of the breakout zone: from the end of the Primary Buy Zone at 1421 and the Maximum Extension at 1382 (all figures basis cash).

Figure 1 shows that there is a mass of resistance in the 1382 to 1386 zone:

  • Maximum Extension: 1382
  • The 38.2% of the 1576 high to the 1270 low: 1386
  • The 50% of the Market Profile directional move (IPM) 1495 to the low 1270 low: 1384
  • There is a MIDAS line coming into the 1380 area probably by end of trading Tuesday.

The volatility died down last night and I expect more of the same tonight. The pre-market is calling a gap up but I doubt if the market will finish heavily on the plus side. Given it’s a Friday and given the volatility of the past few days, I’d expect to see a flat to down close.

Next week Jan 30, we have the FOMC rate decision. The market may move Monday, then I’d expect it to be quiet till after the FED decision. If the FED cuts less than 0.5% will see a sell off? Who knows?Certainly I won’t be doing anything until after their decision.

From my perspective, I am looking for:

  • Volatility to return to normal i.e. a True Range of around mean of 22 +/- 10. (Before the FED decision).
  • The market hold at or below 1406 (this will keep the 13-w Whole Point Count alive – we need 7 consecutive weekly highs at or below 1416 to give us the Whole Point Count. If we hold below 1416 this week, it will be week 1.

Nine consecutive daily highs at or below 1406 will give us a Whole Point Count on the 18-d. Today will be the 7th day. The Whole Point count is my time filter to confirm the start of the bear trend. So if we can hold at or below 1406 till Tuesday, we’ll have a confirmed monthly change in trend from up to down.

The 12m sell trigger needs a close at or below 1337 to confirm the change in trend in the yearly trend from up to down).

  • I would prefer to see the resistance area at 1382 to 1386 hold and
  • Then the market generates a setup and entry pattern.

Q: What if the market just blows through to above 1421?
A: I do nothing. I’ll let the market settle down and I’ll participate only if I see high probability setups. 01-25-2008-zones.jpg

FIGURE 1 S&P Resistance Zones

S&P II

Today I continue tracking the S&P. I’ll do this until the S&P either confirms or negates the bear market scenario. I expect this will occur sometime next week.

In today’s blog all numbers are basis cash.

The market followed the 80-min (daily trend) roadmap until the last 80-min bar whose direction I anticipated but not its magnitude. By moving above 1340, the market broke the symmetry with wave-2 (65.25 magnitude) and skipped a degree. Figure 1 shows this.

01-23-2008-80-min-sp.jpg

FIGURE 1 80-min S&P Daily Trend

Figure 2 shows the next degree in the Ray Wave Count: 5-day (weekly trend). For this count to remain valid, 1346 needs to hold i.e. we will not see a print at 1346. Such a print (1346) will invalidate the count and bring us to the next degree.

01-23-2008-5-d-sp.jpg

Figure 2 5-day S&P Weekly Trend

Figure 3 shows the retracement levels for the current Market Profile’s directional move; a move I call the Initial Price Movement (IPM). The minimum retracement is 33% (1347) and any development should hold below the 50%, 1385. Note that a move to 1385 means a move above 1346 and a triggering of the last Ray Wave degree (18-day, monthly trend) if there is a bear market in progress.

01-23-2008-mktpro.jpg

FIGURE 3 Market Profile Retracements

Returning to the 5-day analysis: Since wave-(2) was simple, we can expect wave-(4) to be complex. The most common complex formation is a sideways pattern.

In the light of the Ray Wave structure doubt (lean against which degree?), and the high uncertainty of the zone in which to take a trade, I am in no hurry to initiate short positions. I’d be looking to next week to indicate the level at which I’ll be looking to take a trade.

In any event, I would not initiate any shorts in the current climate. The volatility is too rich for my blood. Prior to this move, the ATR was about 22 +/- 10. Yesterday the pit session had a 69 point range (greater than mean +3 standard deviations) and the day before, we saw a range of 47 points (greater than mean +2 std). And that’s only the pit sessions!

Another way I measure volatility is with Bandwidth (http://www.bollingerbands.com/services/bb/?page=5). Figure 4 shows the context to the current volatility. It shows we are at 0.15 magnitude of difference between the bands and the start of Black Swan territory (i.e. outlier territory). You see two red lines. The first marks the threshold of where the market has been so volatile that I expect to see a shrinking of volatility. The second represents volatility that suggests I exit all positions.

01-23-2008-bollinger-band.jpg

FIGURE 4 Bollinger Bandwidth

All in all, for me, patience is the key to these markets, at least for the moment.

Trauma of Loss/Roadmap S&P

I hope you all have kept safe. Tonight I write on two topics. I touch on the trauma of wipeout and I look at the S&P’s roadmap for the coming week.

TRAUMA OF LOSS:

Many sent me this link: http://www.youtube.com/watch?v=2qlPW4wSzM8 (you may need to copy and paste)

It also appeared in a number of blogs: e.g. Dr. Brett Steenbarger’s “Traderfeed”: http://traderfeed.blogspot.com/

Watching it re-ignited some deep-set memories, memories of the many failures and of repeated lessons unlearned. I am full of admiration for the traders who learned from one dramatic failure; my journey took 7 years of losses and rehashing the same mistakes before I turned things around. Watching the video brought up the thought that ‘but for the grace of God and the patience and support of Chrisy (my wife) go I today’.

The video is a stark reminder that success in this game rests on the trinity: ‘Plan x Risk Management x Psychology’. Note that multiplication signs: a zero in any factor results in failure.

S&P ROADMAP

Speaking of plan let’s have a look at a roadmap for the S&P for the week and possibly next week:

Figure 1 shows the S&P basis cash with an 18-day Swing (the monthly trend), a completed Ray Wave Count and a Market Profile Structure. The first question is: what is the trend of the 18-day?

figure-01-18d-swing-mktp-rwc.jpg

FIGURE 1 S&P 18-day

To answer that, let’s turn to the 12-M (the yearly trend). The 12-Month has triggered a possible Upthrust change in trend from up to down (See Figure 2). To complete the signal I need a monthly bearish bar close below 1455. Right now that looks the case but only an end of month bearish close will confirm. In the meantime, if we assume the start of a bear market, how should the 18-d unfold?

figure-02-uothrust-cit.jpg

FIGURE 2 12-M S&P

Normal technical analysis theory suggests that breakouts are retested. I have found that the retest zone is generally (in a downtrend) between the upper boundary of the Primary Buy Zone (1406 basis cash) to the Maximum Extension (1360) (see Nature of Trends for definitions). There is also 13-w resistance (13-w breakdown point at 1370/1371). This is a pretty wide zone but does serve as a starting point (See Figure 3).

figure-01-18d-swing-mktp-rwc.jpg

FIGURE 3 18d Breakdown Points

Figure 4 shows a projection of a likely termination zone for the first wave down assuming a 3-wave structure. I consider the old wave-5 as the new wave-(2). A 69% retracement is equivocal on whether we see a 5-wave or 3-wave 1st move. We do know that a 3-wave move will not exceed 1.618 wave-(1). This provides a target to 1238 basis cash. I’ll assume the more conservative 3-wave target until the market says different.

figure-4-wave-3.jpg

FIGURE 4 Wave-(3) Target

Figure 5 shows the 80-min Ray Wave Count. For this count to be correct, the market needs to hold below 1334.20. Wave-2 was simple; Wave-4 will be complex and the structure as at the close on Tuesday 01-22-2008 has qualified as a complex wave-4. If so, wave-5 ought to begin tonight.

figure-5-wave-5.jpg

FIGURE 5 80-Min S&P

Wave-5 will be either the longest or the shortest wave. If the shortest wave, we’ll probably see it end at 1276 to 1248 with the most likely level to be 1258 to 1276. 1258 is the maximum extension of wave-4; 1276 is the minimum projection for wave-5.

This is the preferred scenario. If correct, I expect to see a rally of 1.97% to 2.22% (with a lesser probability of 2.66% to 2.83%) off yesterday’s close. This figure ties in with a wave-(4) around 1324 to 1350. I’ll consider the alternate count (wave 5 is the longest if the need arises).

To summarise: if we do get a wave-5 terminating around 1258 to 1276, we can expect a rally to 1324 to 1350 with the preferred target being 1335 to 1345. This is an area where I’d look to go short IF VOLATILITY has returned to normal. For the moment, I’ll abstain from trading the US stock indices.

[The 1.97% to 2.83% was taken off a study done by the Quantifiable Edges site:

http://quantifiableedges.blogspot.com/2008/01/time-cbi-indicate-bounce-could-be-near.html

(Thanks Brett Steenbarger [http://traderfeed.blogspot.com/)] for the heads up to the excellent Quantifiable Edges site)]

That’s the roadmap for the coming week in the S&P. It’s only a roadmap and I am sure that there will be detours as reality pans out. But by having a roadmap, each detour will provide information to make a more accurate picture against which to take a low risk trade when the current rally ends.

Volatility and the Trader

I was told when I first began trading that ‘volatility is the life blood of a speculator’. Like all trading truisms, this has an element of truth. Imagine trying to eek out a living when ranges are tiny and market direction flat.

But there are times when markets become ‘too volatile’: the meaning of ‘too volatile’ is personal and varies from individual to individual. The important thing is to have some measure of ‘too volatile’. My definition is two consecutive days of ranges greater than an ATR of mean + 3 standard deviations. The definition is instrument specific so that I can have, say the ES being too volatile while BPJY may not be.

Once I see a ‘too volatile’ reading in an instrument, I cut all positions (usually profitable ones; losing trades have probably been stopped out). The reason I do this is twofold:

  1. Quantitatively, my setups are validated by price action that is ‘normal’. When markets get too volatile, the population has been too small to date to draw meaningful conclusions. So in accordance with my first philosophical rule for trading (preservation of capital), I take myself out of the market.
  2. Qualitatively, my psyche is comfortable with only so much volatility. Beyond a certain point, I know I am likely to think the dollar value of the tic fluctuation rather than dwell on the info the market is providing. I can become accustomed to increasing volatility if the increase is gradual. But too rapid an increase places my in a zone of discomfort.

The message I am pushing here is take care if you are feeling uncomfortable with the ranges and market movement.

In line with the theme of this post, let’s turn to the ES.

To identify the boundaries for this structure (in Market Profile Terms – distribution) are off the 13-w swing low prior to the sideways price action (development). I notice that although the swing low occurred June 14 2006, the directional move did not start until July 18 2006. I prefer to anchor the July low to start my retracement levels.

The Primary Buy Zone lies within 1272 to 1229 (basis the CSI perpetual contract). The current difference between the CSI-p and ESH8 is about 5 points (ES is lower than CSI-p by 5). This makes the Primary Buy Zone 1267 to 1225.

01-22-2008-sp-18d.jpg

FIGURE 1 S&P Primary Buy Zone

Last night we edged into the Primary Buy Zone. This is an area where I usually par my position size to no more than 1/3 the initial size.

In addition, the last time the market reacted so strongly, Greenspan came in and cut rates prompting a 5% rally. Now this does not mean Bernanke will cut rates today but he might. Whether or not he does, will only provide more fuel to a market that is volatile.

All in all this is a good time to put some $ in your pocket. Oh sure, the market may head lower but then again it may not. I’ll part with this story: A student was long gold and sitting on some very nice profits. He was looking to exit at the Primary Sell Zone. The market got to within about a dollar of the minimum price.

To say he was excited …well that would be putting it mildly.  As he pointed out, the weekly bar looked good (opening near the lows and closing near the highs). Based on it, there was every reason to believe that the profit levels would be reached. However I did warn him that the daily’s painted a weaker picture and that he should establish some level beyond which he would cut the position.

He decided to place a breakeven stop but I could tell that he did not feel his stop would get hit. Well it did. The market opened lower on the Monday and proceeded South.

The point of the story is this. If you have profits in the ES, Gold etc, identify a level beyond which you will cut the position: Nothing feels worse than letting large profits turn into losses. When I say ‘identify’, I mean treat the loss as having occurred – feel it – rather than just give lip service to the level.

S&P Blog Monday Jan 21

Sorry for the break in continuity. I guess I am too unfit to be travelling as much as I do. I’m either going to have to get fitter or stop travelling as much. For the moment, I have opted for a personal trainer to create the habits to improved fitness!

Today I shall be writing about the S&P but whereas in the past, I focused on my thought processes, today, I’ll focus on my tools. Figure 1 shows the matrix of tools.

prduen-matrix.jpg

FIGURE 1 Matrix

I replaced the matrix with this one from Hank Pruden’s “The Three Skills of Top Trading”. The difference between the approach I use and that of Hank’s is Hank uses a more quantitative process. The matrix serves as a check list to make sure I am trading what I see rather than what I hope to see.

In the S&P, the most sensitive of my indicators, the Sentiment Indices are beginning to register oversold readings. We need to remember that these tend to lead prices by at least 2 weeks and up to 6 weeks. I use the tools to put me on notice not to get too aggressive. The time to be aggressive is when the Sentiment Index is no worse than neutral.

My main tools are in the Price Matrix. The yearly trend (12-month swing), has registered a possible Upthrust Change in Trend – an uptrend that began in 1982. However the Volume configuration is not there: the high on the Oct 2001 high was much higher than the volume on the Mar 2000 high. Nevertheless, if the signal is confirmed by a monthly close below the Primary Sell Zone (1455), we can expect minimum target of 787 to 613. Figure 2 shows the 12-M swing

12m.jpg

Figure 2 12-M S&P

The 13-week (quarterly trend) and the 18-day (monthly trend) need Whole Point Counts (WPCs) at or below their respective break down point to confirm the change in trend in those timeframes (see Figures 3 & 4). Strictly speaking we don’t need the WPCs given that the 12-m line has turned down; but I prefer to see WPCs in the respective lower timeframes as a final confirmation.

13w1.jpg

Figure 3 13-w S&P

18-d.jpg

Figure 4 18-d S&P

If the trend is down, what would invalidate the possible signal? Preferably without the WPCs forming, acceptance above the Primary Buy Zones of the 13-w and 18-d. These are 1431.6 and 1422 respectively basis cash.

Volume and momentum all suggest further downside. The Ray Wave structure suggests 1289 to 1290 (basis ESH8) a possible area for a bounce. The 5-d impulse stats show the 5-d line has gone almost mean + 3 standard deviations as at Fri’s close. The cycle services I subscribe to indicate a cycle low this week, Tues to Thurs. If we do get a bounce, the quality of the bounce will tell us whether or not a bear market has started.

Assuming the bounce has a bearish structure, a preliminary resistance area would be 1366.5 to 1354.5 (basis ESH8). The next level to watch is the 1388 (basis ESH8), the start of the directional move down on the 30-minute Market Profile (See Figure 5). The 1388 is well below the Primary Buy Zone but given the momentum and volume to this downside move, acceptance above the 1388 would give me cause to re-evaluate.

mkt-profile.jpg

Figure 5 30-Minute Market Profile ESH8

The question I am usually asked is: “I did not get short before the break. Should I short the market now?”

My answer: “I don’t know what the market will do. But on a risk-reward basis, with possible support coming in for both price (statistically for the 5-d and on the Ray Wave targets) and time (cycles, this week), I’d treat a short now as a high risk rather than low risk trade.

The time to get short was when the market failed at the top of the Value Area providing a possible Ray Wave Failed 5th (See chart 6). For now, wait for the bounce, whenever it may come but it will come.

18d-failed-5th.jpg

Figure 6 Ray Wave 18-d Failed 5th