I take the view that the S&P (ES H8) is on the cusp.
In “The US$ and the Stock Market”, I outlined my view of the fundamental context for the US stock market.
The 12-month swing shows that a close below 1455 would signal an Upthrust Change in Trend Sell Signal. See Figure 1.
FIGURE 1 12-M S&P Cash
The 13-week swing and Ray Wave show that the market is either in the process of forming a wave:4 Irregular.
Or it shows that the market has already triggered an Upthrust CIT pattern, and we need only see a Whole Point Count (WPC) to confirm (see Nature of Trends). I have taken the former view and I am looking for one more high to complete the 5-wave structure. In this interpretation, I am influenced by the fundamental context.
Should the market break below 1370 (basis cash) and form a 13-w WPC, then I’d change my view.
Since the longer-term charts favour a continuation of the uptrend, I have been playing the S&Ps from the long side. On Nov 27th I went long and exited 1/3 positions on Dec 10th. I brought my stops on 1/3 of the position under 1427.6 and 1/3 to breakeven. I based the stops on Market Profile theory:
- The 1/3 exit was at the top of the Value Area (Zone 1 high).
- The second 1/3 stop is under the Value Area(Zone 1 low);
- The last 1/3’s stop at breakeven is to protect a position against loss where the environment for the long is deteriorating. Figure 3 shows the profile.
FIGURE 3 18-d & Market Profile
This is where the market stands for me. I am not keen to add to my positions given my view that this is the last leg up and that there are doubts about the continuation of the uptrend.
But if I did want to take a position what would I look for?
- The market is in a Sideways Market Zone (78.6% retracement) Figure 4
FIGURE 4 Sideways Zones
- There was a cycle low on December 18th
- Sentiment indicators (COT) is bullish (see below)
- There are three statistical edges suggesting the low is in (see below for an example)
- We had a Market Profile Test Day (read possible change of direction day). To confirm the test day, we need to see strong buying today.
Sentiment indicators and statistical data all suggest a rally from here. I use Floyd Upperman’s data for COT (https://www.upperman.com).
An example of statistical setup that is present answers this question: “How often would I be profitable if I bought on the close Monday (Dec 17) of option expiration week if the on that day the S&P hit at least a 2-week low and I held the position for one week”?
The answer is since 1950 we have had 6 winners from 7 trades. The average drawdown is -0.6% compared to an average gain of +2.2%.
Statistical setups I gather from various sources: the one above from www.sentiment trader.com; others include, http://traderfeed.blogspot.com/ and http://www.stocktradersalmanac.com
So I have a zone and setups. What I need is a trigger and initial stop. But before considering that, I need to consider one possible bearish event.
The market came off the top of the Value Area (Zone 1 high); if it breaks the low of the Value Area (Zone 1 low) without first going to the Primary Sell Zone (Zone 2 high to 1576.10 basis cash), the market is telling us that the high probability event is a change in trend from up to down is happening. That assumption will be confirmed with a WPC below 1370.6 basis cash.
So, if I were to take a position tonight, I’d be looking for signs that the market will rally. We had a ‘test’ day yesterday on the Profile: Neutral Day closing in the middle quadrant. (See Figure 5). So, what we need to see is evidence of strong buying.
FIGURE 5 Market Profile
Today’s open will be important.
Ideally, we’ll see a Drive or Test Open (see Mind Over Markets) to the upside. This will suggest a rotational day giving traders time to get set at or below today’s developing value area. If we get a test or drive open, we can set the initial stop for the day below the low of today or yesterday. The safest stop would be below the 18-d Value Area. (See Figure 3).
Well there you have it. A Ben Hur of a blog (i.e. a very long blog). All the best and take care out there.